Howey's "Common Enterprise" | Blockchain Patents | The FinHub | Introducing an Oracle | and The Oracle Problem.
?Jesse Camacho
IP Practice-Area Chair | Patent Litigator and Legal Strategist Helping Clients Achieve Their IP goals.
(04/24/2022) This week's newsletter explores the "common enterprise" prong of the "Howey" test, looks into blockchain/crypto-patent statistics, points out the FinHub, introduces oracles, and discusses the "oracle problem." Remember to subscribe and like if you find this helpful.
#intellectualproperty?#patentattorney?#cryptocurrency?#defi?#NFTs?#metaverse?#blockchain?#Web30?(As always, no legal or financial advice here.)
04/18/2022
(04/18/2022) Generally, a "common enterprise" under the Howey test exists where an investment scheme involves either “horizontal commonality” or “strict vertical commonality.”
A 2021 order in an SEC civil case helps explain the concept of a common enterprise under the Howey test. See Sec. & Exch. Comm'n v. NAC Found., LLC, 512 F. Supp. 3d 988 (N.D. Cal. 2021) ("the NAC Case" or "the Court").
Recall, Howey refers to the S. Ct. case that explains the test to determine if something is a security. The Ninth Circuit has “distilled?Howey's?definition into a three-part test requiring (1) an investment of money (2) in a common enterprise (3) with an expectation of profits produced by the efforts of others.
This post examines the second prong: a common enterprise.
In the NAC Case, the SEC alleged that retail U.S. investors exchanged capital for ABTC tokens, which could, at the time of the exchange, be put to no use aside from online trading. The defendants were also said to have retained a significant share of ABTC tokens "for their personal and corporate coffers." Id.
A common enterprise exists where the investment scheme involves either “horizontal commonality” or “strict vertical commonality.” Id.
The Court found that the SEC adequately pleaded the common-enterprise prong on the basis of strict vertical commonality between the defendants and the ICO participants.
The Court supported its rationale by finding that fortunes of the ICO participants were linked to those of the defendants.
The ICO proceeds would fund the development of an AML BitCoin ecosystem, and each ABTC token could (eventually) be redeemed for an AML BitCoin. Thus, the "fortunes" of ICO participants—as measured by either the trading value of their ABTC tokens?or?the future trading value of AML BitCoin—were “linked” to the “fortunes” of defendants—as measured by the trading value of their ABTC tokens, the future trading value of AML BitCoin,?or?the general success of their enterprise (which would, as a matter of efficient market theory, drive the price of both digital assets).
Note, the common-enterprise prong is separate from the expectation-of-profits prong.
Takeaway: A linking of fortunes of (1) customers (e.g., coin or token buyers) with (2) an offering organization may--in connection with other facts--tend to support the notion that a common enterprise exists within the meaning of Howey.
04/19/2022
(04/19/22) I am fan of?Blockworks. Make no mistake, a big fan. They present a great deal of useful information. But yesterday, one of its articles stated: "There are no patents or intellectual property in crypto[.]"?https://lnkd.in/gUDMN2C9.
I suspect the article was trying to make a different point. But it is possible that some might think there is no IP or no patents in the overall crypto space. That would not be ideal.
I had posted a few days ago that over 7,000 patents have issued that at least mention "blockchain" somewhere in the document. But all patent attorneys know that it is the claims that define an invention, not the specification, and certainly not references to prior art. And although the mere mention of "blockchain" in a patent might be some sort of useful metric, claim mentions would be far more relevant.
So, let's look at patent claims.
What might be coming down the pike?
There is overlap in the above, and no telling if the applications will ripen into patents. But there are definitely patents and IP in crypto.
Crypto & blockchain technologies are innovative technologies, as are Internet, telecommunications, embodied software, and networking technologies. From an IP perspective, crypto/blockchain does not sit in its own silo.
Instead, crypto/blockchain innovations will generally fall into the category of a new type of process, machine, article of manufacture, or improvement thereof.
If you are innovating in the crypto or blockchain space, consider consulting with a patent attorney of your choosing who can explain your potential patent rights.
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04/20/2022
(04/20/2022) The Strategic Hub for Innovation and Financial Technology (FinHub) coordinates the SEC's oversight and response regarding emerging technologies in financial, regulatory, and supervisory systems, including in the areas of distributed ledger technology (for example, digital assets), automated investment advice, digital marketplace financing, and artificial intelligence/machine learning.
Its website is here:?https://www.sec.gov/finhub.
The website groups several papers and publications regarding the following:
In short, the website is a rich source of information about the SEC’s views and actions related to FinTech innovation.
04/21/2022
(04/21/2022) In the blockchain context, an oracle is software that facilitates communication between blockchains and off-chain systems.
One of the reasons that public blockchains like Bitcoin and Ethereum are secure is that they work only with on-chain information. They are isolated from off-chain systems in the outside world. But that limits the utility of blockchains and especially smart contracts.
Let's say a smart contract was desired that would automatically compensate Alice $50 if the temperature in a certain region reached a certain amount. Or Bob was to receive an insurance payout based on the occurrence of a weather event. These types of scenarios rely on data that does not natively reside on-chain, such as on the Ethereum blockchain, for example.
An oracle is often referred to as "middleware" because it sits in the middle of a blockchain and the external world. There are several types of oracles that carryout various functions. See?https://lnkd.in/g-yK28t7.
But there is a problem: using oracles stands to disturb some of the underlying tenants of blockchains that make them reliable and secure. Blockchains are secure because of consensus, which ensures predictable and deterministic outcomes. Seeking off-chain data presents potential consensus and security risks.
For example, presume a smart contract needed to know the current price of an asset. Recall, there are many nodes maintaining copies of the Ethereum blockchain. If any two nodes received different data, no matter how small, that could lead to a lack of consensus and frustrate the entire notion 100% reliable and deterministic outcomes.
This is known as the "oracle problem," and will be addressed in a different post.
To Clarify the Cryptic: an oracle is software that allows a blockchain to communicate with off-chain systems.
04/22/2022
(04/22/2022) In blockchain technology, "the oracle problem" refers to the problem of safely, securely, and deterministically communicating data to or from a public blockchain (such as Ethereum).
Yesterday's post explained that an oracle is a type of software--middleware--that facilitates communication of data to or from a blockchain, which only processes on-chain data.
The functionality of blockchains would be severely limited if they could not interact with off-chain data. But interacting with off-chain data in an insecure or even unsure way could undermine the technological underpinnings of blockchains that make them so secure, reliable, and trustworthy.
For example, two nodes receiving different answers to even simple questions (such as "What is the temperature in Central Park right now?" or "What is the price of ETH?") could disturb the deterministic nature of the blockchain.
A deterministic model of computation contemplates that successive states of a machine, and all operations performed, are completely determined by the preceding states. In short, if the millions upon millions of transactions were repeated from the beginning, the resulting state of the blockchain would be the same at any given point in time. (This stands in contract to probabilistic models.)
Two technological underpinnings are decentralization (lack of central control) and distributed-ledger technology (maintaining identical copies of the ledger on thousands of computers).
Concerns with oracles include ensuring that data is accurate, facilitating scalability, and avoiding a single point of failure. These issues generally prevent oracles from being integrated into the base layers of blockchains.
Chainlink Labs?aims to solve the oracle problem by utilizing a network of decentralized oracle networks (DONs), with each DON involving a combination of multiple security techniques needed to service a particular use case. In short, the DON seeks to replicate the decentralized and distributed nature of the blockchain itself in providing a way to interreact with the blockchain. See?https://lnkd.in/ghXBBVC2.
To Clarify the Cryptic: the oracle problem refers to the problem of a public isolated blockchain being able to securely and reliably interact with off-chain data.
[The End] (Remember to like and subscribe!)