How blockchain can prevent counterfeit products

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The counterfeit business is booming. In fact, counterfeit goods account for a whopping 3.3% of world trade1 and costs the US economy about $ 600 billion annually.2

The dangers of counterfeit products

Counterfeiting has widespread negative effects, leading to product recalls, legal proceedings, consumer harm, lost sales, loss of consumer trust and ultimately long-term reputational damage. Some of the most dangerous counterfeit products on the market today include counterfeit airbags that fail in car accidents, counterfeit lithium-ion batteries that self-ignite or explode, counterfeit helmets and baby carriers that break easily, counterfeit prescription drugs that cause accidental overdoses, and counterfeit cosmetics that cause severe skin reactions.3

Blockchain for provenance

Blockchain helps fight counterfeiting by identifying the origin (ie., Proof of origin) of a product, as the blockchain is a secure and trustworthy tracking system from one end of the supply chain (production or extraction of raw materials) to the other end of the supply chain (where the end user enjoys the finished product). Because blockchain can identify the origin, law enforcement agencies can more conclusively determine the counterfeit nature of suspicious products and companies can protect their bottom line.

Companies implement blockchain origin identification through the use of smart tags that, when attached to a commodity, identify where it was manufactured, track its location and assign other relevant information to it at every stage of the supply chain. Common types of smart tags include:

  • QR codes. QR codes (Quick Response Codes) are a type of barcode that can be easily read by smartphones or tablets and can encode information such as telephone numbers or Internet addresses.

  • RFID tags. Radio Frequency Identification Tags (RFID) are tags that use radio waves to convey information to readers. A reader is a device that sends out radio waves and then receives a signal back from an RFID tag.

  • Signatures on metallic or ceramic surfaces. Laser marking machines etch barcodes and graphics onto metallic or ceramic surfaces. Some of these marking machines produce 2D data matrix metal labels that users scan with a special scanner to perform data collection and product tracking functions.

As soon as a user attaches a product with a smart tag, the smart tag sends data with corresponding immutable time stamps to the blockchain for each new transaction. Therefore, at any point in the supply chain, a supply chain partner can trace that product back through the supply chain to see where and when that product came from.

While this would be difficult in practice, a scammer could create a fake tag by duplicating a real smart tag. However, scanning this fake label would reveal the history of the real item, which would help a customer determine that the scanned label is a fake.4th For example, if a leather wallet with a fake smart tag indicates that the wallet was sold by the merchant to the ABC Purse Company for sale to the public, but the customer found the wallet for sale at the XYZ Purse Company, the customer could conclude that the smart tag was fake.

Counterfeit Prevention by Industry

The proliferation of counterfeit products has dealt a severe blow to the fashion, electronics and pharmaceutical industries. Given the importance of minimizing counterfeit products in the market, leading companies are looking to blockchain to identify product origins.

Fashion

High quality products that can be quickly reproduced by counterfeiters and sold at a high price are very susceptible to counterfeiting. In 2019, Harvard Business Review reported that counterfeit luxury goods accounted for 60 to 70% of all counterfeit goods sold annually, and accounted for about a quarter of all global luxury goods trade, valued at $ 1.2 trillion.5

To protect its luxury product lines in the market, the LVMH group, which boasts brands like Louis Vuitton and Bvlgari, has teamed up with two other luxury brands, Prada and Cartier, to develop the Aura Blockchain Consortium.6th The LVMH Group introduced the collaboration in April 2021, calling it the world’s first global luxury blockchain, with the goal of giving consumers the ability to track a luxury product through its lifecycle.7th The Aura Blockchain is a private blockchain developed by ConsenSys, a pioneer in software development in the blockchain field, and Microsoft.8th

In the secondary market, blockchain offers a tool for verifying the authenticity of fashion items. For example, a retail store could use blockchain to record the identity of the original customer for a luxury wallet sale, and a subsequent buyer could register with the blockchain to record the wallet sale to another downstream buyer. The decline in resale value that can result from a disruption in the traceability chain can encourage downstream buyers to register their ownership on the blockchain.

Additionally, blockchains can maintain or increase product value over time, as consumers can verify product authenticity without expert help. By using an appropriate blockchain construct, luxury brand companies can create products that consumers can authenticate without using the luxury company’s internal corporate resources. Smart contracts programmed in blockchain can also automatically execute downstream transactions and offer producers and previous owners compensation for reselling a product.

drug

Counterfeit drugs often look exactly the same as real drugs, with the same branding and packaging. However, the counterfeit drugs may be contaminated or ineffective. Merck KGaA reported that counterfeit antimalarial drugs alone could kill up to 155,000 children annually.10

In response to the FDA’s 2019 call on companies to create pilot projects to test electronic interoperable systems, two dozen companies in the pharmaceutical industry, from drug manufacturers (including Pfizer Inc. and Eli Lilly and Company) to distributors and retailers, have , developed a blockchain platform called MediLedger Network to track prescription drugs around the world in hopes of eliminating counterfeit drugs.11

electronics

The identification of counterfeit products in a supply chain is proving difficult because counterfeiters package the counterfeit products as legitimate and because the counterfeit products often function adequately at least for a period of time. In addition, since many electronic products end up as internal components in other devices, it could be difficult for downstream consumers to identify replica parts. If counterfeit electronics are not detected in the supply chain, there is a risk of product malfunction that could result in personal injury or death.

For this reason, Honeywell has partnered with iTRACE and SecureMarking to increase the security of the e-commerce market for its aerospace parts using blockchain technology.12th Honeywell’s new process involves laser etching a data matrix on the nameplate of a part and then applying an invisible high-security paint to the tag. Honeywell’s digital blockchain ledger records the digital authenticity record for the part so Honeywell can secure, track, track and authenticate any part sent to Honeywell’s blockchain process anywhere in the world.

Financial performance

In 2019, BCG, a business strategy consultancy, calculated that by implementing blockchain-enabled authentication of products, companies could realize financial benefits of 2% to 5% of sales.13th For example, electronics and technology companies lose around 4-7% of their sales to counterfeit products annually.14th If the same electronics and technology companies were to implement blockchain solutions paired with smart tag technology, these companies could reduce fraudulent sales by 60-80%, allowing manufacturers to recoup an average of 3.85% of sales.fifteen That translates into savings of nearly $ 40 million for a $ 1 billion electronics company.16

However, blockchain counterfeit prevention solutions may not be the right solution for every manufacturer. Factors to consider before implementing a blockchain solution include the value of the target product, the size and complexity of the supply base, and the extent of counterfeiting related to the product in question.17th Companies considering adopting a blockchain anti-counterfeiting system should perform a careful analysis to determine whether the financial benefits of tracking with blockchain outweigh the costs and challenges of implementing blockchain technology.


1 Sularia, Sanjeev, The Counterfeit Problem and How Retailers Can Fight Back in 2020, Forbes (March 17, 2020).

2 Schlesinger, Jennifer and Andrea Day, The trade war could lead to a boom in counterfeit goods, CNBC (March 13, 2019).

3 Counterfeit Goods: A Public Safety Threat, US Immigration and Customs Enforcement (last accessed August 9, 2021).

4th Akash Bhatia et al., Combating counterfeit goods with blockchain and IoT, BCG (May 17, 2019).

5 Roberto Fontana et al., How luxury brands can defeat counterfeiters, Harvard Business Review (May 24, 2019).

6th LVMH partners with other major luxury companies on Aura, the first global luxury blockchain, LVMH (April 20, 2021).

7th ID card.

8th ID card.

9 Aura (last accessed August 16, 2021).

10 Blockchain: A New Security Check for Medicines, Merck KGaA, (last accessed August 16, 2021).

11 Gertrude Chavez-Dreyfuss, Companies in the pharmaceutical supply chain are developing a system to track counterfeit medicines, Reuters (February 21, 2020).

12th Sweetheart, iTrace and SecureMarking fight counterfeiting activities in the aerospace industry with blockchain, Honeywell (December 16, 2019).

13th Supra, Note 4.

14th ID card.

fifteen ID card.

16 ID card.

17th ID card.

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