Blockchain’s Promising Future in Battling Counterfeit Luxury Goods

The Legal Intelligencer

Counterfeit goods—those unauthorized products that deliberately imitate the legitimate goods of others so as to mislead consumers as to their true nature—plague retailers across all industries. In 2019 alone, the Organization for Economic Cooperation and Development (OECD) reported that counterfeit goods accounted for more than 3.3% of global trade. At best, counterfeit goods are lower quality products meant to imitate the original. At worst, they can be downright dangerous. Consumers can inadvertently end up with tainted baby formula, spontaneously combusting batteries or malfunctioning brake pads. In any case, counterfeit goods harm both consumers and retailers. They blur the line between the retailer and imitator; and they damage that retailer’s business, reputation and goodwill.

For luxury brands, annual losses from counterfeit goods reach well into the billions. Despite concerted efforts to thwart imitators, the market for fakes continues to grow. The rise in e-commerce and online secondary retail markets, particularly during the past year with much of the world confined to small-screen shopping, has added fuel to the fire. Leading luxury retailers are now turning to blockchain technologies in an effort to douse the flames.

What Is Blockchain?

As its name implies, blockchain technology stores data in digital blocks linked to create a chain. In essence, it is a digital ledger of transactions (an open-source, time-stamped series of records). Rather than being controlled by one entity, it is maintained across a network of computers. Most importantly, data maintained in a blockchain cannot be altered, deleted or destroyed.

How Might Blockchain Help Luxury Brands?

Blockchain’s record-keeping technology can help luxury brands in their fight against counterfeits. Luxury retailers can use blockchain to record step-by-step how their goods are made, sold and resold. For example, DeBeers, the world’s leading diamond company, worked alongside its competitors to develop a blockchain platform called Tracr, which uses blockchain technology to record (or trace) a raw diamond’s origin, sourcing and authenticity, as well as that later-processed diamond’s cut, clarity, color, characteristics, appraisal value, sale value and resale value. Tracr also tracks whether the raw diamonds are ethically and sustainably mined by workers in safe conditions. Similarly, LVMH Moët Hennessy Louis Vuitton (LVMH), the world’s leading luxury goods conglomerate, recently launched AURA, a blockchain platform that authenticates luxury goods by tracking the raw materials used up through the point of sale, and even afterwards to second-hand retail markets. LVMH began testing its AURA blockchain technology to track luxury goods from its world-famous Louis Vuitton and Christian Dior brands, and if successful, plans to expand the platform to even more of its luxury brands in the coming years.

Platforms like Tracr and AURA use blockchain to create a sort of digital passport for each product, ensuring the authenticity of each item. That passport can be linked to each product via a serial number, microchip, QR code or app. Most significantly, that passport can then be made accessible to consumers via their smartphones. Equipped with accessible, transparent, and trustworthy information, consumers can buy, sell, and re-sell luxury goods with certainty that every item is authentic and made with the highest quality standards.

Blockchain’s record-keeping technology can provide many benefits to luxury retailers. As the platforms become more standard, imitators’ failure to produce these digital passports will make it more difficult for them to sell counterfeit goods at scale. The platforms can also be used to declare an item lost or stolen, making it more challenging to trade in stolen luxury goods. Blockchain also might even allow luxury brands to take back the second-hand market for their goods. Indeed, at least one luxury brand has entered the second-hand market using blockchain. Audemars Piguet, a Swiss luxury watch retailer, recently announced it would launch a second-hand watch business. If used strategically, blockchain can help luxury brands authenticate, track and control their products throughout their lifecycles.

Are There Potential Pitfalls Associated With Using Blockchain?

Blockchain, however, is not without its shortcomings. Data entered into a blockchain platform cannot be altered or removed. A blockchain platform cannot prevent a wholesaler from mistakenly recording a sale of 100 handbags instead of 10. Nor can it prevent a more nefarious supplier from falsely claiming that its raw diamonds were ethically mined. This means that innocent errors and even intentional misrepresentations could disrupt platforms and hinder consumer trust. Nevertheless, blockchain technology provides some promising new ways to combat counterfeits.

Luxury brands spend copious amounts of time, money, and resources to protect their brands, trademarks and intellectual property. But even so, the counterfeit market keeps growing. Blockchain technology provides an alternative approach to the fight against fakes. By providing accurate, transparent, and verified data directly to consumers, blockchain might allow luxury brands to radically change the playing field. If imitation is the sincerest form of flattery, blockchain may just be the next tool in helping luxury brands expose counterfeiters as the insincere predators that they are.

“Blockchain’s Promising Future in Battling Counterfeit Luxury Goods,” by Jillian M. Taylor was published in The Legal Intelligencer on March 25, 2021.

Reprinted with permission from the March 25, 2021, edition of The Legal Intelligencer © 2021 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.