The intersection of intellectual property law and blockchain technology presents unique challenges that require specialized expertise and strategic thinking. As distributed ledger innovations continue to evolve at breakneck speed, companies in this space must navigate complex decisions about protecting their proprietary technologies while operating within an ecosystem that values transparency and open collaboration.

In this edition of our Crypto Law Series, we explore these critical issues with Marc Kaufman, Partner at Potomac Law Group, PLLC, who shares his expertise on developing market-oriented IP frameworks for blockchain companies. From evaluating the patentability of distributed ledger innovations to managing IP risks in M&A transactions, Marc addresses the most pressing questions facing crypto companies today.

This Q&A examines practical approaches to building patent portfolios, protecting proprietary elements within cryptocurrency protocols, and conducting thorough due diligence in blockchain transactions. For companies operating in the crypto space, these insights offer valuable perspective on balancing innovation protection with the regulatory and community expectations that define this dynamic industry.

1. Given your expertise in developing market-oriented frameworks for IP protection, what approaches do you recommend for blockchain companies when building comprehensive patent portfolios? How should organizations evaluate the patentability of distributed ledger innovations?

My primary advice is to develop a good relationship with your intellectual property attorney! Organizations, especially early-stage companies should meet briefly with their patent attorney on at least a quarterly basis to discuss all recent technical innovation with the organization and any necessary actions for preserving right to intellectual property. Not all technical innovation can or should be patented, but all technical innovation should be evaluated (at least briefly) for patent protection, trade secret protection, and copyright protection. Once you disclose your innovation to the public or commercially use your innovation, you lose rights to fully protect it. The last thing you want to do is find that competitors are copying you and it is too late to seek intellectual property protection.

Consider protection for any technical innovation that resolves problems/limitations in the current systems (bandwidth, accuracy, transparency, speed, etc..). Back to your relationship with your intellectual property attorney, be prepared to disclose technical implementation details of your  innovations to your attorney. Such detail is required for evaluation and protection and is confidential and privileged.

The analysis conducted with your patent attorney should be informed by at least your business and revenue models, the patent landscape (related patents and who owns them), and your budget for intellectual property protection. With decentralized technologies, your protection strategy must consider the various players in the ecosystem and craft claims to read on activity of such players in a strategic manner. For example, a patent that covers activity of a single competitor is more valuable than a patent that requires the activity of multiple parties (possibly including your customers).

2. What legal theories do you advise for protecting proprietary elements within cryptocurrency protocols, such as consensus algorithms or security mechanisms? How can companies effectively maintain trade secret protection while meeting regulatory disclosure requirements and community transparency expectations?

Again, all innovation should be evaluated for one or more of patent protection, trade secret protection, and copyright protection. In decentralized technologies, it is often not possible to maintain secrecy of innovation because of the technical nature of the networks and the need for all participants to have confidence in the underlying mechanisms of the system. Often patent protection, which requires full disclosure of an invention, is the most powerful protection. Keep in mind that a patent owner is not required to enforce patents against all participants and thus patents can be leveraged to ensure participation in desired ecosystems and prevent unauthorized forking and copying.

3. What specific IP risks and considerations should be prioritized during due diligence for mergers, acquisitions, or investments involving blockchain companies? How do you assess patent infringement exposure and open-source licensing compliance in transactions involving complex distributed systems and cryptocurrency protocols?

In most deals, you will want to feel comfortable that the target organization has valid and valuable patents that can help achieve business objects and provide obstacles to entry by competitors This requires detailed analysis by a patent attorney familiar with the technology space. The level of detail can be adjusted to be commensurate with the size of the deal and the relative value of the IP to the investor/purchaser.  While it is difficulty to establish that any specific technical activity does not infringe any existing or future patents, a focused patent infringement study should usually be conducted to examine patents by likely competitors or others whose activities could be disrupted by the organization. Finally, it is critical to analyze closely the use of open source software to determine is such use has subjected to target company to any obligations to disclose their own source code.