Understanding Bitcoin and Virtual Currency
Bitcoin is the most well-known form of digital currency (also referred to as digital money or virtual currency). It was created by Satoshi Nakamoto, a pseudonymous person whose true identity remains elusive, via software that was released under an open source license. Satoshi Nakamoto also released
Advantages/Risks of BitcoinBitcoin transactions are peer-to-peer transactions (i.e., no financial intermediaries are necessary). This can reduce the cost of transactions by avoiding fees normally paid to such intermediaries. This can be a huge advantage in various contexts (e.g., retailers can avoid credit card fees, and consumers can avoid fees for sending money internationally).
Bitcoin transactions are also pseudonymous, (i.e., they are neither truly anonymous nor fully public). Rather, information from each transaction—including the sender’s and recipient’s wallet IDs and the amount of bitcoin transferred via the transaction—is written to the public ledger (the blockchain). One advantage of this, compared with credit and debit card transactions, is that it avoids the impact of data breaches. For instance, if a user pays a retailer with bitcoin, the retailer would only receive the user’s wallet ID (public key) during the transaction. Even if the retailer experiences a data breach, the wallet ID alone is not useful without the private key. Thus, as long as the user maintains her private key as confidential, there is little risk of loss due to a wallet or retailer being hacked.
Another advantage of bitcoin is that transactions are generally irreversible. Once bitcoins are sent and a transaction is validated and written to the blockchain, the transaction generally cannot be undone. This avoids charge-back fraud, a common problem with credit card transactions. Charge-back fraud occurs when a consumer makes an online purchase with his or her own credit card, but requests a credit, or “charge-back,” from the issuing bank after actually receiving the purchased goods or services. The charge-back cancels the financial transaction, leaving the consumer with both the goods and a refund of the money spent. However, the irreversibility of bitcoin also may make it difficult for consumers to get their money back if they pay for goods but don’t receive them or if they are damaged.
There are also various risks associated with bitcoin. For one, the value of bitcoin has fluctuated dramatically. This can present a risk for retailers if they accept bitcoin and the value of the bitcoin decreases shortly after the transaction. To mitigate this risk, a number of companies (e.g., Bitpay, Coinbase) provide services to retailers whereby the companies accept a user’s bitcoin payment for a retailer and “immediately” credit the retailer with the dollar value of the bitcoin, thereby removing the volatility risk. Many retailers accepting bitcoins use these services.
Another potential disadvantage of bitcoin is the perception that it lacks value, as it is not issued by a single entity nor backed by a government or commodity. Its value instead derives from the fact that a growing number of users are willing to mine and/or use it, and a finite number of bitcoins can be mined. Many people have a hard time understanding how a “currency” not backed by a government or commodity can have value. It is worth noting, however, that many fiat currencies have not been backed by anything since going off the gold standard, making bitcoin less unusual in this regard.
IP Issues/Concerns with BitcoinPatents
Bitcoin is an open-source virtual currency, but it is also a transaction protocol. This means that people can modify bitcoin to create new virtual currencies and can build applications to leverage the protocol. The alternative currencies are often referred to as “alt-coins,” while the applications being built on top of the bitcoin platform are referred to as Bitcoin 2.0.
As with other innovations, these modifications and new functionality can be patented, assuming they meet the requirements for patent eligibility and are novel and not obvious. This is analogous to the internet—the TCP/IP protocol is the foundation of the platform, but many applications have been built on top of the platform and have been patented.
Some examples of bitcoin or virtual currency patents or patent applications include the following:
U.S. Patent No. 8510186 B2 - creation, redemption, and accounting in a virtual currency system (Facebook)
US 20140172633 A1 - payment interchange for use with global shopping cart (MasterCard patent application)
US 20140156497 A1 - alternative value exchange systems and methods (Western Union patent application)
Different entities have filed trademark applications for the BITCOIN mark in various countries, creating a complex situation regarding ownership rights in the term. To date, no enforcement actions have been filed.
In the United States, a number of trademark registrations have been issued that include the word “bitcoin” (e.g., AMERICAN BITCOIN EXCHANGE, EASY BITCOIN, MILLY BITCOIN, INSIDE BITCOINS), though most have disclaimed use of “bitcoin” apart from the overall mark. The term “bitcoin,” by itself, would likely be considered descriptive (subject to protection only upon a showing of secondary meaning) or possibly generic (not subject to protection) under US law.
Bitcoin software is licensed under an open-source license. Thus, it implicates the usual copyright issues that arise with open source. Beyond that there have not been many copyright-specific issues relating to bitcoin. For further information, see Open Source Fundamentals.