Transforming ideas into a tradeable asset — how tokenization will disrupt Intellectual Property Rights
The tokenization of Intellectual Property Rights (e.g. patents, copyright) will significantly reshape a stagnating, yet crucial sector. Not only will this lead to increased collaboration and thus better innovation, but also to far more liquidity. Additionally, merger and acquisition related processes are eased as the dependence on bureaucracy when discussing the value of innovations can be neglected. In the US alone, Intellectual Property Rights account for more than a third of the GDP and inherit an estimated value of 6 trillion (!) dollars. This is set to increase even more with the rapid evolution of technology and accelerating innovation thereof. This can be specially seen in the blockchain industry, where a day often feels like at least a week in other sectors. Despite their substantial economical worth, the process of obtaining an Intellectual Property Right and with it financing can be described as outdated. Here applying blockchain technology and subsequently tokenization will rejuvenate the current state of the art and prepare this sector for the fastly approaching digital economy or better: The “tokenomy” of Web 3.0. — Author: Nicolas Weber
Introduction to Intellectual Property Rights
Generally, an Intellectual Property Right (IPR) can be depicted as the right given to individuals/groups over the creation of their minds. They grant an exclusive permission for the use of the invention over a specific period of time. Virtually every impactful innovation originates from these IPRs. None of the contemporary market players would exist, if it wasn’t for IPRs pathing the way to success. Therefore it comes to no surprise that they inherit the value of trillions of dollars and bear a significant role for just about anybody — inventor or utilizer. The unique thing here is the fact that they truly do not differentiate between industries, since every single sector seizes the opportunities they provide. To better understand their broad spectrum of utilization, they can be subdivided into (1) Industrial Property Rights and (2) Copyrights.
(1) is divided according to subject matter of protection and includes instruments such as trademarks (distinctive sign of product or service), designs and patents (technological innovation or process). A protection and registry in the respective patent and trademark office of a country becomes necessary, if the inventor plans to ban third parties from using it. (2) on the other hand refers to the legal right of the owner of intellectual property. The original creators of products and anyone they give authorization to are the only ones with the exclusive right to reproduce the work. It becomes evident how much value and future growth tokenization can bring to the table here. The reproduction can be conducted much smoother and therefore turning IPRs into a liquid, fungible asset will enable companies to not only finance their business, but also to prevent having to give away their innovations to the wrong people. Some of the most meaningful patents in history are the telephone by Alexander Graham Bell, the car by Karl Benz and the World Wide Web by Tim Berners-Lee. The market for the monetization (e.g. tokenization) of patents is definitely there and auspiciously growing, since the number of patents applied for per year is steadily growing, as illustrated in figure 1 below.
Figure 1: Patent applications annually 1990–2018.
The current, undymanic structure present
In principle, the protection is limited to the country where the initial grant was provided. As we live in the age of globalization, it is obvious that applicants want their innovation to be protected across the world. With the current, undynamic system in place, you virtually have to apply in every country, where you pursue to conduct business to prohibit competitors from copying. In Germany alone, the estimated costs for possessing a patent for 20 years are 20.000 EUR or more. Not included are costs for lawyers and researchers deciding whether the application is valid and limiting the risk of deletion. Furthermore, the whole process itself until an IPR is permitted may be more than two years infused with various single steps and fragmented payments to be made. Now imagine how many working hours and hence costs are accumulated for globally oriented businesses, when even the European Patent Office (EPO) is constantly struggling to build a standardized architecture. Moreover, many intermediaries are involved leading to an omnipresent high degree of friction.
Trying to cope with these issues, the Patent Cooperation Treaty (PCT) was implemented by 151 countries aiming to abolish regressive structure. However, the plan did not go quite as smoothly as intended. We still have a fragmented validation preventing an unified approach and the PCT again is for instance not on par with the EPO. Further, the PCT still requires multiple different channels of registration based on the destined regions and countries where IPRs are supposed to be protected. Another detrimental aspect here to mention is that prior to utilizing the PCT, one has to fully decide which countries they want to be protected in. Any later changes to this will lead to even more costs, individual processes and time consuming paperwork. One major pain point crystalized itself: A significant lack of standardization making it impossible for companies to efficiently utilize these substantial innovations without the risk of eager competitors simply copying or even improving their idea. Reproduction obviously involves a similarly complex and inefficient process.
When applying for an international patent for example, at least 2000 Euro have to be spent on initial research, then it will be eligible for the registration of the primary check. Within 30 months, a signup in the destined countries has to be concluded individually. Afterwards additional requirements and varying costs in each respective country further bolster inefficiency. Therefore costly patent lawyers have to be hired, familiar often with only the laws in their respective jurisdictions. Consequently, costs become almost unbearable, especially for smaller firms. As a result, the market gradually attains an oligopolistic layer where only larger companies can in fact dictate and thus take advantage of innovation. What has not even been mentioned so far are expensive legal battles when two or more parties argue on the possession of the IPRs and the actual ownership or when merger and acquisition negotiations take place. There is actually no universal databank which lists all protected IPRs in a user-friendly way or even remotely estimates their value. Last but not least, financing this whole process and the efficient reproduction sale are also lacking behind the possibilities of today’s world. Financing a patent, which in turn could be worth millions of dollars in the future, can be, as described above very expensive. Here dynamic methods are missing and much paperwork and friction are harming innovation. In addition to this, when selling the usage or reproduction of an IPR, again many cost and time intensive obstacles have to be surmounted before for instance a patent from company A can be utilized by company B or when company A merges or acquires (with) B and they discuss the value of their respective innovations.
Tokenization and blockchain can solve pain points and turn IPRs into 24/7 tradable assets with transparent ownership distribution
Simply put, a blockchain is a distributed, decentralized database. The copies of these databases are stored on a large number of servers. A single update on one server results in simultaneous updates of the data on all others. Transactions in blockchain based platforms cannot be changed afterwards and are mostly transparent. Tokens can now be linked to these transactions, primarily as digital representations of valuables, ownership, money or securities. Transactions are transferred and updated in real time, and all processes are automated and standardized via smart contracts. Objects of value are recorded in an unchangeable data structure and managed by an algorithm based on cryptographic mechanisms. Thus, numerous points of friction in today’s economy can be counteracted preventively. These features make blockchain a predestined fit for establishing an universal and user friendly database for storing information and value of all the protected intellectual properties. This would for instance significantly ease the processes of mergers and acquisitions.
A substantial benefit of tokenizing IPRs and hence applying smart contracts is the fact that the ownership can be fragmented. Subsequently they can be distributed on the open market for investors to raise capital or ownership of the rights can be sold to other parties wanting to utilize the same patent for their own purposes. It could even go as far as that the patent issuer will be rewarded through a pay-per-use system, fully automated with smart contracts. Additionally, ownership transfer or reproduction could be instantly available with full legal compliance. Delaying intermediaries and cost and time consuming paperwork would be a thing of the past. The creation of a frictionless market would be fulfilled. Further, these instant transfers would permit patent holders to limit the various expenses of the earlier described process of receiving a patent. They now have multiple efficient and instant ways to guarantee funding for their innovation by for instance offering them on the secondary market. The underlying blockchain technology will guarantee full transparency while executed transactions and even past ownership could be easily traceable.
As investors tend to be future oriented, tokenized patents provide them the most advanced option to diversify their portfolios. Acquiring complimentary IP assets or licenses needed to IP rights and related protected technologies is similar to a non dilutive company equity. This is a unique source of capital for primarily early stage corporations or entrepreneurs with disruptive innovations. Also this could provide a liquidity boost for pre-profit research laboratories. It will have reduced legal and administrative costs and accounting plus recognition could be handled efficiently. Last but not least, tokenized IPRs are instantly convertible into other assets thanks to the distinct features of ERC20 tokens. Thus they morph into a financeable asset class. The key benefits of tokenizing IPRs with pioneers like Amazing Blocks can be seen below.
Figure 2: Key benefits of digitizing IP.
How to tokenize Intellectual Property Rights with Amazing Blocks
Tokenizing a patent for example is an unprecedented way to provide liquidity and expose them to a global marketplace. After the successful tokenization, the patent still belongs to the owner, but the ownership is efficiently packaged into a special purpose vehicle (e.g. token). The owner will receive an Ethereum-based digital token that represents the rights to the patent. First of all, legal hurdles have to be taken out of the equation. Amazing Blocks efficiently leverages the renowned TVTG (Liechtenstein Token Act) enabling the establishment, disposition and administration of digital legal entities (e.g. tokenized patents) in Liechtenstein with EU-wide validity. On the other hand, Amazing Blocks utilizes Ethereum as a technological layer for its client oriented white-label software called Tokenpad. The consequential emergence are equity tokens, which are represented on a blockchain. They consist of a legal part (the articles of association) and a technical part (smart contract). Both are perfectly integrated — tech and law. If you plan to tokenize your asset (e.g. patent), you first have to select an IP appraiser to determine the initial value. Subsequently, you have to request and fill out a few templates already provided by Amazing Blocks. Then the documents will pursue the process of legal verification, as efficiently as possible thanks to a wide range of partnerships with actors of this space (e.g. lawyers). A few days later, access to the Tokenpad will be granted and the comprehensive journey to owning digitized ownership rights for patents has started. Now stored in ERC-20 wallets, the ownership can be fragmented, traded, sold and bought on the secondary market. All whilst enjoying the instant, peer-to-peer features of Ethereum. Thus the final result is an alternative, dynamic asset class for financing purposes, investments and reproduction distribution.
Future outlook and conclusion
The liquidation or better monetization of patents will lead to far greater resources for every party involved. Also it increases mutual collaboration in the business world, instead of spending tons of money on trying to reproduce an invention. Now innovators have the chance to work closely together providing customers the best and most disruptive product possible. Simultaneously, the inventor of the patent is benefitting from this while turning IPRs into a tradeable asset class and in turn leading to a significant capital influx. Especially small and medium sized enterprises now actually have the opportunity to compete with the IBMs of the world. They do not have to worry about costs too much for establishing a patent and can easily offer and protect their innovation around the world with secured funding. This will unlock trillions of dollars worth of innovative ideas and make them available on the market. Investors can better diversify their portfolios whilst investing in the future and innovators do not have to worry about financing their ideas anymore. A dynamic market is created.
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Amazing Blocks offers a white-label software that enables its clients to tokenize shares of a Liechtenstein legal entity. Legal entities can then be founded based on equity tokens and administered with less effort, in a digital way and remotely from anywhere. The best use cases are legal entities for blockchain startups and as a legal wrapper (special purpose vehicle, SPV) for any tokenized asset (e.g. machines, cash flow generating contracts, trademarks, real estate, classic cars). Our goal is to standardize legal entities which then dramatically reduces the cost and time needed to tokenize assets and rights. Digital legal entities are easy to administer (e.g. ownership transfer of equity in a few minutes) as they rely on tokenized shares in line with the Liechtenstein Token Act. Here, our software helps guarantee a high degree of automation and standardization. In a similar way, fundraising and ESOP for your legal entity can be done anytime: A few click in your software and the shares for the new investors or employees are generated and transferred — inline with the legal entity’s articles of association.
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