Are patents important in the crypto industry?

Patents meet blockchain

In general, patents‘ role in protecting innovations cannot be understated. They provide a legal framework that allows inventors to protect their intellectual property, preventing others from using, selling, or manufacturing their inventions without permission. This protection encourages innovation by ensuring inventors reap the rewards of their creativity and hard work.

In the crypto industry, one might think that patents are particularly important due to the rapidly evolving nature of the technology. Blockchain and cryptocurrency innovations are being developed at a breakneck pace, and patents should provide a way to protect and monetize these innovations. They should also provide a roadmap of the technological advancements in the industry, helping drive further innovation.

However, that is not the case. Patents seem to have little impact on the crypto industry, particularly those focusing on Web3. The ethos of Web3 is built on principles of decentralization and open-source development, which are quite at odds with the concept of patents and ownership to some extent. In this view, the true value of the crypto industry lies in the collective development and use of technologies rather than in individual ownership and control.

The centralization dilemma

This perspective is reflected in the relatively low number of patents in the crypto industry compared to other tech sectors. Many developers and companies in the crypto space choose to focus on open-source development, contributing to a shared pool of knowledge and technology rather than seeking individual ownership. This approach fosters a collaborative environment that can drive rapid innovation and adoption.

Moreover, the success of Bitcoin as a decentralized public blockchain suggests that attempts to control and centralize blockchain technology, such as by creating Central Bank Digital Currencies (CBDCs), may face significant pushback. The crypto community values decentralized blockchains’ transparency, security, and autonomy, and any attempts to limit these features could be met with resistance. So we hope. 

In this context, the need for patents may be less pronounced. If the future of the crypto industry lies in open-source development and decentralized public blockchains, then the traditional benefits of patents may be less relevant. However, as the industry continues to evolve and mature, the role of patents may also change. Only time will tell how this dynamic will play out.

How the crypto industry is different

While patents generally provide companies with a legal monopoly over their inventions for a certain period of time, allowing them to protect their intellectual property and potentially earn significant profits from licensing their technology to others, crypto companies outside China have put little effort in this space. Although it’s a ‘decentralized’ technology, if we take the case of Linux vs Windows for example, we could expect that some major corporations should try to protect their intellectual property in a similar way. So what’s going on? 

There could be several reasons. On the one hand, some crypto native companies, like Coinbase and Binance, might focus more on developing their products and services rather than obtaining patent protection. 

As for European and American banks, they might be taking a more cautious approach to blockchain technology. While they recognize the potential of blockchain, they might also be aware of the regulatory uncertainties and potential risks associated with this new technology. Therefore, they might focus more on exploring and understanding the technology rather than obtaining large number of patents. 

The monopoly trap

Cryptocurrency transactions present unique challenges in patent eligibility, often falling into abstract ideas that are not typically patentable. Two leading U.S. fintech companies, Square Inc. and PayPal Holdings, Inc., have navigated these challenges by patenting technologies related to commercial transactions. While Square has developed patents that potentially enable it to monopolize the banking of cryptocurrency in the United States, PayPal has focused on more nuanced issues.

Square Inc. is recognized for its mobile credit card reader and the Cash App, making significant strides in cryptocurrency by purchasing Bitcoin and banking operations through Square Financial Services. They have developed and patented a “Cryptocurrency Payment Network” that enables real-time transactions, bridging cryptocurrency and fiat currency and potentially positioning Square as a dominant player in the commercial transactions of cryptocurrency.

PayPal Holdings, Inc., the owner of Venmo, the largest peer-to-peer payment application in the U.S., began allowing customers to buy and sell Bitcoin and checkout using cryptocurrency in 2020 and 2021. More recently, they have launched their own dollar-backed cryptocurrency. With patents directly related to improving cryptocurrency transactions, including dispute resolution and risk assessment, PayPal’s focus on nuanced issues in cryptocurrency may offer competition to Square, but the breadth of Square’s patents could grant them a potential monopoly on cryptocurrency banking in the United States.

Finally, arguably some of the most successful companies in the space, Microstrategy, are betting all their chips on just simply buying Bitcoin for now. They seem to have little interest in developing patents or intellectual property in this space.