The Bitcoin Patent – Only A Matter Of Time?

Ira Schaefer and Ted Mlynar are partners in the Intellectual Property practice at Hogan Lovells in New York, where they advise on patent and intellectual property issues relating to blockchain and cryptocurrency technologies.

In this opinion piece, Schaefer and Mlynar discuss whether bitcoin could be patented, and whether it would be enforceable if it was.

Bitcoin is a technological marvel that has revolutionized financial systems.

The birth of bitcoin came in 2008 in a paper entitled "Bitcoin: A Peer-to-Peer Electronic Cash System" by the pseudonymous Satoshi Nakamoto. The genesis block – the first block of transactions – was created the following year, and the network has continued ever since.

Given that no person (or group) has credibly claimed authorship of the 2008 Nakamoto paper or the bitcoin transaction method it describes, not surprisingly, no patent based on that original work has appeared.

However, that does not stop us from imagining what a patent claim on the bitcoin method might have looked like if a patent application was filed in the US before the Nakamoto article was published.

While patent claims are written to pass muster at the US Patent and Trademark Office (USPTO), we have taken the liberty of drafting our proposed claim in simple English. We could draft broader claims to capture individual features of the bitcoin method, but find a claim focused on a collection of key features to be more useful for the purposes of discussion.

Noting that the Nakamoto paper does not use the term "blockchain," but rather describes a "chain of blocks," our proposed claim implements that same terminology:

A method for peer-to-peer electronic currency transactions comprising the steps of:

• Creating a hash value for a prior transaction;
• Combining the hash value, transaction data and the public key of a transaction recipient;
• Digitally signing the combination to form an electronic coin;
• Broadcasting the electronic coin to peers with a time-stamp;
• A subset of peers collecting electronic coins to form a transaction block
• Each peer in the subset creating a solution to a proof-of-work problem for its transaction block
• Each peer in the subset broadcasting its transaction block and the solution to peers
• Obtaining consensus that a transaction block is valid
• Adding that transaction block to the existing chain of blocks.

Bitcoin is just that simple. It is a series of steps implemented on computers connected the internet.

If the proposed claim was filed in 2007, it should have issued in a patent by 2011, passing through the window for business method patents opened by the State Street decision we discuss below.

Legal background

Prior to 1998, it was understood that even though you could get a patent on a process, machine or manufacture, there was a "business method" exception. That exception would prevent you from patenting a method for performing a financial transaction. It was ineligible subject matter.

That all changed in 1998 when the Court of Appeals for the Federal Circuit (the appellate court for patent cases) ruled in State Street Bank & Trust Co v Signature Financial Group that a claimed investment structure for use as an administrator/agent for mutual funds was, in fact, patentable.

Regarding the "business method exception" the court explained, "We take this opportunity to lay this ill-conceived exception to rest."

The State Street decision ushered in an avalanche of business method patents and, in particular, patents directed to implementing business methods with a computer connected to the internet. That avalanche was not well-received by many. Patents issued covering "computerized" versions of a multitude of well-known business methods.

In 2014, the Supreme Court took action in Alice Corp Pty Ltd v CLS Bank Int’l. It held that a patent directed to a computer-implemented method for mitigating settlement risk by using a third-party intermediary was not eligible subject matter for a patent.

Rather, the claimed method was an abstract idea that could not be patented. The court also specifically singled out financial business methods that implement a "fundamental economic practice" as being likely unpatentable abstract ideas.

But the Supreme Court left the door open by making an exception for business methods that include "technological" advances. Subsequent Federal Circuit decisions explained that improving the functionality of a computer qualified as a suitable "technological" advance.

Would a bitcoin patent be viable?

Of course, the idea of recording the exchange of currency in a ledger has been a "fundamental economic practice" for more than a thousand years.

The Nakamoto article admits that hashing, digitally signing, time-stamping and solving a proof-of-work problem were all known processes in 2008.

However, it cites no precedent for (a) the particular combination of processes it describes, nor (b) specifically using a hashed chain of transaction blocks as a currency transaction ledger. Viewed as providing an improved computer data structure, our proposed bitcoin method claim should be precisely the type of improvement to computer functionality that is still patentable under Alice.

By applying for the bitcoin method patent after State Street, “Satoshi Nakamoto” should have succeeded in obtaining a patent. Based on recent court decisions, it appears that patent would be eligible for enforcement today.

A patent carefully camouflaged by using terminology difficult to detect but covering some aspect (or application) of bitcoin nonetheless, very well could have issued and be enforceable. Although the open-source community has enthusiastically embraced bitcoin, "Satoshi Nakamoto" has not expressly returned the embrace.

That reality should give us all pause for thought and reason to be cautious. Given the incentives, let's not be too surprised that when the identity of Satoshi Nakamoto is finally revealed... along with holding a million bitcoins, *someone* holds a handful of bitcoin patents as well.

The views expressed in this article are those of the authors and do not necessarily represent the views of, and should not be attributed to, their firm, its clients, or any respective affiliates. This article is for general information purposes only. It is not intended to be, and should not be taken as, legal advice.

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