Blockchain for Grown Ups
The FedInvent Reports for August 9th and 11th and More
Hello from FedInvent,
This week we're exploring Blockchain for Grownups, patents, and patent applications resulting from federally funded research and development.
But first, the latest FedInvent Reports. Here are the links to this week's FedInvent Reports:
The FedInvent Report for Taxpayer-Funded Patents granted on August 9, 2022, is here. The link to the detail page for department-level browsing is here.
The FedInvent Report for Taxpayer-Funded Patent Applications, published on August 11, 2022, is here. The link to the detail page for department-level browsing is here.
Blockchain for Grownups
The dynamics and emergence of Web3 are trending. Web3 is a loose term of art for the next iteration of the World Wide Web. Web3 incorporates decentralization computing models, blockchain and distributed ledger technologies, cryptocurrency, and token-based economics. There is also a significant amount of federal spending on figuring out how Web3 technology will integrate with the American economy and the digital landscape.
Bitcoin (BTC) was created in 2009 when Satoshi Nakamoto's white paper discussed how to solve the problems created by the 2008 financial meltdown. The Silk Road, the online black market and the first modern darknet market, started in February 2011. The IRS claims that one of its agents started watching it emerge in January 2011. The FBI shut down Silk Road in October 2013. In its short run, the Silk Road did over 100,000 transactions worth more than $3 billion.
Ethereum (ETH) launched on July 31, 2015, after its creator Vitalik Buterin, credited with conceiving Ethereum, published a white paper to introduce it in 2014. Ethereum, unlike Bitcoin, supports self-executing smart contracts.
US Treasury's Financial Crime Enforcement Network (FinCEN) issued guidance on the applicability of the regulations implementing the Bank Secrecy Act (BSA) to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies in March of 2013. This is the same year as the first Initial Coin Offering (ICO), the distributed token economy's funding equivalent to the Initial Public Offering (IPO) for raising money. The SEC's first blockchain enforcement action against a firm running a bitcoin Ponzi scheme involving the sale of 700,000 BTC. (You can see their whole Crypto Assets and Cyber enforcement action list here.)
In 2014, New York University's Stern School of Business offered its first blockchain on blockchain and financial services. Thirty-five students signed up.
By 2015, The Securities Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), Treasury's Financial Crime Enforcement Network (FinCEN) Anti-Money Laundering team, and the Internal Revenue Service (IRS) all retained forensic cryptocurrency analysis firms. Drug Enforcement Agency (DEA), the Federal Bureau of Investigations (FBI) at DOJ, and the Immigration and Customs Enforcement (ICE) agency at the US Department of Homeland Security all have dedicated teams of cryptocurrency analysts to track the illegal criminal economies enabled by cryptocurrency — money laundering, human trafficking, drug trafficking, ransomware cybersecurity attacks, dark web drug, and weapon sales, illegal fishing, and more.
The 2018 National Defense Authorization Act requires the Department of Defense (DOD) and the Intelligence Community officials to monitor the federal adoption of blockchain technology. In addition, the Secretary of Defense is to provide Congress with "an assessment of the use or planned use of such technologies by the federal government and critical infrastructure networks."
Where there is new and emerging technology, there are regulatory frameworks, standards, patents, and federally funded research and development. The Securities Exchange Commission, the Commodities Futures Trading Commission, and the Internal Revenue Service are actively engaged in efforts to regulate cryptocurrency, NFTs, and how the underlying technology that rides underneath it works. To regulate, the agencies must first define what they are regulating. The IRS has defined cryptocurrency as property. The SEC uses the Howey Test to determine if tokens are securities where investors can expect their investment to grow without participating in the venture. The CFTC considers a virtual currency a medium of exchange that can be traded as part of a derivative contract.
Agencies have a lot of issues on their plate. The cryptocurrency markets have been experiencing a downturn. Bitcoin hit $64,400.00 in November 2021. On August 12, 2022, one Bitcoin was worth $24,675.40. In 2020 Non-Fungible Token (NFT) arose as a new asset class. Cryptopunks, Pudgy Penguins, Bored Apes NFTs soared in value. Digital artist Mike "Beeple" Winkelmann sold his "The First 5000 Days" collage of digital pictures made each day for thirteen years sold for $69.3 million at auction at Christie's. Christie's also sells paintings by Monet, Degas, and van Gogh. Six months ago CryptoPunk #5822 sold for $23.7 million, 8,000 ETH priced at about $2,962 each. Over the last seven days, 49 CryptoPunk NFTs sold for an average price of $74,200.
In the meantime, Paris Hilton sells NFTs and merchandise at her Roblox Paris World virtual disco. She's hoping to sell NFTs to people who can't afford to jet in to see her DJ in person.
Stablecoins are turning out not to be so stable. So the SEC launched enforcement actions that drove two of the biggest stable coin operations into bankruptcy. An employee at OpenSea, the NTF marketplace, was arrested for insider trading and front running when he was self-dealing on upcoming NFT launches.
The IRS is busy trying to determine how capital gains from the sale of cryptocurrency will be treated. In 2022, the IRS will have a new challenge. How will taxpayers deal with cryptocurrency losses on their tax returns, and how will these assets be handled on the corporate balance sheet? MicroStrategy reported quarterly results short of Wall Street estimates on Tuesday, with revenue coming at $122.1 million against expectations for $126 million. Losses in the quarter totaled $918.1 million, with $917.8 million attributable to the company's bitcoin holdings. As of August 2022, Microstrategy owned owns 129,699 bitcoins. (The shareholders gasped.) And most of the ventures created using initial coin offerings are on life support, and their investors are holding tokens worth a fraction of a dollar—another challenge for the IRS tax regulation writers.
You can read more on the current Web3 state of affairs on Molly White's website, Web3 is Going Just Great. Ms. White documents case after case of crypto malfeasance: investments that turn out to be scams, poorly-run projects that collapse under mismanagement, and hacks that drain supporters' money.
But it's not all bad news. Blockchain and distributed ledger technology aren't all about selling pixelated images. The most recent set of taxpayer-funded blockchain patents and patent applications present thoughtful ways to use blockchain and crypto currents transaction models in a host of useful ways. These patents are a mix of inventions for financial transactions in energy markets, secure document distribution and management, cybersecurity, and blockchain technology to block disinformation and robocalls. You can explore the most recent FedInvent taxpayer-funded blockchain patents and patent applications here.
Just as Web3 has evolved, so has the federal approach to funding R&D. For context, here are examples of blockchain R&D funded by the National Science Foundation (NSF).
You Have to Start Somewhere
In 2014, post-Bitcoin and pre-Ethereum, NSF started requesting proposals for grants for cryptocurrency-related R&D. In February 2015, NSF awarded the University of California Irvine a grant titled, "Private Digital Currencies and Closed Payment Communities: Law, Regulation and Financial Exclusion After Bitcoin." The grant's principal research activities were interviews with lawyers, regulators, and payments industry professionals, participant-observation at industry conferences, and code walkthroughs, during which the researcher will follow programmers as they build new functionality into the blockchain. (A pretty nice government-funded research gig.)
What About Those ICOs?
NSF funded a grant for research at the University of Kentucky titled "Cryptocurrencies and the New Spaces of Finance." Researchers at the University of Kentucky focused on "ways blockchain-based cryptocurrencies are reshaping the geographies and practices of valuation and financing within startup firms. For example, cryptocurrency-backed initial coin offerings (ICOs) represent a novel form of venture financing that changes the scale and scope of investment as well as encouraging firm structures that maximize hospitable regulatory locations.
The grant was awarded in 2019. Peak use of ICOs for funding new ventures started tapering off in 2018 as the SEC started informing ICO tokens are securities and need to be treated as such. Initial Coin Offerings are a security exchange for investment dollars in a new venture. ICOs are a hot regulatory topic at the SEC, but not in a good way.
Real Blockchain for Grownups
One of the more innovative inventions for using blockchain to solve problems came from the criminal justice academic community. NSF funded a grant titled, "Blockchain-backed system that establishes the provenance of digital images and videos." The grant was awarded to CUNY John Jay College of Criminal Justice. Dr. Shweta Jain is the Principal Investigator. Her work addresses a vexing evidentiary issue as law enforcement increasingly relies on smartphone images and videos taken at crime scenes.
This research focused on developing blockchain-backed technology to provide visual proof of the occurrence of an event. The technology frontend allows a controlled capture of images and videos, computes a unique signature of the media, and collects metadata such as date, time, and device ownership and identification. In the backend, a blockchain places the unique signature and meta information in a block committed upon consensus by two-thirds of the blockchain participants. Blockchain consensus guarantees the immutability of the media once the block is committed. A certified recipient can re-compute the unique signature from the file, search the blockchain for a matching block, obtain proof that the media is authentic, and instantly obtain the metadata, such as the date and time. The content creator could be anonymized, or copyright information can be validated.
This grant follows Dr. Jain's earlier NSF grant, "E-Witness: Preserve and Prove Forensic Soundness of Digital Evidence." E-Witness is a system that allows civilians to use their smart devices to collect forensically sound multimedia evidence. The building blocks of E-Witness consist of:
A secure smartphone application.
A time-stamping service implemented as a public blockchain maintained by individual miners.
A location-attestation service that provides confidence in the truthfulness of the location reported by the evidence device.
This NSF grant led to US Patent 11297500, "AUTHENTICATING DIGITAL EVIDENCE."
Send Me Your Documents
On June 2, 2022, NSF sent a Dear Colleague Letter titled, "Advancing Educational Innovations and Broadening Participation in STEM with Blockchain Technology." The National Science Foundation expects that applications of blockchain technology in the areas of formal and informal education, broadening participation, and qualified workforce development in all areas of STEM will bring forward novel, impactful, equitable, accessible, and cost-effective solutions to facilitate secure, traceable, and verifiable exchange of educational data among various stakeholders and benefit the broadest possible range of users.
Here NSF is looking at using blockchain and smart contracts to provide access to scientific and research data that won't require users seeking access to work through intermediaries. One of the more promising federal uses of blockchain technology is for the assembly, validation, and storage of clinical trial data. NSF is casting a wide net. NSF noted some of the more basic data that can be stored on the blockchain. This data includes tracking the development and publication of curricula, lessons, or courses; maintenance and use of student records; issuing diplomas, credentials, or certificates; data storage and operation; maintenance of payment or attendance records; accreditation; validation of records; personal and group portfolios; and many other areas.
NSF and the Treasury Department have worked on two proofs of concepts to see whether blockchain technology could reduce the financial reporting required with grant funding. This one looks like an example of technology in search of a problem to solve.
For Crypto Entrepreneurs
NSF also has an ambitious list of topics for entrepreneurs interested in seeking funding under its Small Business Innovative Research grant program:
DL1. Autonomous Systems and Economies, and Smart Contracts
DL2. Blockchain, DAGs, and Next-Gen Protocols
DL3. Convergence with Big Data, and Artificial Intelligence
DL4. Convergence with Internet of Things, Crowdsourcing and Crowdsensing
DL5. Cryptography, Security, and Cybersecurity
DL6. Distributed Consensus and Fault Tolerance Mechanisms
DL7. Distributed Ledger in Edge and Cloud Computing
DL8. Distributed Ledger Interoperability
DL9. Distributed Ledger in Network Architecture and Management
DL10. Financial Technologies
DL11. Human-to-Technology Interface; Decentralized Applications (dApps)
DL12. Scalability Solutions and Accumulators
DL13. Trusted Identity and Identity Management
DL14. Other Distributed Ledger Technologies
And the R&D Continues
On March 9, 2022, President Biden signed an Executive Order on Ensuring Responsible Development of Digital Assets. This EO is focused on a broad range of policy issues and objectives dealing with advances in digital and distributed ledger technology for financial services. The order notes that in November 2021, non-state-issued digital assets reached a combined market capitalization of $3 trillion, up from approximately $14 billion in early November 2016. At the same time, monetary authorities globally are exploring, and in some cases introducing, central bank digital currencies (CBDCs). The document is jam-packed with research opportunities to address the complex issues of a broader transition to digital cryptocurrency. Stay tuned.
We'll keep the FedInvent Blockchain page up-to-date as new blockchain innovations evolve.
A Few Numbers
As of August 9, 2022, USPTO has granted 4,267 taxpayer-funded patents. The chart below reflects the Technology Center breakdown for these patents. The chart does not include eight design patents and four re-issue patents. At the current rate, taxpayer-funded patents are expected to exceed 7,000 in 2022.
The latest update to the Health Complex Patents page is available here. As of August 9, 2022, 1,660 patents were granted to inventors who cited 5,289 different funding sources from the Department of Human Services entities.
Before We Go — The Scofflaws
The Bayh-Dole scofflaws who deliberately avoid reporting their contract and agency information on their patents and patent applications are a focus of FedInvent research. It's a weekly challenge to dig them out. Who pays for gas turbine engines and jet propulsion innovations performed by federal defense contractors? EPA?
Who is paying IBM for natural language processing and text-based analytics software and extracting entity names and relationships between extensive collections of documents? National Security Agency? Maybe another intelligence agency that needs to quickly go through massive volumes of text to hunt for national security threats? What is the point of the scofflaws — most of whom are defense contractors — obscuring the contract information o their patents? Haven't they heard of this thing called "the internet?" Here are this week's scofflaws.
Among Tuesday's new patents there are two Bayh-Dole scofflaws. The first Raytheon's new patent 11408300, "ROTOR OVERSPEED PROTECTION ASSEMBLY." Raytheon patented more gas turbine engines and jet propulsion inventions. More technology funded by the Department of Defense (DOD).
The second scofflaw patent is from Honeywell International. Well, kind of. The inventors on US Patent 11410844, "ENCLOSURE FOR ION TRAPPING DEVICE," all work for Quantinuum. Quantinuum was formed when Honeywell International's Quantum Solutions group and Cambridge Quantum Computing joined forces.
In 2021, Honeywell announced plans to spin out its quantum computing unit and merge it with UK quantum computing startup Cambridge Quantum Computing (CQC). The new combined entity was rebranded as Quantinuum. Honeywell plans to invest around $300 million in the venture. IBM has also invested in Quantinuum. It is expected that at some point, Quantinuum will be spun out as a new publicly traded company.
Honeywell leads one of the research teams for DARPA's Quantum Apertures (QA) research team focused on developing a new way of receiving radio frequency (RF) waveforms to improve sensitivity and frequency agility for defense applications. We'll add this scofflaw patent to our quantum computing list of inventions funded by DARPA.
This week's patent application scofflaws include 20220252013, "Hybrid Seal Dual Runner," from Raytheon Technologies, and 20220252197, "Fluid Flow Connector," from Honeywell International. Both are inventions of technology for gas turbine engines and jet propulsion. We'll add these to our DOD patent lists.
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