Blockchains, crypto assets and distributed ledger technology are all experiencing increased interest and sizable adoption. There are multiple websites, YouTube channels, blogs, articles, and communities committed to exploring their possibilities, development, and application.
Here we discuss the basic features of the technology and provide a brief overview as to how this emerging technology could impact intellectual property rights and IP legal practice. The technology is complex, and its application is substantial, and so this article is intended to introduce only the very basic features.
What is a blockchain?
Blockchain became well-known for its association with Bitcoin. Bitcoin was developed to allow an electronic currency to be transferred directly from one party to another without the need to go through a government-controlled financial institution. This concept was set out in a white paper entitled "Bitcoin: A Peer-to-Peer Electronic Cash System" released on 31st October 2008 by a mysterious developer known by the pseudonym Satoshi Nakamoto.
Blockchain technologies have now developed from this initial use case to support a digital currency and there are now many ways a blockchain can be implemented depending on the requirements and goals of the users.
Essentially, a blockchain network is a shared, immutable ledger that facilitates the recording and tracking of data or transactions, frequently relating to assets. The assets can be a physical (tangible) item that has a monetary value, such as a house, or the assets can be non-physical (intangible) that have an associated value, such as patents, intellectual property, and branding. To transfer the ownership of an asset, or part of an asset (tokenization), a new transaction record is generated. In one example, that new transaction record will include the public key of the new owner and is digitally signed by the existing owner with the existing owner's private key. This process records the transfer of the ownership from the existing owner to the new owner, the new owner being represented by their public key. Each transaction record or block of data (a mathematical proof of ownership) is transmitted to all participants in the relevant network (i.e. computer nodes) to be verified by each participant and, once verified, added to the chain.
As each transaction is verified, it is recorded chronologically
in a block of data that logs the exact time and sequence of
transactions. Over time, these blocks of data are securely linked
together, with every new block referring the previous block, and
this process progressively leads to a chain of linked mathematical
blocks called the "blockchain".
The secure linking of the blocks together attempts to prevent any
alteration or insertion of a new blocks. This means the technology
is theoretically secure and tamper-evident because to change any of
the information would require a simultaneous attack on the majority
of the copies held on the distributed nodes. The blockchain itself
is thereby seen as immutable and the content can potentially
provide immediate, shared, and observable information that is
stored on a ledger that only permissioned network members can
access.
What is a smart contract?
To enable more complex transactions some blockchain and distributed ledger technologies use "smart contracts" which are essentially a computer code that automatically implements transactions if set conditions are met. This code may be executed on a secure platform, such as Ethereum (a layer one platform), that enables the recording of the transactions in blockchains. The smart contract ensures that all terms of the contract are complied with before the transaction is recorded on the blockchain.
For example, the smart contract may support the purchase of an asset, such as an IP right. The information input to the smart contract may be the identity of the seller, the buyer, the asset, and the sale price in a chosen currency. The smart contract ensures that the seller is the current owner of the asset and verifies that the buyer has a sufficient amount of the chosen currency. The smart contract then records a transaction to reflect the transfer of ownership of the asset from the seller to the buyer along with a transaction that reflects the transfer of the correct amount of the chosen currency from the buyer's account to the seller's account. If either transaction is not successful, then neither of the transactions is recorded on the blockchain.
When a smart contract successfully executes a transaction, a message to record that transaction is sent to each node in the network that maintains a replica of the blockchain. Each node then executes the computer code, and the transaction is recorded on the blockchain
Blockchain technology and IP rights
Blockchain based IP registers offer IP offices the potential to further control the registration of the IP rights and make the process accurate, secure, fast, and transparent. The World Intellectual Property Organization (WIPO) has now established a Blockchain Task Force, the German government is actively and publicly working on a blockchain strategy with special emphasis on the creative arts sector, and the European Union Intellectual Property Office (EUIPO) has established its own blockchain for trade marks and designs in the EU.
The ability to give complete transparency along with security also means that blockchains and the distributed ledger methodology has industrial applications in many IP heavy areas of technology. In the pharmaceutical industry a blockchain network can help to verify supply chains, expose fraud, and assure product authenticity. The blockchain could be accessed securely even by competing businesses because the blockchain network would not be owned or managed by a single company but rather the users would each trust the network and it would be governed by all the members together.
There is enormous interest in blockchain from consumer (luxury) goods companies, especially luxury brand owners such as LVMH, to combat counterfeit goods with a supply chain recorded on immutable distributed ledgers. Blockchain can also aid in providing evidence of sustainability and ethical sourcing by supporting digital product passports.
The ability to record IP rights in a distributed ledger offers huge advantages in the management of IP rights within a business network, effectively turning them into "smart" IP rights and registries. This would provide for the ability to hold all the information regarding any IP right in an immutable record giving every participant the ability to access and verify information.
IP audits and due diligence could be simplified, and indeed all aspects of collecting information on IP rights and transaction would be accelerated because auditors can easily and quickly verify transactions on blockchain ledgers.
Evidence for creation and use of unregistered IP rights could be verified with the blockchain effectively providing a time stamp record of uploading whilst also providing the ability to maintain privacy. An artistic creation, such as a song or image, can be encoded in digital form and the data stored on a blockchain, as evidenced by the rapidly growing popularity of non-fungible tokens (NFTs).
Smart contracts could further be used to establish and enforce IP agreements, with a decentralized verification system, and allow the rapid processing of payments to IP owners. However, care must be taken to ensure that assignments carried out using smart contracts are registered with the relevant national office. For example, a UK trade mark assignment may be executed using a smart contract but that assignment should still be registered at the UKIPO to enable a more straightforward route for enforcement.
Future of Blockchain technology
Many applications of blockchain technology and use cases are still in the early stages of development. The technology is complex and there are uncertainties regarding future regulations by governments and the legal recognition of the smart contracts.
Problems exist with the large amounts of computer resources that are required to effectively store transactions and large amounts of power is required to maintain the integrity of the blockchains. The security of the blockchains will also be negatively impacted by the rapid advancement of quantum computing technology, especially with regards to Shor's algorithm and some of the currently used public key cryptographic techniques.
Asset tokenization is another growing area of fintech, with Blackrock announcing their own BUIDL fund in March 2024. IP rights could also be tokenized, meaning that the goods can be marked with a code which is represented by a token on the blockchain. However, this potentially creates future problems with ownership and enforcement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.