Patent Challenge Update; CFPB Rulemaking; CFTC Issues Report on Digital Assets and Blockchain Technology

Patent Board to Hear DEF’s Patent Troll Challenge 

What happened?

On January 5th, the Patent Trial and Appeal Board (PTAB) of the United States Patent and Trademark Office (USPTO) granted DeFi Education Fund’s petition to institute an inter partes review (IPR) of True Return Systems, LLC’s (TRS) patent that falsely claims to invent oracle-like technology. An IPR is a procedure for challenging the validity of a U.S. patent before the PTAB. For additional context and information about the petition, see our previous blog post.

To institute an IPR, a petitioner must show that at least one ground for challenging the patent is reasonably likely to succeed on the merits. Here, the PTAB found that “[DEF]… demonstrated sufficiently, for purposes of institution, that claim 1 would be unpatentable under §103.” Meaning we successfully convinced the Board that our view - that challenges the validity of TRS’s patent - is likely to succeed on the merits. 

Currently, an oral hearing by the PTAB is scheduled for October of this year, and the parties will have a chance to make motions ahead of the hearing. See the full scheduling order here.

What does this mean?

This is a welcome development for the blockchain industry and a positive step towards the revocation of a patent that wrongly claims to own oracle-like technology. An IPR will give DEF the opportunity to show that TRS did not contribute anything novel or inventive, and that their patent is based on existing technology and prior art.

Patenting technology that is commonly used and shared in the blockchain sector is incompatible and hostile to the culture of open-source software software development and protocol interoperability. The patent system is meant to encourage innovation and protect original and unique ideas, not to stifle innovation via the exploitation of existing technology.

DEF is confident in its case and looks forward to defending blockchain’s open source culture at trial.

DEF Comments on the CFPB’s Rulemaking

What happened? 

Last Monday, we submitted a comment letter on the Consumer Financial Protection Bureau’s (CFPB) proposed rulemaking, “Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications.” While DEF shares the CFPB’s objective of empowering and protecting consumers, we argue that the proposed rulemaking should not be finalized in its current form and the CFPB should defer any further action until Congress provides a comprehensive legislative direction.

Specifically, we argue that: 1) the proposal’s definitions for the “‘general-use digital consumer payment applications” market and “larger participants” in that market are vague and make it nearly impossible to decipher which entities will be included; 2) the proposal does not include an adequate cost-benefits analysis and fails to consider publicly-available resources that could aid in conducting a more thorough analysis; 3) the proposal conflicts with other agencies’ interpretation of their own authorities over the same market participants; and 4) novel technology requires careful consideration and the CFPB — among other agencies — should await Congressional action before attempting to regulate the digital asset industry.

What does this mean? 

We believe that distributed ledgers, cryptocurrencies, and DeFi protocols promote many of the same goals that the CFPB seeks to accomplish with this proposal. We also believe that users of these technologies should have unencumbered access to a more transparent financial system that does not vary depending on who they are, where they are located, or their ability to open an account with a traditional banking institution. However, U.S. agencies should create sound, consistent rulemaking in alignment with legislative frameworks. In order for that to happen, agencies should wait for Congress to enact a comprehensive market structure bill before implementing further rules.

CFTC Issues Report on Digital Assets and Blockchain Technology

What happened?

Last Monday, the Commodity Futures Trading Commission’s (CFTC) Technology Advisory Committee Subcommittee on Digital Assets and Blockchain Technology released a report which (1) defined “DeFi”; (2) outlined DeFi policy proposals, objectives, and risks; (3) laid out DeFi-related issues for policymakers and industry; and (4) suggested possible policy and regulatory recommendations for existing and emerging DeFi projects.

CFTC Commissioner Goldsmith Romero stated that the report “finds… the benefits and risks of DeFi depend significantly on the design and features of specific DeFi systems… most DeFi systems are not completely centralized or decentralized but instead operate on a spectrum. I hope that this report can serve as a first step to facilitate a dialogue between policymakers and industry particularly because DeFi remains at the center of illicit finance risks, cyber hacks and theft.”

The report strongly endorses a partnership between public policymakers and DeFi developers to create sensible regulation. The Subcommittee additionally recommended that the Commission “share information and strategies across regulators to identify common points of information and assessment that could be harmonized across multiple authorities.” 

What does this mean?

The report emphasized the inherent complexities and nuances in ever-evolving DeFi. The Subcommittee rightly found that DeFi projects will require new rules and that applying TradFi regulations to DeFi projects wouldn’t work and would undermine its innovation. This report is a productive step forward in the policy debate around DeFi, and it is especially notable for being the first like it in the United States.  

As the Subcommittee noted, public-private partnership will be integral to create rational policy moving forward.