The Motivation behind Square Inc’s Cryptocurrency Open Patent Alliance
Square Inc recently announced the launch of a patent pool called the Cryptocurrency Open Patent Alliance (COPA). What is a patent pool? A patent pool refers to an agreement between two or more patent holders who transfer their intellectual property into a consortium related to a specific technology. The members of the consortium then come to an agreement to cross-license patents with each other and, sometimes with outside third parties related to that specific technology.
Often, patent pools are associated with complex technologies that require complementary patents in order to provide efficient technical solutions. Generally, these patent pools cover mature technologies. Pools also frequently represent the basis for industry standards that supply firms with the necessary technologies to develop compatible products and services. This allows licensees to use patents on fair, reasonable, and nondiscriminatory (FRAND) terms.
Patent pools have been the subject of ongoing discussions from both a legal and an economic perspective. On the one hand, patent pools may have positive effects on competition and innovation. By sharing intellectual property assets, companies may develop new products and reduce their transaction costs. On the other hand, under specific circumstances, patent pools may provide an opportunity for a possible anti-competitive behavior: like any cooperation among competitors, they involve an inherent risk of collusive behavior. In other words, a patent pool may be regarded as a cartel. In addition, there may be competition-related concerns regarding the licensing practices and restrictions they entail.
Enter Jack Dorsey, CEO of both Square Inc. & Twitter Inc. who has been an advocate for cryptocurrency in the last few years. He is a man who thinks that bitcoin is poised to become the native currency in a new global internet-based economy. He also strongly believes that bitcoin can push Square Inc. to the forefront of a new global digital economy.
As mentioned earlier, last week Square announced the launch of the COPA, a non-profit that wants to prevent companies from locking up useful technologies in patents related to cryptocurrency, a practice that stifles innovation. To become part of COPA, members must pledge to make their patents freely available to all other members using a shared library. This library will act as a “collective shield” protecting members from “patent aggressors,” said Square — which ventured into crypto in 2018 and has already committed to putting its own crypto patents into the new library.
In order for COPA to successful, some of the major patent holders within the cryptocurrency space have to join the consortium. Who are the major players? Figure 1 below shows the top 10 patent holders for the last 10 years. This illustrates the number of patents but does not take into account the strength of the patents themselves. Companies liked Digital Gold Exchange, nChain Group, and Bizmodeloine Co are at the forefront of cryptocurrency patent filing. As noted below there has been a huge spike in filings since 2017.
What does this all mean in relation to COPA and why would Square launch the patent pool now and not at the beginning of their business journey? Is it because probably because Jack Dorsey realizes they can’t build a scalable, high-throughput product without tapping into innovation that is patent protected. How else can Jack Dorsey position Square so that they may take advantage when bitcoin becomes the native currency in a new global internet-based?
Square appears to understand that the innovations that are crucial to building a successful blockchain and digital currency platforms and services have already been patented. In other words, the formation of COPA is a strategic move that Square needs in order to advance its cryptocurrency agenda and they are hoping a few of the companies with these crucial patents will join their consortium, giving them access to the technology. Currently Square Crypto is the only company in COPA, and as time moves on, it will be interesting to see if other companies join Square Crypto’s new non-profit organization.