Blockchain Beyond Bitcoin: Eliminating Counterfeit Goods
Media coverage of blockchain technology has become synonymous with Bitcoin. It is no secret that cryptocurrencies have been extremely volatile and pose regulatory challenges as an alternative asset class. This has caused underlying technologies like blockchain to be overlooked. I would like to shift your focus toward some other uses of blockchain that have the ability to disrupt, and add value to industries beyond cryptocurrency. The combination of blockchain and the Internet of Things has tremendous potential to provide tech solutions for supply chain transparency and eliminate counterfeit goods.
Blockchain and the Internet of Things
Blockchain is intrinsically linked to Bitcoin because it was originally created to solve the double spend problem. Digital information can often be easily replicated, which leaves the potential for the double spending of cryptocurrencies. Blockchain preemptively stops double spending by sharing all transactions in a network available to the users. This way, if two transactions using the same currency are submitted, only one of them will be confirmed by the network because they are traceable to the original source. For example, if you were to send one Bitcoin to a peer, the transaction would be placed in an unconfirmed pool before being added to the chain. When the transaction is being confirmed, every node in the network verifies it. If the same Bitcoin is sent to two different peers, the first transaction would be added to the blockchain and the second would be rejected. At its core, blockchain is a way of recording information in a secure, and indelible way. It removes the need for trusting a third party by securing information through a digital ledger that is only verified when majority consensus is reached. This provides transparency to all parties eligible to view the record of transactions. Each block along the chain is identified by a digital signature, or cryptographic hash. Each block also contains the hash of the previous block. This way, the information can be traced back to the genesis block, which is the first in the chain. Access to the blockchain can be limited or expanded based on the needs of the user which makes it ideal for corporate use.
The Internet of Things (IoT) refers to a system of objects that are interconnected and share data. Chances are you probably own something that is an IoT device, and it could be as simple as being able to turn off your lights with an app on your phone. However, applications for IoT extend far beyond simple household tasks. The latest luxury item you’ve been lusting after likely will be manufactured and distributed using IoT and blockchain technology in the near future. The more devices that share data with one another, the more interoperable your devices become. The digitalization of consumer goods is becoming necessary because the counterfeit market has continued to grow.
Protecting the integrity of luxury brands
The Global Counterfeiting Report, 2018 estimated that luxury brands incurred a loss of 98 billion USD due to counterfeit sales. 30.3 billion of this loss was from online sales. To provide meaningful comparison, global illicit drug sales are currently estimated to be 330 billion annually, while total counterfeit sales are valued at 461 billion annually. These numbers have grown significantly with the rise of e-commerce and are forecasted to grow further to 991 billion by 2022. The proliferation of counterfeit goods has become increasingly problematic for luxury goods companies whose revenue is driven by exclusivity and brand recognition. The growth of luxury brands is determined by the company’s ability to preserve originality and justify a premium price. To mitigate the risk of dilution, production is limited by almost all luxury brands and it is not uncommon for items to be sold out for months at a time to preserve scarcity. This means that counterfeit items flooding the market can devalue the original goods significantly. This has been the case with several Louis Vuitton monogram items which are easily replicated and hard to distinguish from counterfeits. Louis Vuitton has been particularly aggressive and allocates a yearly budget of 19 million to combat counterfeiting. Blockchain would allow for brands like Louis Vuitton to pursue protection through more effective avenues than litigation.
Solving the counterfeit problem
Blockchain and the Internet of Things have the potential to help curb the counterfeit luxury goods market and eliminate the possibility of human error in authentication. This technology is already being implemented in the pharmaceutical industry to track drugs throughout the supply chain with the use of near field communication tags. It can be similarly applied to the manufacturing and distribution of goods like jewellery, clothing, shoes and handbags.
Placing a near field communication (NFC) tag in goods during the manufacturing process would allow for progress to be tracked throughout the supply chain. NFC is a method of wireless data transmission between devices that are in close proximity. Similar technology is used for Apple Pay on iPhones. The combination of NFC and blockchain would create an impenetrable way of recording data. By keeping updated information on a tag inside the product, data can be provided about the origin of materials and point of sale. The transparency this technology would provide has several upsides for both manufacturers and consumers.
Blockchain can help create more transparent resale market. Presently, there is no single channel for consumers to authenticate their goods. This leads to reliance on third party authentication. However, this doesn’t stop counterfeit items from being sold on popular platforms like eBay. Since there is no digital way to confirm if an item is genuine, serial numbers and authenticity cards can be easily forged. Unless the buyer knows exactly what they’re looking for, there is an issue of asymmetric information. It becomes especially difficult to authenticate goods such as scarves and sunglasses that often do not have significant differentiating details. Blockchain can streamline the entire process by helping buyers be more informed and eliminating the need to trust a third party. It will also have the ability to link the brand and end user even if the item is sold in the resale market or gifted. Producing realistic counterfeit goods would become much more difficult with the use of NFC tags and blockchain. The implementation of this technology would also benefit manufacturers by legitimizing the secondary market for end consumers, which would deter counterfeit production.
The Internet of Things provides a platform, blockchain provides security, and near field communication provides a way to transfer data between users. While luxury brands have been slow to adopt it, blockchain is something we will be hearing more about as it becomes a new way for brands to manage counterfeiting and link the product from raw material to end user.
