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Blockchain and its application in the field of IP

Smart Contracts and IPR management

14 December 2018

While the bandwidth of use cases is still subject to ongoing research, one of the fields that will profit from the possibilities of blockchain are "smart contracts", i.e. legal contracts built and executed (entirely or in parts) by means of software. This article will provide a first glimpse at what role intellectual property rights might take in this "new world" of blockchain and smart contracts.

The enormous potential of blockchain and its real-world application has increasingly gained traction throughout all industries. In 2017 the dreamlike growth in value of the blockchain-based cryptocurrency "Bitcoin"  brought the concept of blockchain to the attention of the general public. However, the ongoing debate about Bitcoin's suitability as a financial investment should not detract from the fact that the underlying technology of the blockchain-protocol and similar technologies based on the idea of a decentralized register are going to have tremendous impact on how we – and machines  - do business in the future. This is especially due to the fast-growing digitization and automation of our world in general. While the bandwidth of real-world use cases is still subject to ongoing research, one of the fields that will profit from the possibilities of blockchain are "smart contracts", i.e. legal contracts built and executed (entirely or in parts) by means of software. The present article aims to provide a first glimpse on how Intellectual Property Rights ("IPR") might play a role in this "new world" of blockchain and smart contracts. 

Blockchain and Smart Contracts – an overview

The blockchain-protocol was first introduced in a whitepaper published under the pseudonym Satoshi Nakamoto in November 2008.  The whitepaper describes a concept where bundles of transactions (blocks) between users (nodes) are cryptographically linked in chronological order, creating a continuous, tamper-proof register (chain) that is stored and managed by all users simultaneously (distributed ledger). Intermediaries such as centralized service providers are not required. Each user disposes of a private key (to initiate a transaction) as well as a public key (to receive funds). Dedicated participants of the network (miner) provide the necessary computing power to validate transactions (Proof-of-Work) while creating (mining) Bitcoin as reward for their expenses (e.g., hardware, energy costs). However, Bitcoin is only one application of distributed ledger technology, which is expected to be useful in a broad variety of other cases across almost all industries in the future. 

Smart contracts, a concept first postulated by the computer scientist Nick Szabo in 1994 , are intended to execute contractual obligations through software code. For example, if a certain pre-defined condition is met (e.g., confirmation of a payment), the code triggers the respective legal consequence(s) (e.g., dispatch of delivery good; grant of access to know-how). In this context, a blockchain linked to a smart contract could provide the parties with a transparent, verifiable, tamper-proof register to record the contract's execution. But not all types of contractual obligations can be described by a (rather simple) digital true/false- or if/then-scheme which is more applicable to standardized procedures.  More complex tasks on the other hand, such as:

  • the compilation/execution of contractual obligations;
  • the weighting of the parties' interests; and 
  • the construction of undefined legal concepts like "reasonable" or "necessary", 

may not be mastered by software alone, but will likely require human intellect in order to resolve any disputes in a fair and well-balanced way – at least with current technical means.

IPR managed by Blockchain-applications

Any type of IP (e.g., patents, utility models, trade marks, know-how etc.) could be subject to a blockchain-application as the object of the transactions can be freely defined dependent on the purpose of the respective use case. One field of application may be (public) IP registers such as the German or European patent and trade mark registers. For example, assignments of IP rights, licenses or pledges on patents could be entered into a blockchain-based IP register directly by the parties (respective software API provided), reducing time and costs of Office proceedings. In addition, it could render the register more reliable regarding the substantive legal situation, ensuring the register is kept more up-to-date.  

In the context of any development agreement, any work results (e.g., contributions of collaboration partners, freelancers) - or rather the IP's corresponding "digital fingerprint" (hash value) can be stored in the blockchain, enabling the contracting parties (as well as any other third parties) to verify the IPR's coming into existence at a certain point in time (Proof-of-Existence). Such proof can be of particular importance if the applicable legal regime does not provide for a registration mechanism (conveying absolute rights to a person on a given subject matter) such as (German) Copyright law.

With respect to smart contracts, blockchain may further be suitable for the management of access authorization and the grant of licenses. For example, access to digital online content  (e.g., music, videos, photos, other documents) would only be provided if the respective payment made by the user was validated in the blockchain. Similarly, in case of licensing relationships, the smart contract/blockchain could track the grant of licenses and/or sublicenses and the orderly payment of royalties (which could be calculated based on the number of acquired licenses or other data).

Another use case may be "Smart" Research and Development ("R&D") Agreements where the collaborating parties license their existing IP to each other in order to create new IPR. The regime of allocating ownership of (new) IPR and (unilateral/mutual) licensing of project IPR might be handled via a blockchain solution. Moreover, confirmation that certain project milestones are reached (e.g., successful development of a first-stage prototype) could unlock further funds. 

However, so far blockchains have their limits where more complex issues such as legal assessments become necessary. That could include the evaluation of whether the developed subject matter actually complies with the desired research results envisaged under such "Smart" R&D Agreement or any construction of a term which needs interpretation.

Examples of further potential use cases
  • Geneva has implemented a commercial register based on blockchain technology
  • Blockchain-based decentralized organizations ("DAOs") that can operate autonomously (e.g., managing funds).
  • In Estonia public notary services are provided via the platform "Bitnation" enabling registered residents to notarize business contracts, birth certificates and even marriages
  • A number of countries such as Canada run research projects to establish blockchain-based identity management systems
  • Local energy trading focused on building blockchain-backed smart grids.

Industry 4.0 and the technologies that come with it are still in their early stages. However, it is clear that digitization and automation of entire industries are progressing at a fast pace and will shape our lives over the next few decades. With respect to blockchain and the design, supervision and enforcement of smart contracts, it is clear that IP lawyers will need to accumulate the necessary IT know-how to render effective legal advice. While it might not yet be entirely clear to what extent these new technologies will be implemented or when the necessary software standards will be available, first use cases appear to be promising and should be closely monitored from the start. 

Key Take-Away Points
  • In general, first use cases of blockchain and smart contracts appear to be promising, but further research will be required to assess the full potential and possible legal challenges in the future.
  • Copyright and patent law provide the required legal means to protect any new development in this field.
  •  IP could be subject to and managed by smart contracts. However, certain limits are reached where human judgment is required (e.g., construction of legal concepts such as "reasonable" or "necessary).