How blockchain is critical to the securitization of IP

By Amanda G. Ciccatelli
October 9, 2017

Bitcoin blockchainToday, product endorsements and licensing deals aren’t the only way for entertainers and athletes to make big money from their intellectual property – they can also issue blockchain-based securities to bring in more cash.

As of late, liquidity in markets for cryptocurrencies like bitcoin is opening a new door for musicians and athletes to issue digital tokens in exchange for money. The tokens are validated by blockchain, a public ledger used for the authentication of digital currency transactions, and backed by copyright, trademark or other IP assets. The tokens are issued through smart contracts regulated in the U.S. by the Securities and Exchange Commission. However, it is still not clear how regulators will treat them, so this area of digital currency will be gray until the SEC steps into a more active role in the next few years.

IPWatchdog recently sat down with Aaron Swerdlow, and Banu Naraghi, attorneys at Gerard Fox Law, to discuss why digital currency offers a new way to scrutinize IP.

According to Naraghi, blockchain specifically is critical to the securitization of IP because it guarantees the validity of a transaction by recording the transaction on a main centralized register as well as a connected publicly distributed system of registers. The fact that data is embedded within a public network and updated with each transaction promotes transparency and prevents modification or corruption.

“One of the most common applications of blockchain technology is the use of it as a registry of IP rights, to catalogue and store original works,” he explained. “When IP rights holders register their works to a blockchain, the rights holders can ultimately end up with concrete evidence of ownership, which is free from tampering, because once a work has been registered to a blockchain, that information cannot ever be lost or changed. So, third parties can use the blockchain to see the complete chain of ownership of a work, including any licenses and assignments.”

Today, digital currencies give Internet users the ability to create value and authenticate digital information and can therefore provide artists with a new revenue stream and distribution model. Blockchain’s distributed ledgers allow for the creation of peer-to-peer music distribution systems which enable artists to sell songs and licenses directly to their customers.

“An artist can release a song on blockchain and once users purchase licenses to download, stream, or remix the song via ‘smart contracts,’ which are automatically executed computer codes built directly into the blockchain technology that facilitate and enforce the performance of a contract,” said Swerdlow. “Then, each payment can be automatically split on the blockchain and set to the appropriate rights holders based on their percentage share of the work.”

The most prominent athletes advocating for blockchain-based securities are Floyd Mayweather and Mark Cuban, per Swerdlow. Mayweather has the distinction of being the first paid celebrity digital currency sports endorser, helping Stox.com ICO generate over $30 million. Cuban is a financial backer of U.S. e-sports betting platform Unikrn, which plans a $100 million initial coin offering (ICO), in the next month. The currency, UnikoinGold, will allow users to gamble on e-sports in regulated markets, backed by the underpinning of blockchains.

“Expect athletes whose primary IP is their name, likeness and data generated by their athletic performance, to increasingly monetize blockchain-based securities through celebrity endorsements rather than the selling of their IP through a blockchain,” he said.

For example, TokenStars, the first project to tokenize athletes, aims to revolutionize the talent management system by using blockchain to decentralize it and facilitate support for young athletes, then share the value with the community. A notable exception is TokenStars, which recently began selling tokens to support young athletes, with investors to receive a share of the athletes’ income, and endorsements at a significant discount, training time, merchandise and event tickets.

These days, liquidity is facilitating entertainers and athletes to be able to go directly to fans, consumers, and everyday investors to raise capital in the form of digital tokens. Many fans have sentimental connections to their favorite celebrities, which can lead to an overvaluation of an opportunity to be associated with or support, personally, a celebrity or athlete. “You can expect celebrities and athletes to offer personal access, special tickets or events and souvenirs to entice purchase of digital tokens,” he explained. “In these situations, investors should separate their affinity for a celebrity or athlete when determining the value of a digital token, perhaps with the advice of legal counsel.”

The appeal of smart contracts make business decisions and delegate tasks to other smart contracts, means smart contracts are likely here to stay, according to Swerdlow. And it is also clear that regularity clarity is necessary. In fact, Commodity Futures Trading Commission (CFTC) and the self-enforcing Financial Industry Regulatory Authority (FINRA) are keeping a close watch on the industry under the assumption that the potential to make money will be motivated to game the rules. Smart contracts can have their code manipulated so that money is stolen so if left alone by regulators, the popular area of finance would open for an outbreak of fraud and theft.

“We may see states as the laboratories of various forms of regulation of smart contracts,” he said. “Arizona may lead the way, having earlier this year recognized blockchain signatures and smart contracts as having full legal effect, validity and enforceability. New Hampshire appears to taking a different approach by excusing digital currencies from money transmission regulations.”

This early in the evolution of the industry, so it is likely that federal regulators will closely monitor to see if the technology is truly as secure and reliable as many proponents claim, while studying the impact and effects of state regulations on cryptocurrencies and digital tokens, per Swerdlow.

“The SEC’s treatment of cryptocurrencies is important because it affects the overall value of cryptocurrencies as well as the likelihood that the blockchain technology will thrive in a country or jurisdiction,” explained Naraghi. “The legal gray area that this currency occupies has caused companies to avoid U.S. investors and markets altogether. The SEC has slowly stepped into a more active role regarding evaluating these currencies

The Author

Amanda G. Ciccatelli

Amanda G. Ciccatelli is a Freelance Journalist for IPWatchdog, where she covers intellectual property. She earned a B.A. in Communications and Journalism from Central Connecticut State University in 2010. Amanda is also currently the Lead Strategist of Content Marketing, Social Media & Digital Products at Informa, a leading global business intelligence, academic publishing, knowledge and events business. She also works as a Freelance Journalist for Inside Counsel. Amanda was formerly a Web Editor at Technology Marketing Corporation. Follow her at @AmandaCicc.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 2 Comments comments. Join the discussion.

  1. Joachim Martillo October 12, 2017 4:44 am

    I wonder whether block chain could be used for the USPTO Registry of patents and patent applications.

  2. Papichulo December 1, 2017 4:53 am

    Hi Joachim, I’m positive that Blockchain technology is ideal for the registry of patents and patent applications as in the USPTO. Also for het registry of ships and diplomas.

    MIT to Issue Diplomas Using Bitcoin Blockchain

    https://news.bitcoin.com/mit-issue-diplomas-using-bitcoin-blockchain/?utm_source=OneSignal%20Push&utm_medium=notification&utm_campaign=Push%20Notification

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