Companies like Huawei, Xiaomi, Alibaba, Tencent and DJI are proof that China is a world-class, highly competitive, technologically innovative country. Along with these companies’ tech prowess comes a large number of patent applications.

Since China joined the World Trade Organization in 2001, it has claimed to be making its best efforts to protect intellectual property. Foreign investors still bet on China when outsourcing their products, technology and operations, despite the country being notoriously accused of stealing U.S. and European intellectual property. That said, foreign investors exercise the diligence to mitigate the risk of infringement by protecting their intellectual property through filing the necessary patent and trademark applications.

Protection of IP Rights

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China has claimed to make best efforts to protect IP rights

For innovations and new developments like blockchain, patents are very important as they provide their owners the right to exclude others from exploiting the patented technology. For almost a decade, China has received the largest number of patent applications globally, and it has been increasing every year. The number’s continued rise translates to a booming economy and increasing confidence from global investors despite the country’s ongoing tensions with the US. Intellectual property applications themselves are a revenue source for the government, which generated $35 billion in fees paid for using IP rights.

To increase IP support, the government announced in September 2019 the draft of its intellectual property law that pledged higher penalties for IP infringement, stricter protection of foreign intellectual property and prohibition of forced technology transfer. While Beijing is unlikely to admit concession to Washington, strengthening IP law — especially protection of the IP of foreign companies — was one of the U.S.’ top requests. For U.S. firms, this would build confidence that their claims would be considered fairly in a dispute with a local firm.

Blockchain-Related Patent Applications

Blockchain technology adoption by both startups and big firms has been popular in China since 2017. According to online patent search engine Innojoy, over 10,000 blockchain-related patents have been filed with the China National Intellectual Property Administration (CNIPA). Leading the pack is Alibaba Group with 543 patents, followed by state-owned telecom company China Unicom with 214 patents. In contrast, as of 2019, US companies IBM and Bank of America filed just 174 and 69 blockchain-related patents, respectively, with the U.S. Patent and Trademark Office. Interestingly, U.S. firms have filed a substantial number of blockchain patents in China.

Over 10,000 blockchain-related patents have been filed with the China National Intellectual Property Administration (CNIPA). Leading the pack is Alibaba Group with 543 patents, followed by state-owned telecom company China Unicom with 214 patents. In contrast, as of 2019, US companies IBM and Bank of America filed just 174 and 69 blockchain-related patents,

Patent Activity By City

By major city, Beijing leads the country with over 2,000 blockchain-related patents. The numbers mirror the local governments’ support for the development of blockchain in these cities.

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Foreign Firms’ Patent Activity

Innojoy data also shows that most blockchain patent applications come from companies in business, finance, communication and data processing. Foreign companies that have filed blockchain-related patent applications are mostly from the US and Japan like Microsoft, JP Morgan, Sony and Toyota.

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According to CNIPA, the requirements for patent application in China are similar to that of Europe in terms of novelty, inventive step and sufficiency. Chinese patent law also requires claims to be directed to technical solutions for technical problems, which is the same requirement in the European Patent Convention. This means that technical improvements or improvement in the blockchain system may be eligible for a patent. However, pure algorithms, which include mining methods, are prohibited under Article 25 of the country’s Patent Law, which is classified under “rules and methods for intellectual activities.”

As of the first quarter of 2019, China leads blockchain innovation with almost two-thirds of the world’s blockchain projects. However, patent applications have slowed since 2018: The high-tech arms race to acquire blockchain patents has fizzled out as companies start to apply and experiment with their registered patents.

Patent Shakeout

Patent wars have existed for centuries. Before blockchain was the emergence of the internet, when related patents in the US surged from 165 in 1995 to 2,193 in 1998. However, not all patents would necessarily lead to useful products or proven use cases.

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China has the world’s highest number of approved patents

There are concerns that too many blockchain-related patents — which will be owned only by a small number of big firms — may slow down the technology’s development. However, such concern may not hold water as legal experts claim that patents on an algorithm like blockchain, an abstract idea, is not patentable and may be rejected.

Furthermore, according to the American Bar Association, even if blockchain technology becomes patentable subject matter, showing the patent’s novelty and non-obviousness is still required. The same patentability requirements are also present in China’s patent law. Hence, the number of blockchain applications by the leading companies may still be reduced to only a handful.

See related article: ‘China’s developers aren’t most creative,’ but there’s power in numbers to excel

As of March 2019, China has the world’s highest number of approved patents, according to data from the World Intellectual Property Organization. However, Alibaba, despite having the greatest number of patent applications, only ranked fifth among global institutions in approved patents.

What This Means For China And The Global Market

The government support for IP through subsidies provided to patent applicants is driving the staggering number of blockchain patent applications. This incentive removes the financial burden, particularly for startups and early-stage companies. However, the number of applications does not necessarily translate into better, faster technology. Only 26% of the applications filed by residents were granted in contrast to the approved 68% for non-residents. This may mean that patents filed by residents are less innovative, low quality and not on par with those of non-residents.

On a global scale, Chinese companies are also hesitant to file the counterpart patent applications in other countries. This may potentially limit these companies’ growth to the domestic market. Arguably, this hesitation has caused China to reach only fifth place in the number of approved patents globally.

Based on the ratio of applications to approvals, it is not far-fetched to suspect a lack of quality in the large number of blockchain filings in China. But the stark contrast between approved patents of residents and non-residents could indicate an opportunity for global companies to file their patents in China as they may prove to be more competitive than domestic firms.

This article is part of Forkast.Insights’ China Blockchain Report.