Blockchain and IP: Navigating Emerging Issuesmedia.straffordpub.com/products/blockchain-and-ip... · 2017. 9. 25. · developing and implementing innovative solutions to some of the

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Blockchain and IP:

Navigating Emerging Issues Blockchain, DLT Platforms, Crypto-Tokens, Smart Contracts, and More

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, SEPTEMBER 26, 2017

Theodore J. (Ted) Mlynar, Partner, Hogan Lovells US, New York

David Ng, Lawyer, Patent Agent, Trademark Agent, Norton Rose Fulbright Canada,

Toronto, Canada

Louis Stone, Managing Director- Global Head of Business Development, Symbiont, New York

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Today’s Program

• Bitcoin, Blockchain, and Smart Contracts

• Use Cases

• DLT Platforms, Intellectual Property, and Privacy Issues

• Crypto-Tokens, ICOs, and Regulatory Issues

Ted Mlynar and David Ng

Ted Mlynar

David Ng

Louis Stone and David Ng

5

T

B.S. Electrical Engineering, California Institute of Technology, 1991

J.D., University of Southern California, 1994

Education

Intellectual Property

Litigation and Arbitration

Patents

Trade Secrets and Confidential Know-how

Trademarks and Brands

Copyright

Practices

[email protected]

+1 212 918 3272

Ted Mlynar is a partner in the New York office of Hogan Lovells specializing

in intellectual property. For more than twenty years, he has been

developing and implementing innovative solutions to some of the most

difficult intellectual property problems in the world. Combining a keen legal

acumen, first-chair trial experience, and a deep understanding of

technology, Ted works closely with clients to resolve disputes outside the

court room where possible, and inside when necessary.

He has a particular focus in areas of complex technology, including

electronics, wireless communications, software, and e-commerce. He

majored in electrical engineering at Caltech and is a registered patent

attorney.

Ted has co-authored numerous articles relating to blockchain and smart

contract technologies, speaks widely on those topics, and has been

acknowledged as a subject matter expert. Ted chairs the Hogan Lovells

Blockchain-Smart Contracts IPMT Working Group.

Partner, New York Theodore J. "Ted" Mlynar

6

David Ng B.Sc., M.A.Sc., J.D.

Sr. Associate, Patent & Trademark Agent

Norton Rose Fulbright Canada LLP

[email protected] www.nortonrosefulbright.com/ca/en/people/77439

7

Louis Stone is a Managing Director and Head of Business Development at

Symbiont.io. He is responsible for identifying and developing new business

opportunities and managing key relationships for the firm. Prior to joining

Symbiont in 2015, Louis spent 11 years at MSCI Inc. helping to build market

leading businesses around MSCI’s suite of risk management and investment

decision tools (RiskMetrics & Barra). Louis began his career as an interbank

foreign exchange trader working for several money center banks in the mid

and late 1990’s. Louis holds a Bachelor Degree in Economics from the

University of Wisconsin-Madison and an MBA from Cornell’s Johnson

Graduate School of Management.

8

Introduction

• Bitcoin, Blockchain, and Smart Contracts

• Use Cases

• DLT Platforms, Intellectual Property, and Privacy Issues

• Crypto-Tokens, ICOs, and Regulatory Issues

9

What is Bitcoin?

• Digital money

• Cryptocurrency

1 BTC = $3900 USD

Source: coinmarketcap.com

10

Bitcoin = Digital Money

How can we trust a transaction?

11

Bitcoin = Cryptocurrency

Bitcoin relies on:

• Cryptography

• Consensus rules

• Distributed ledger of

transactions

• Computationally difficult

transaction proofs required to

add to ledger

• prevents double-spending

/ modification

12

Bitcoin Wallet

myWallet

• Balance = sum of all unspent transaction block outputs

• Wallet points to or finds transaction blocks that transfer

bitcoins to me

• Need private keys associated with the transactions blocks to

spend the bitcoins

13

Bitcoin – Example Transaction

myWallet (Balance = 5 BTC)

• Private key corresponding to transaction C (address X sent me 5

bitcoins)

Ledger

• Transaction blocks

A►B ►C

14


Transaction (send 5 BTC, to:address Y, private key)

• Miners generate transaction proof to create Block D and add

Block D to ledger

• May include payment to miner

• Broadcast Block D

Blocks A►B ►C

Blocks A►B ►C ►D

15


Consensus algorithm (# of confirmations) determines if/when

transaction is validated

Blocks A►B ►C

Blocks A►B ►C ►D

16

Distributed Ledger

Technologies

Blockchain

Terminology

Bitcoin

17

What is a ledger?

A ledger is simply an accounting record, just

like that of your own checking account

18

What is a ledger?



Your checking account ledger keeps track of your

balance by recording each transaction with the

date, amount, check number and payee, or

deposit and payor.

19

What is a ledger?






deposit and payor.

The bank also records your transactions and sends you a

monthly statement. The bank’s record of transactions is also a ledger, controlled by the bank and is the “official” ledger between you and the

bank.

20

What is a ledger?






deposit and payor.

The bank also records your transactions and sends you a

monthly statement. The bank’s record of transactions is also a ledger, controlled by the bank and is the “official” ledger between you and the

bank.

You can also access the bank’s ledger online, so it is

shared, but as it is controlled by the bank, you cannot

make any changes.

21

Distributed ledger

Current payment systems require third-party

intermediaries that often charge high processing

fees…

…but machine-to-machine payment using a distributed ledger could allow for direct payment between individual

parties.

Instead of your bank having control over your checking account ledger, control of the ledger is decentralized and dispersed among multiple computers on the network. Each computer holds a copy of the distributed ledger.

22

What is a blockchain?

• A blockchain is – a data structure – created by a computer program

• In most blockchains of interest,

– the stored data is transaction data – the computer program implements a transaction

(e.g., Alice pays Bob $100)

23

Why is a blockchain special?

• In most blockchains of interest, – the computer program runs on a network of computers

◦ the data structure is stored on each computer (a distributed ledger)

◦ the network of computers must reach a consensus to add data to the data structure

◦ each computer adds data to its copy of the ledger (blocks are added to the blockchain)

24

How blockchain works

1. Transaction requested Network users request a

transaction

25


2. The transaction is broadcast

to a peer-to-peer (P2P) network of

computers

26


3. The network validates the transaction

as well as the user’s status using algorithms. Transactions are verified

when consensus has been achieved among the participating computers.

27


4. The new block of validated transactions is added to the existing

digital ledger. The transaction is

cryptographically recorded in ledger.

28


5. The transaction is complete and the

shared ledger is simultaneously updated,

creating a verifiable, permanent audit trail to prove occurrence and

timing of the transaction.

29

How does a blockchain work? - Public key/Private key

Sender Recipient Encryption Decryption

Private key Public key

Plaintext Encrypted text

Plaintext

Each “key” is a string of characters used to encrypt and decrypt a message. The private key is kept confidential. The public key is distributed as the user’s public address.

30

What else can a blockchain store?

• In some blockchains,

– the stored data is another computer program: a Smart Contract – the stored computer program implements

a more complicated transaction (e.g., if today is June 15, then Alice pays Bob $100)

– the network of computers run the stored computer program automatically and simultaneously based on data on/off the blockchain

31

What is a smart contract?

• A smart contract is a computer program (series of instructions for a computer to implement)

– designed to implement (part or all of) an agreement – written in a computer programming language

32

Why use a smart contract?

• Automatic execution reduces contracting risks – deliberate non-performance – third-party interference – force majeure

• Less ambiguity – computer programs requires precision • Standardization – reliably repeatable performance • Fraud avoidance – contract stored “permanently”

33

Potential benefits of blockchain technology

Reduce costs of overall transactions and IT infrastructure

Consensus in a variety of transactions

Near-instantaneous clearing and settlement

Irrevocable and tamper-resistant transactions

Ability to store and define ownership of any tangible or intangible asset

Improved security and efficiency of transactions

Reduction in systemic risks (eliminate credit and liquidity risks)

Increased accuracy of trade data and reduced settlement risk

Enabling effective monitoring and auditing by participants, supervisors, and regulators

34

Symbiont Business Lines

• Symbiont proposes framework for

Delaware Blockchain Initiative (DBI)

• Blockchain Technology Ambassador to

(DBI)

• “Blockchain Amendments” signed to law

August 1st

• Roadmap: Smart UCC Filings, Corporate

Registrations and Distributed Ledger

shares

Private

Markets

• Lifecyle Management for

Corporations

• Security Issuance

• Capital Table Management

• Board Governance – Voting etc.

• Smart Securities-Vesting, ROFR,

Conversion etc.

• Joint venture formed with IPREO 2016

• Successful pilot with 20 financial

institutions- CS, Wells Fargo, State

Street, KKR, Eaton Vance etc..

• Shared Data and Business Logic

• Advanced crytopgraphy ensures

market privacy requirements are

enforced

• Expected live in 2018

Symbiont Smart Contract Platform

Syndicated

Lending/Synaps

Government

35

Example 1: Corporate Registration- DBI

➔Register Corporations with the

State of Delaware on (Symbiont)

Blockchain

➔Delaware Authorizes Shares

which are Authenticated with the

State’s digital signature

➔Smart Contract Prevents

Issuance beyond the number

authorized

➔Franchise Tax Calculation by

Smart contract

➔State filings and updates

36

Example 2: Private Securities & Corporate Record Keeping

➔Board Voting

(resolutions etc.)

➔Vesting

➔Option Exercise

➔Conditional

Transfers/Actions

➔Board Resolutions and

Voting

➔Automated Payout Rules 37

Example 2a: Private Securities & Dynamic Captable

Real-Time Cap Table

Updates

➔Mergers, Acquisitions, Spinoffs

➔Vesting, Corporate Events

➔New Series, Rights Offering

➔Option Exercise

➔Beneficial Ownership Changes

38

Example 2B: Analysis Of Shared Business Rules

Waterfall Analysis

➔How Share Class Rights

Are Enforced Under

Different Scenarios

➔Liquidation Preferences

➔Poison Pills

➔Flip-ins / Flip-overs

39

Example 2B: Analysis Of Shared Business Rules

Waterfall Analysis

➔How Share Class Rights

Are Enforced Under

Different Scenarios

➔Liquidation Preferences

➔Poison Pills

➔Flip-ins / Flip-overs

40

Agent

Fund Manager

Bank/Dealer

Custodian/Trustee

Servicing

Data

Lender Data

Trade Data

Servicing

Data

Lender Data

Trade Data

Servicing

Data

Lender Data

Trade Data

Servicing

Data

Lender Data

Trade Data

Example 3: Syndicated Lending

➔Accuracy: Contributors write data

directly on ledger

➔Authenticity: All data digitally signed

➔ Immediacy: Duplication and

validation delays eliminated

➔Availability: Stakeholders share data

and business logic

➔Privacy: Smart contracts control

which accounts can decrypt ledger

data

➔Security: Immutable, append-only

record with no risk of mischief by

administrator

41

Use Cases – Decentralized Records

Credit Bureau

Mortgage

Provider

Mortgage

Credit Card

Company

Credit limit, balance Employer

Employment history

Inquiry

Auto Financing

42

Use Cases – Insurance

Flight Delay/Cancellation Insurance

Data

Provider

Web-App + Wallet

Smart

Contract

43

Use Cases – Trade Finance

Trading Partner Bank

Trade Finance - Distributed Blockchain Ledger

RBC Business Client

(Importer)

Trading Partner (Exporter)

1. Negotiate contract 1. Negotiate contract

Contract definition

Import/Export contract

Letter of Credit application

2. LoC application

3. LoC

4. Ship goods

4. Send documents

4. Send documents

Contractexecution

Multi-signature transactions

Account/wallet management 5. Payment

5. Payment

6. Debit

7. Release shipment documents

8. Pick-up goods

Riskmanagement

Paymentmanagement

44

Use Cases – Supply Chain

Manufacturer

Brand owner

Source

materials /

parts

Customer

• Track all parts,

processes, locations in

creating final product

• Identify specific

products for recall

• Track sales

• Verify genuine name-brand product

• See ingredients/parts, manufacturing

• Chain of title

45

Use Cases – Loyalty Program

Others

• Music industry

• Loyalty rewards

• Real Estate Contracts, Land Registries

• Vehicle Records

46

DLT Platforms

Ethereum

• Public blockchain platform

• Allows anyone to build and use decentralized applications

• Ether – native tokens of Ethereum

• “fuel” to run the network – applications must pay ether to perform operations

• Accounts – Ethereum’s blockchain tracks state of every account

• (contrasted with Bitcoin’s blockchain which tracks transactions)

• Includes: Ether balance, contract code

• Messages/transactions between accounts trigger code execution

47

DLT Platforms

Corda

• Developed by consortium of banks led by R3

• Specialized for use with regulated financial institutions

• DLT – transactions and ledgers are not globally visible

• restricts access to parties

• State object – digital document

• records existence, content and current state

of agreement between parties

• Links code to human-language legal

document

• Admissible as evidence

• Legally binding

• Regulatory/Supervisory observer nodes

48

IP/IT Issues

• Patentable subject matter

• Open source software

• Patenting Trends

• Contractual Issues

• Privacy / Data Protection

49

Is it Patentable?

• U.S.

• Post Alice – 35 USC 101

• Creating shadow credit/debit records – fundamental economic practice - ineligible

• Abstract? Significantly More?

• Enfish v. Microsoft, Visual Memory v. NVIDIA

• Canada

• Amazon one click patent – Federal Court of Appeal

• Examiner’s strip out computer elements if they are not “essential” to the invention

• Computer problem?

• Europe

• Software must cause a “further technical effect”

50

Open source software / platform

• License restrictions when using open source DLT libraries

• Copyright in derivatives or code built with libraries

• Enforceable?

• Can it be sold / licensed?

• Patent rights – enforceable?

• GNU GPL v3

51

Patenting trends

• USPTO keyword searches:

• Standardization / Patent Pools

• Market perception/investment

• Offensive / Defensive strategies

Keyword Patents Applications

Blockchain 40 367

Distributed ledger 5 140

52

IT Contractual Issues

• Digital signatures

• Smart contracts initiated through public/private key interaction

• Does Electronic Signature legislation apply?

• Parties

• Identity of the other party? Does this form a legal contract?

• What if a contract is initiated by a device or program?

• Bugs in code

• Errors in coding of smart contract

• Processing error by platform hosting the contract

• External integration error

• Liability?

53

Privacy / Data Protection

• Distributed ledgers are public

• Transactions, funds, contracts

• may be linked to an address/wallet, user or IP address

• Personal data – “any information relating to an identified or identifiable natural person…an identifiable natural person is one who can be identified, directly or indirectly, in particular by reference to an identifier such as…and identification number…and online identifier…” Directive 95/46/EC of the European Parliament

• Consent to collect, use, disclose

• Retained only for as long as necessary, right to have data erased

• Not transferred outside country without adequate protections

54

Crypto-Tokens, ICOs, and Regulatory Issues

Some Debatable Definitions

• Crypto-Token: “token” or “coin” representing *something or some value* in cryptographically secured transactions

• Cryptocurrency: digital currency representing value in a cryptographic transaction system (e.g., Bitcoin)

• Utility Token/Coin: redeemable for unit of service

• Asset Token/Coin: represents unit of a (usually tangible) asset

• Initial Coin Offering (ICO)/Token Sale: offer coin/token to others – Usually intended to differ from initial public offering (IPO) of securities

– Nevertheless, may be subject to regulation as an offer of securities

55

How much is involved?

From: https://www.coinschedule.com/stats.php (visited 9/24/17)

56

How much is involved?

From: https://coinmarketcap.com/currencies/bitcoin/ (visited 9/24/17)

• 1119 Cryptocurrencies – Market Cap: $129B+ – 24h Vol: $2,126,268,545 – BTC Dominance: 47.4%

• Bitcoin (BTC) Market Cap: $61B+

– 24h Vol: $778,255,000 (210,789 BTC)

• How much is involved?

57

U.S. Regulatory Issues

• Are they money? – SEC says YES.

• Digital product or goods? – IRS says YES.

• Commodity? – CFTC says YES.

• Are they securities? – SEC says CAN BE unless exempt.

(See www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings)

58

Is that Coin/Token a Security?

• U.S. Securities Act of 1933 defines a “security” as, inter alia, an

investment contract (See Section 2(a)(1))

• U.S. Supreme Court, in SEC v. Howey, articulated test as to whether

something is an investment contract (328 U.S. 293 (1946))

– Supreme court reaffirmed test in SEC v. Edwards, 540 U.S. 398 (2004)

– Both cases predate invention of blockchain and most cryptocurrencies

• A contract is an “investment contract” if:

– It is an investment of money

– In a common enterprise

– With an expectation of profits

– Solely from the efforts of others

59

Is that Coin/Token a Security? Applying Howey Test

Whether a blockchain token meets Howey test, depends on

(a) design of the token and (b) system in which it exists

• Investment of Money: If tokens are only sold, rather than mined,

then difficult to argue not an investment of money

• Common Enterprise: If tokens are sold before the network is

operational, probably a common enterprise

– If tokens are sold after the network is up and running, maybe not.

• Expectation of Profit: If token represents equity or an investor right,

there is an expectation of profit

– If token simply gives the owner the right to do something, maybe not.

• Solely Efforts of Others: If token value is increased only by actions of

third parties, and not by token owner, more likely it is a security

60

More U.S. Regulatory Issues

Know Your Customer (KYC) requirement

• Certain nations and individuals are subject to sanctions

in U.S. and E.U. = cannot transact business

• Blockchain network having a distributed ledger in U.S.

or EU subject to KYC

• Anyone doing business over a blockchain network

must be able to certify not doing business with

sanctioned entities

61

More Regulatory Issues

Anti-money laundering (AML) laws

• Bitcoin system lets anyone create a node (permission-less

blockchain with pseudo-anonymous parties)

• Is transaction legitimate?

• How and where did funds originate?

Combating the financing of terrorism (CFT)

– from both legal and illegal sources

62

Documents

Blockchain and IP: Navigating Emerging Issuesmedia.straffordpub.com/products/blockchain-and-ip... · 2017. 9. 25. · developing and implementing innovative solutions to some of the