Why IP rights, patents and trademarks can be irrelevant, especially in FinTech

I have always recommended that FinTech startups should not waste too much time on registering their trade names or domain names or logos, simply because they have nothing to protect.

The entire IP rights registration machine is designed to convince you that you are actually protecting your future secrets and profits, when in reality everyone copies other people's marketing strategies, prices and product ideas.

And we are not even talking yet about open source code.

However,  Stephan Kinsella and his work took my scepticism to the whole next level.

I never questioned the necessity and  the merit of the IP rights. I thought IP laws were essential for protecting innovation.

And then this former patent attorney and hard core bitcoiner blew my mind by arguing that intellectual property rights are not "property rights" and as a result they are counterproductive. 

IP restrictions create artificial scarcity of ideas by legally restricting the use of ideas and information.

This impedes free flow of information and utilization of ideas. Rather than promoting innovation, patents and copyrights often slow it down. They create legal barriers that prevent others from building upon existing ideas, which is crucial for technological progress.

In a way, IP rights grant monopoly privileges, which means that the original inventor is not motivated to innovate further and others are discouraged to compete with them.

This leads to higher prices, reduced competition, and inefficient allocation of resources.

Kinsella argues that the assumption that having IP laws and restrictions promotes innovation and accelerates technological progress is not empirically evidenced.While we can argue that creators may deserve compensation, Kinsella contends that this doesn't justify granting monopoly rights. Market demand and voluntary transactions can reward creators without IP laws.

History shows that innovation occurs without IP protection. Many successful businesses operate without relying on IP. Trade secrets, contracts, and other market mechanisms can protect business interests without resorting to state-granted monopolies. Many industries, like fashion and cuisine, thrive without strong IP laws. Alternative incentives exist, such as first-mover advantage and reputation.

Kinsella challenges the notion that ideas can be owned like physical property. He argues that IP is a relatively recent legal fiction, not a natural right, and that it's fundamentally different from physical property.

Unlike physical goods, ideas are non-scarce resources, meaning they can be used and shared infinitely without depletion. IP laws try to artificially impose scarcity on something that is not scarce, leading to inefficiencies and economic distortions. If we think about it, IP laws infringe on the actual, physical property rights of individuals. For instance, if someone owns a factory or a printing press, IP laws dictate what they can or cannot produce with their own property, violating their right to use it as they see fit.

It could be argues that copying or imitating an idea is fundamentally different from theft. When someone copies an idea, the original creator still possesses it. In contrast, theft involves the physical removal of a good from its rightful owner, leaving them without it.

The worst of all, IP laws often result in a wealth transfer from consumers to large corporations that hold patents and copyrights. These laws allow corporations to charge higher prices and restrict access, benefiting a few at the expense of the many.

The enforcement of IP laws is costly and often leads to lengthy legal battles that consume resources. What qualifies as "novel" or "original" is often subjective, leading to inconsistent rulings and granting protection to trivial or obvious ideas, further distorting markets.These resources could be better spent on innovation and production, rather than on legal disputes.

When I just first digested these ideas, my main objection was "but what about developing new drugs and R&D costs?"

Well, I am glad I asked ;-)

Kinsella argues that patents in the pharmaceutical industry are counterproductive and harmful, particularly from both economic and ethical perspectives. He presents several reasons why patents, which are often justified in this sector on the grounds of incentivizing innovation and recovering R&D costs, actually hinder progress and distort markets.

While the pharmaceutical industry claims that patents are necessary to fund R&D, this is not necessarily the case. Many breakthroughs in drug development come from government-funded research or university labs, not private pharmaceutical companies. In fact, the promise of patent monopolies can lead companies to prioritize short-term gains and "me-too" drugs (slight variations of existing drugs) over more significant and innovative research. Much of the industry's spending goes towards marketing, not actual research.

Additionally, significant portions of drug development rely on prior public research or knowledge, which companies later commercialize and monopolize through patents. This monopoly pricing restricts access to life-saving medications, especially for low-income populations and developing countries, and creates inefficiencies in the healthcare system. Without competition, prices remain inflated and patients suffer from limited access to essential drugs. And we have not even touched the regulatory capture and corruption.

Why I am so excited about these ideas and find them liberating? - Because they actually mean we should not worry that much about Generative AI violating "IP rights".

All it means is that new business models need to be developed. 

Musicians and artists make the majority of their money from concerts and brand sponsorships, and less so from copyrights and streaming.

An argument could be made that Scarlett Johansson did not actually lose any "rights" when Chat GPT created a voice that's similar to hers.

What is your reaction to this?