Patents, profit, and regulation at the 2023 Exeter Blockchain and Law Conference

A two-day conference organized by the University of Exeter brings government, academics, and blockchain industry figures together to talk about where innovative technology, such as blockchain and AI, intersects with the legal system.

On November 1, the University of Exeter kicked off its two-day ‘2023 Blockchain and Law Conference,’ in which government officials, academics, and industry practitioners gave their perspectives on current legal issues in blockchain and AI.

Organized by Dr. Jack Rogers, senior lecturer in economics at the University of Exeter Business School, the first day of the event in one of the department’s lecture theatres, an appropriate location for exploring how to encourage and get value from tech innovation.

Topics included how patents get approved and why they may be rejected. Can AI inventions be patented? Is there value in blockchain patents? How are U.K. regulatory efforts faring? And how should we define smart contracts?

To this end, day one of the conference focused on where patent law intersects with technology and sought to dispel the popular image of patents as solely protectionist and innovation-stifling.

An introduction to patents

Opening the event was Andrew Hole, senior patent examiner at the U.K. Intellectual Property Office (UKIPO), who laid the groundwork for the day’s discussions by outlining the essentials of current patent law in the country.

“It’s a limited monopoly right, it doesn’t let the patent holder do anything, it excludes others from doing the subject of the patent,” Hole said. “Patents are commercial tools, they’re used by businesses, and there’s no point in having a patent unless you’re going to use it”—this latter comment became somewhat of a theme throughout the day.

In essence, explained Hole, a patent is an agreement between the state and the patent holder, with the state agreeing to exclude others from doing the subject of the patent but making the patent public so that others can work on it.

This is the crux of how the UKIPO sees patent law. Not as a way for inventors or companies to vigorously stop others from copying them, but as making sure any invention or innovation is out there in the public sphere, to be improved upon and perfected (whilst making sure investors also get their due).

In this regard, Hole quoted the U.K. patent court, which generally dictates how rules are applied in practice, and describes the process like this:

“The patent system aims to incentivize technical innovation, and investment in disclosure of such innovation”—from a 2020 court of appeal decision in E Mishan & Sons, Inc v Hozelock Ltd.

For a patent to be granted, it must be “novel” and not exist in what is called “prior art,” i.e., any other previous and/or public account. If an invention is in the public domain anywhere, the patent application will be denied.

Hole outlined how certain things are also considered ‘not inventions’ or ‘exclusions’ for the purposes of obtaining a patent, namely:

• A discovery, scientific theory, or mathematical method;
• A literary, dramatic, musical, or artistic work (which is generally covered by copyright law);
• And a scheme, rule, or method for doing business or performing a mental act, playing a game, or—importantly—a ‘program for a computer.’

If a ‘computer program’ is to get around this last disqualifier, it must have a ‘technical contribution.’ This means it must solve a problem lying outside the computer, solve a technical problem within the computer, and/or constitute a new computer operation in a “technical sense.”

“If the invention’s only technical contribution lies in the exclusions, the patent will be denied,” Hole warned.

During the question and answer, one participating audience took issue with the description of huge swathes of computer programs and coding as ‘not technical’ and therefore excluded likely one of the conference’s many computer science attendees. When they asked Hole if it would be reasonable for the government to take out the ‘computer programs’ exclusion—bound by the restriction of government-authorized statements—he was only able to answer, “We can’t change statute, we interpret it.”

This debate rolled nicely into the day’s second talk as Rob Valkass, another UKIPO officer, went into more detail on how to obtain blockchain patents.

Blockchain patent

Building on the idea that there are certain things you can’t get a patent for, including mathematical methods, business methods, and computer programs, Valkass suggested innovative tech inventors ask themselves the question, “What has the invention really added to the stock of human knowledge?”

As patent examiners, “we must look at substance, not form,” said Valkass. Meaning inventions that have found a way to do something that already exists, just slightly more efficiently, are unlikely to get approved.

For example, “If you’re using the blockchain to perform some kind of financial transaction, it’s going to be very difficult to get out of the business method exclusion,” Valkass explained.

However, he assured his concerned-looking audience, some of whom were budding innovators in the Exeter University fintech program, “There is hope, as long as your computer program makes a technical contribution.”

These are the same technical contributions outlined by his colleague Andrew Hole.

Even with the technical contribution route, Valkass admitted that it’s not an exact science (pardon the pun) and that the challenges UKIPO has with interpreting this rule are where much of the contentious actions in the field come from.

“It’s tricky, these exclusions are where we get a lot of our tribunals and court cases,” he said.

The idea of the rules being derived from precedent was expanded on by the next speaker, another colleague from UKIPO, Nigel Hanley.

AI patents

“We don’t have a lot of case law on AI, it’s quite new” said Hanley, Head of Examining Group at UKIPO.

In the absence of substantive legal precedent, Hanley and his colleagues have to interpret the current laws as they apply to other technologies.

Summing up the patent office’s current approach to AI, he said the guidelines “do not depart from the established position on computer programs, same rules apply”—in other words, applications should avoid exclusions or offer a technical contribution if they want to be approved.

Hanley gave various scenarios to contextualize this, but was keen to caveat them as “example scenarios,” not official guidelines.

One was an AI trading assistant, which would not be given a patent because it amounts to a “method of doing business”—a more efficient method perhaps, but a business that already exists.

Another example was an AI that asks users questions, then analyses answers and gives a financial plan. This is also concerned with a method of doing business, i.e., offering financial advice, and as such, would be denied a patent.

Both examples also fall foul of the “technical contributions” route to a patent, as they don’t solve a problem outside or inside the computer or constitute a new operation of a computer in a technical sense.

Essentially, the message from Hanley was that it is not straightforward to get an AI-related patent approved, but not hopeless if you keep in mind the exclusions and the technical contribution.

“We aren’t here to turn down patents, we’re here to encourage innovation,” assured Hanley.

Another revealing moment came when he was asked, “Can you patent an invention made by AI, or does it have to be a human?”

Hanley, not wanting to step outside the bounds of government-approved messages, diplomatically responded that “there is a case before the Supreme Court. At the moment, it’s up to the Supreme Court to decide if AI can be an inventor.”

The case is that of entrepreneur Dr. Stephen Thaler, who is seeking to patent inventions that he claims were derived from an AI program called ‘DABUS.’ Thaler believes the owner of AI systems should be the default owner of patents for inventions derived from those systems and that it should be possible to name those AI systems as inventors on patent applications.

The UKIPO disagreed, and its findings were upheld by both the High Court and Court of Appeal in London.

Thaler has now taken it to the U.K. Supreme Court, which will have to determine whether a patent requires a human or a company to be named as the inventor in all cases, if a patent can be granted without a named human inventor, and when an invention is made by AI, whether the owner, creator and user of that AI machine are entitled to the grant of a patent for that invention.

In terms of Hanley’s opinion on whether an AI can be an inventor, he simply said, “I’ll reserve judgment.”

What is IP worth?

After the morning’s behind-the-curtain look into the inner workings of the patent office, Roya Ghafele, Director of OxFirst and visiting Professor at Brunel University, took the reins for an equally enlightening exploration of the economics of innovation and IP.

“IP is not inherently valuable, it becomes valuable once you pick it up and make something out of it,” said Ghafele, introducing the concept of ‘value-based IP management.’ The idea is that IP needs to be put out into the market. It’s no use if you just have a patent and sit on it.

As director of OxFirst, Ghafele would know about the value of IP. The firm has been labeled ‘Best IP Valuation Firm in the UK’ by Global 100 and ‘Best IP Law and Economics consultancy’ by SME News.

She went into depth about how to build a “great firm” based on IP valuation by building a product portfolio and deploying an IP portfolio—deploying being the optimum word.

“The exciting part of a patent is that it separates the invention from the inventor,” Ghafele noted. Meaning, as Hole explained earlier in the day, that the covenant of the patent involves the protection of the inventors’ rights to profit from the invention, but equally important is the invention being made public and available to be worked on and furthered.

Essentially, open innovation is the goal or should be.

Ghafele explained how secondary markets can be created for IP; after the first step of protecting the invention, the second step is a market/economy where ideas are exchanged.

On this point, she lamented how protective some people are with their IP and how the whole concept of IP has increasingly become about the protection and enforcement of rights, not the sharing of information. This is often due to the money involved in this process and the economy built around the protection and prosecution of IP rights, particularly in the legal sector.

However, Ghafele suggested this doesn’t need to be the case, that there are profits to be made in the sharing of IP, such as licensing, arranging, and renting out patents.

“This is a win, win… doing good by doing patents,” said Ghafele, in an optimistic finish to her talk and a convenient segue to the conference’s next speaker, whose company embodies this approach to patents in the blockchain space.

Commercial considerations of blockchain IP

Next up to bat was Robert Alizon, Chief IP Officer of nChain, a blockchain firm that the Exeter event’s organizer Rogers described in his intro as “probably the most successful company in the world in the area of blockchain.”

Global technology company nChain was named by LexisNexis in its second annual “Innovation Momentum: The Global Top 100” report and is primarily known for its extensive portfolio of blockchain patents.

Alizon expanded on the ideas around patents laid out by previous speakers, adding his expertise on how blockchain technology fits into the equation—and who better to speak on the subject than the Chief IP officer of the company with the most blockchain patents in the world.

After giving a brief introduction to Web3 and blockchain for the uninitiated—in which he stated that “blockchain is a utility, an infrastructure to evolve the internet”—Alizon went on to address the day’s main theme, patents.

“We sit on a large amount of patents,” said Alizon. “Maybe this can reassure you because this morning you heard that it’s difficult to get software patents through, and it’s true.”

This is no exaggeration, as nChain currently has 3,590 ‘active patents’—pending or granted—846 granted patents, and 510 patent ‘families’—a collection of patent applications covering the same or similar technical content.

But, as well as reassuring attendees that applying for a blockchain-related patent isn’t the fruitless endeavor that some of the UKIPO officials may have (unintentionally) made it sound, Alizon was equally keen to reassure fans of ‘making something out of patents’, such as Ghafele, that nChain isn’t a blockchain dragon, happy to guard over its ever-growing pile of patents.

“We look for utility,” said Alizon, who explained that “five to ten percent of patents in a portfolio might drive the value for the whole portfolio.”

He also echoed earlier sentiments that patents have the dual purpose of disseminating information and protecting inventions—it’s about balancing the awarding of limited monopoly to the inventor with the interests of a free market.

In the blockchain space, said Alizon, patent claim types are usually methods, apparatus, or systems. Like any IT invention, blockchain “needs to prove utility and distance themselves from abstract ideas.”

Once a blockchain patent has passed the UKIPO’s technical contribution test and been granted, the next step is how to enhance its value.

“The function of the patents is to protect and enhance the market share of technical companies,” explained Alizon. So, the patent is protecting a company’s share of market, but it can also license its share of patents to add value.

After concluding his dive into the world of blockchain patents, Alizon summed up his and nChain’s philosophy with regard to the field:

“I think it nurtures competition…patents can be used to research new areas you cannot research yourself… it’s a way to organize innovation, not prevent it.”

This was also an appropriate sentiment to round off the first day of the event, as it was a view that seemed to be shared amongst the various speakers.

Indirect regulation

Despite storm Ciaran hammering the South of England, canceling transport across the country, and forcing some of the conference attendees online, the energy of the speakers on day two remained undampened by the rain.

This was helped by a blistering first talk from Gareth Malna, founder of Englebert and Partner at Gunnercooke law firm, who gave an animated and revealing insider appraisal of how the U.K.’s new digital asset promotions regime is functioning in practice, as well as industry opinion on the regulation—it’s fair to say it wasn’t a wholly complementary one.

The U.K. announced the new digital asset promotions rules back in June, and they came into force on October 8.

Under the new rules, which are being enforced by the U.K.’s top financial markets regulator, Financial Conduct Authority (FCA), any promotion of digital asset products or services needs to attach a ‘clear warning.’ Firms marketing digital assets to U.K. consumers need to introduce a 24-hour cooling-off period for first-time investors to allow them to think about and possibly back out of spur-of-the-moment or potentially unwise investments.

Another significant change is that now there are only four lawful routes firms can take to communicate digital asset promotions in the U.K.:

• The promotion can be communicated by an “authorized person,” as defined by the FCA. This includes ICVC, the Society of Lloyd’s, and persons with Part 4A permission.
• An unauthorized person can communicate a promotion that an authorized person has approved.
• The promotion can be communicated by a digital asset business registered with the FCA under the Money Laundering, Terrorist Financing, and Transfer of Funds Regulations 2017 (MLRs).
• The promotion meets the conditions of an exemption in the Financial Promotion Order.

Promotions not using one of these legal routes will be considered in breach of the new regime and thus “a criminal offence punishable by up to 2 years imprisonment, an unlimited fine, or both.”

“The rules are blanket and they’re getting enforced strictly,” Malna said after outlining the regime to the attendees, physical and virtual, of the Exeter event.

In his talk, titled “Banning Bitcoin: the surprising power of indirect regulation,” Malna explained how the promotions regime amounts to ‘indirect regulation.’ 

“Crypto assets, as of today, are not a regulated industry. There are regulations that capture them, the money laundering regulation being an example,” Malna remarked. “But here, suddenly, we have a regulator that can come after a crypto product via its promotions or marketing.” And the regulator in question, the FCA, appears to be taking to its new responsibility with gusto.

The FCA issued 146 alerts on breaches of the new rules in the 24 hours after the new regime went live; that number had risen to 221 as of October 30.

A breach of the rules is also likely to land a digital asset firm on an ever-growing warning list, which means authorized persons will no longer work with the firm to communicate their promotions, after which it becomes next to impossible for a firm to legally promote and market in the U.K.

“Once you’re on the list, it’s hell,” explained Malna, who speaks from experience, as his company Englebert is currently in the process of obtaining an “authorized person” license to sign off financial promotion in the digital asset space.

More concerningly for Malna is that the promotions regime in its current form can be used by authorities to relatively easily bar certain players from the market.

“If you happen to be a project that the FCA doesn’t like, and they might think this is a good opportunity to remove you from the market, they can use the promotion regime to scare off approvers from working with you.”

The implication here is that ‘questionable’ entities who are under suspicion, investigation, or already in court in other jurisdictions can be put on the warning list, which then dissuades any authorized persons from working with them, lest they be tainted in the FCA’s eyes by association and lose their authorizing privileges. Without any legal route to promotions, such an entity would effectively be forced out of the market.

Needless to say, Malna is not a huge fan of the digital asset promotion regime. He summed up his talk by pointing out, “Isn’t it crazy that in an industry not yet regulated, I can spend forty minutes telling you how you can market that industry in the U.K.?”

Whether the promotion rules are too onerous or appropriate for an industry mired by scandal is debatable, but essentially, the message was clear: get compliant with the promotion regime, or you won’t last long in the United Kingdom.

This was a sentiment echoed by the second speaker of the day.

Innovation and regulation

“To be successful on any metric you need to be compliant. Nothing kills a business like non-compliance,” said Dan Hyde, Partner at Keystone Law, Cyber Coach-Mentor at the Judge Business School, and visiting Professor at Queen Mary University.

Sometimes it’s best to keep it simple, Hyde told the day two conference audience. “The more factors and tech involved in a business model, the more compliance factors you’ll need to consider.”

Hyde’s lecture focused on aligning innovation and regulation for commercial success, particularly in relation to blockchain and AI.

“Blockchain is a seminal world-changing technology because it fills an important gap, the trust gap,” said Hyde. He went on to explain how the possibility for immutable ledgers, free from the tampering of intermediaries, has the potential to offer the trust to consumers and investors that might have been missing from the financial sector.

In terms of other gaps in the market, Hyde suggested that “with AI, the potential is so huge we don’t even know what the gaps are it can fill.”

“The generative AI solution we have now is just the tip of the iceberg.”

However, whilst singing the praise of such technologies, he was keen to remind the attentive conference attendees that “when you use any technology it has to be in a globally permissible way.”

‘Globally permissible’ means compliant with regulation across jurisdictions, without which any tech would be limited in scope. This is easier said than done when it comes to some of the most innovative, fast-moving fields.

“Both blockchain and AI can play very different roles in very different businesses. Their versatility is their strength in this regard, but it’s their weakness when it comes to regulation,” suggested Hyde. Who added that “in the arena of tech, regulation is a moving target.”

The law will always be playing catch up with the rapid advancements in technology, such as blockchain and AI. This is something that’s been painfully obvious in the U.S. of late, where many digital asset advocates and companies cry foul over the Securities Exchange Commission‘s (SECs) supposedly heavy-handed enforcement of rules that they see as unsuitable for technology that defies traditional categorizations such as ‘security.’ However, there are equally loud and well-reasoned voices who say the existing regulation is suitable and the industry’s non-compliance is simply willful lawbreaking.

Hyde’s parting advice to businesses whose use of certain technology might land them in the middle of this debate was, “If you’re going to build a business around disruptive tech, don’t lose sight of traditional business values, such as behaving in a sustainable and ethical way, this will minimize risk.”

Sound advice if I’ve ever heard it.

What is a smart contract?

Rounding off day two’s exploration of the intersection of law and innovative technology, Monica Vessio, Lecturer of Law at the University of Exeter and researcher in CBDC and smart contracts, gave a presentation on her smart contract research project.

Appearing on the lecture theatre’s big screen via video link—her physical attendance another victim of storm Ciaran—Vessio explained how her soon-to-be-published research set out to define smart contracts and determine whether they fall more into the legal or computer science field, straddling as they do both disciplines.

Vessio’s study found that, while computer scientists felt comfortable with the terms, they were using it in indiscriminate ways. “There was a lack of consensus about the term in computer science communities,” Vessio stated.

“Most logical meaning that can be assigned to smart contracts must incorporate only universally technology agnostic characteristics.”

Blockchain is the field with which smart contracts are most closely associated, but not their exclusive domain. Therefore, any universal definition of a smart contract, if there is such a definition, must not be focused solely on its blockchain application.

After much cross-referencing and searching where and how the term appears in both legal and technological fields, as well as how it’s understood in the public consciousness, the definition Vessio and her colleagues landed on was the following:

“A smart contract is a digital representation of terms and conditions (unlike a static pdf), this quality allows fluidity of data; performance is automated or part automated; and it’s a legally binding agreement.”

Vessio added that whatever form it comes in, “the code needs to meet the requirements for it to be a contract or it’s something else, not a contract.”

The study also found, perhaps due to its relative recency and the contradiction with how it is understood in various circles, that the term ‘smart contract’ was not yet so entrenched that it could not be adapted.

Rounding off her talk and in a nice bit of symmetry with day one of the conference, Vessio made a similar prediction for the future accepted definition of a smart contract as UKIPO’s Hanley had made the previous day with regards to whether an AI could be considered an inventor—look to the courts.

“Eventually you’ll have a case that comes before the courts and they’ll have to define a smart contract,” Vessio said. “Then we’ll have a more definitive definition in common law to work with.”

Unfortunately, torrential weather and flooding prevented the event’s final scheduled speaker, Member of Parliament (MP) Martin Docherty-Hughes, from attending a fireside chat on blockchain policy in what would have been a fitting sendoff to the conference—if only the U.K.’s aging and poorly funded infrastructure moved as quickly and inexorably as the march of technological innovation.

However, in the MP’s absence, the event was no less fascinating and timely in its discussions. With the rate of progress in the areas of AI and blockchain technology, it seems certain deeper exploration of such topics will only become more vital. So here’s hoping this is the first of many future conferences in Exeter.

Watch: IEEE Exeter Blockchain Event highlights