When a Patent-Happy Industry Meets Open-Source Technology

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When the financial services industry started paying attention to blockchain technology, many companies, seemingly as a reflex, sought patent protection for their ideas.

It was ironic, since the original bitcoin blockchain was a breakthrough of open-source development, in which software code is made freely available for anyone to use or modify. As the industry has gained a clearer understanding of how distributed-ledger technology could change its business, it's begun to see the merits of such openness in supporting collaborative innovation, and the limitations of the traditional, you-can't-touch-this approach.

Some are even using a hybrid strategy, pursuing patents to secure a competitive advantage – or at least protect themselves from legal challenges – while publishing code and inviting others to improve it by submitting fixes or patching bugs. The situation underscores the cultural differences between the banking and technology fields as the former looks to the latter for help meeting the demands of an increasingly digital world.

While patents reflect serious competitive considerations, they have become more difficult to grant because it is harder to establish boundaries in the software and Internet fields. Further, simply pursuing them can be a drag on innovation, since time and money are spent on an effort that, at best, just slows down other firms.

"The reality today is you probably should be building software patents if only for their defensive purposes, but used in the wrong places [patents] can limit innovation, rather than encourage it," said Brian Behlendorf, the executive director of the Hyperledger Project, an initiative to advance blockchain technology for recording and verifying transactions across multiple industries.

There is a line somewhere between the things banks should be building with other parties and what they should keep as intellectual property, said Behlendorf, who also sits on the board of the Electronic Frontier Foundation, a tech advocacy group that has campaigned against questionable patents.

"What you have to do is paint a picture of technology as a stack, with the lower bits being the plumbing and the higher bits being the parts that actually talk to end users and are more about the interface," he said. "Those are all end user systems that are best left to companies to do."

Patenting open source software is fundamentally oxymoronic, said Hu Liang, senior managing director of State Street Bank's Emerging Technology Center.

"In the spirit of open source, you're getting [an invention] for free," he said. "Maybe you want to take that and not share it with everyone else, but to go build a patent on top of that kind of counters what this is."

Moreover, patents might be unnecessary to creating a competitive advantage, Liang added.

"The right way we build our applications on top of [blockchain technology] is our advantage. Do we need to patent everything that we do? You create it and you use it – that's your competitive advantage, building a better product. You don't necessarily need to create a barrier through a patent to recognize the benefit of creating a certain product."

Wall Street is one of the largest holders of patents pending in the U.S., and there hasn't been a lack of technological innovation because of it in the last 20 years, said Richard Levin, chair of the fintech and regulation team at law firm Polsinelli. The patent activity in the blockchain space is just part of the natural competition system, he said at the Wall Street Blockchain Alliance conference in November.

"Patents are just a very aggressive form of intellectual property protection," Levin said. "One of the best things patents do is slow competitors down while a company has a patent pending, or one that's been approved. That may give a company six months to two years to get ahead of its competitors."

Large institutions, like Bank of America, have been pursuing patents aggressively in recent years in new banking and payments technologies, financial products and business techniques. Last December, the U.S. Patent and Trademark Office published a patent filing by Goldman Sachs for a distributed ledger-based settlement platform. In January Bank of America said it was seeking 20 blockchain-related patents in addition to the 15 it previously filed in 2014. JPMorgan Chase and MasterCard have also sought blockchain patents; Nasdaq has said it plans to. None have been granted yet.

The most high-profile blockchain technology vendors and bank consortiums have gotten in the game too. Digital Asset Holdings' patent application was made public later this year. In October, R3 revealed that it had filed a patent application for Corda, a distributed ledger platform designed to manage financial agreements. Yet R3, Chain and Symbiont also released code as open source this fall. Digital Asset Holdings has said it plans to as well.

"My guess is it would be quite difficult to grant such patents and we don't know if they'll actually hold up in court," Liang said.

Caitlin Long, president of blockchain technology vendor Symbiont, can attest to that from her experience filing patents when she worked at Morgan Stanley.

"[Patents] are really not very valuable," she said. "You just make better software. This market is moving so fast that the patents — by the time they're granted in this area — are just going to be irrelevant… Don't slow down and apply for a patent. It's not going to be helpful. It's not going to be relevant by the time the patent office gets through the process."

She also warned against investing money in trying to shut out potential rivals.

"In these complex systems all you have to do is change one important term and then the patent doesn't apply, so there's an awful lot of money being spent by players in this industry," she said. "If you raise too much money, you spend it too fast. If you spend all your money filing patents you slow yourself down. At this point the race is on to build production-ready software. That's what we're focusing on as a company."

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