The World Customs Organization and International Chamber of Commerce estimate that seven to eight percent of all world trade each year involves counterfeit goods, resulting in lost sales of $512 billion globally and $200-250 billion in the United States.  Blockchain, commonly known as a core component of bitcoin in the finance sector, made its runway debut at the Shanghai Fall 2016 Fashion Week and may prove to be an effective tool against counterfeiting and diversion.
A blockchain is a decentralized digital ledger that records transactions across many computers in such a way that the registered transactions cannot be altered retroactively, ensuring utmost security for its digital assets. In essence, blockchain provides a hack-proof way to store data in two forms of records: transactions and blocks. The records are inherently incorruptible because once a new transaction “block” is time-stamped, recorded and linked to a previous block, it is stored across a shared network to prevent retroactive tampering. Initially heralded as a coding breakthrough for its use with Bitcoins as a way to verify and prevent double spending, the use of blockchain has expanded beyond financial services. Now, major players in the energy, consumer goods, and pharmaceutical industries are experimenting with blockchain as a security measure. In the fashion industry, blockchain is being used as an anti-counterfeiting and anti-diversion tool.
The New York/Shanghai-based fashion apparel brand Babyghost has pioneered the use of blockchain in its partnership with BitSE, a Chinese blockchain start-up. The new Babyghost line first incorporated blockchain technology into its Spring/Summer 2017 collection by embedding an encrypted chip in each design from Babyghost’s ready-to-wear line. A mobile smartphone app called VeChain uses blockchain technology to make the manufacturing and supply chain “public, transparent and traceable.” The chip also can be programmed to store interactive memory such as the design concept, product history and personalized information, including the purchase date and the identity and reason for the purchased — thereby increasing brand value and consumer trust.
The anti-counterfeiting and anti-diversion benefits of blockchain result from its confidential and complete record of “chain of custody.” The blockchain technology provides an effective means of mitigating counterfeiting and diversion. A wide-spread adoption of blockchain in the fashion sector could reduce the number of counterfeit goods that flood the global market. The transparent auditability of blockchain also facilitates supply chain management, creates increased accountability, and makes regulatory compliance more efficient and cost-effective.
While it is too early to tell whether blockchain will succeed as one of the newest fashtech (“fashion technology”) developments, many predict a promising future. Sunny Lou, COO of BitSE, has predicted that blockchain can bring “digital experiences to . . . consumers and enable them to build up a personalized connection with the products they own.” Ryan Orr, CEO of Chronicled — a company that uses blockchain to fight counterfeiting and diversion of sneakers – has forecast that in five years, encrypted chips will be in all luxury goods, noting that the question is “not ‘if,’ but ‘when.’”
For more information about blockchain, contact us for an introduction to Sheppard Mullin’s Blockchain Technology and Digital Currency Team.
The author would like to thank the contribution of Michelle Juen, who is a legal intern.