Cryptocurrency has dominated the attention of the financial world for most of the past 12 months as Bitcoin’s value (as well as other cryptocurrencies’) soared over 1,500% in 2017 (though it has experienced some recent volatility). While investors are happy to see their wallets growing, companies should be excited about the technology underlying most cryptocurrencies – blockchain – which has the potential to create a competitive advantage in trade secrets protection.
Blockchain technology is a revolutionary method of distributing digital information. It is a decentralized system where transactions (information) are recorded and confirmed anonymously. Once information is entered, it cannot be altered. At its most basic level, blockchain works in the following way: when a digital transaction is carried out, it is grouped in a protected “block” with other transactions. The system then needs to verify the transaction by solving complex coded problems. Once a block of information is verified, that block is timestamped and added to a chain in a linear, chronological order. Newer blocks get linked to older blocks, making a chain of blocks (“blockchain”) identifying each transaction made in the history of the blockchain.
There are two notable features of blockchain: “hashing” and “proof of existence.” Hashing is a unique one-way digital process by which the inputted information gets transformed into a fixed length of code. For example, when a user inputs the word “Hello,” the hashing process would provide an output of “123ABCDE456LAWYER59801KFNNA101.” The new output gets displayed in the blockchain while the term “hello” remains private. Proof of existence is the recording of the hashing into the blockchain. The “hashing” and “proof of existences” processes apply to all transactions in the blockchain and can be used for many forms of intellectual property, including trade secrets. But how?
To be protected as a trade secret, the information must not be generally known or reasonably ascertainable by others. If a business inserts its trade secrets into a blockchain, the technology will encrypt the information through the hashing process. The only piece of information that gets publically displayed, therefore, is the fixed-length code and the timestamp indicating when the transaction of information occurred. The “secret sauce” remains hidden from the public eye, thereby maintaining the confidentiality of the information. Blockchain technology resembles existing standard encryption methods, but should offer a superior level of protection. Once the information is entered into the blockchain, it can no longer be modified due to the hashing process. This process is different than the traditional encrypting, which is a two-way function that allows anyone with the proper encryption key to unlock or decrypt information (which means anyone can access the original information with a key). In addition, since the technology is decentralized and requires additional levels of security for purposes of verifying and encrypting the information, blockchain cannot easily be hacked into by rogue actors (including rogue employees). Therefore, the information should be more secure than normal encryption processes.
Though it is far too soon to tell how courts will approach blockchain technology in trade secrets matters, it is a revolutionary system that companies should consider for IP protection. At least one start-up in San Francisco is using blockchain technology to allow artists to protect original images in the copyright context.
Because trade secrets are only valuable to the extent they are kept secret, companies will want to keep an eye on developments in this area and consider how best to leverage technology to protect their most valuable business assets. To this end, Orrick has formed a blockchain task force to help clients stay informed and take advantage of this technology.