Blockchain of Custody – Is Blockchain the Answer to Counterfeits?

I.   Introduction – Blockchain technology and authentication of luxury goods

On 20 April 2021, LVMH announced that it has “joined forces with two other major luxury names – Prada and Cartier … to develop Aura Blockchain Consortium”. This Consortium claims to offer a “single, innovative solution” to “provide consumers with a high level of transparency and traceability throughout the lifecycle of a product”.[1]

The blockchain space exploded during the pandemic. What was previously a nebulous concept that was confined only to those in the tech-space become an unprecedented global bubble when Covid hit in 2020. Non-fungible token (NFTs) sales, which is a blockchain-based record of ownership of a digital item, was recorded to hit $1.9 billion in August 2021.[2] It is therefore unsurprising that LVMH, the fashion juggernaut, hopped onto the trend to bring the blockchain technology into the world of fashion.

While blockchain is more commonly known for its use in cryptocurrencies and NFTs, at its core, the blockchain technology is simply a “method of recording information that makes it impossible or difficult for the system to be changed, hacked, or manipulated”.[3]

According to Aura’s official website, the blockchain technology is intertwined with the authentication solution like so. The luxury good is fitted with a QR code, or an NFC chip. When someone purchases the luxury good, they scan the QR code on the item, “claim its ownership, easily certify its authenticity and access all of the product information”.[4]  The alleged brilliance behind this solution is that because blockchain is touted to be impenetrable and “unhackable”, no one should be able to fake an entry of the ledger to fake the provenance and authenticity of the luxury good.

This makes blockchain a prime solution for authenticating anything, to ensure that the provenance and the chain of custody of any thing is unbroken and untampered with. It should ring a death knell for counterfeits, which is a prevalent and growing problem in the luxury fashion industry. But does it truly?

II.   The problem of counterfeit luxury goods

The pandemic was a catalyst for everything good and bad. It brought blockchain into the mind space of the general public, but it also catalysed the counterfeit industry.

In March 2022, Europol and the European Union Intellectual Property Office (“EUIPO”) issued a joint Threat Assessment report, which updates policymakers, practitioners, businesses and the general public on the threat from intellectual property crime facing the European Union.[5] In that report, Europol and the EUIPO observed that “counterfeit and pirated goods in the EU have an estimated value of up to EUR 119 billion” and that the “overall number of detections of counterfeit goods by customs authorities, at the EU’s border and on the internal market, has decreased since 2019”. Critically, “the COVID-19 pandemic also provided a boost to the criminal economy. IP crime, such as the production and distribution of counterfeit goods, has increased sharply during this period”.

Lawmakers around the world are pressured to take active measures against counterfeits, which pose a huge threat to brand owners. Singapore takes an aggressive stance against counterfeits. Singapore enacted the Intellectual Property (Border Enforcement) Act in 2018 implement border enforcement measures to target counterfeit products. The implementation of the Act came in three phases, and the last phase came into operation on 21 November 2022. With the implementation of the Act, the Singapore Customs is imbued with the power to seize any goods that is suspected to infringe any intellectual property rights in Singapore. The Singapore Customs may do so even if it did not receive any written request from the brand owner to do so.[6] This seizure, referred to as “Ex-officio Seizure” is a clear indication of Singapore’s proactive stance to prohibit the counterfeit trade in Singapore. To implement such seizures more effectively, Singapore Customs also “regularly liaises with rights holders to organise IPR product training for its officers. These training sessions allow rights holders to share information on various counterfeit goods and equip Customs officers with the knowledge to differentiate between genuine and counterfeit products.”[7]

Theoretically, these measures should starve any supply of counterfeits in Singapore, and in any other jurisdiction that implements the same or similar border measures. In Singapore, there was a reported high profile seizure of counterfeit goods by the Singapore Customs in or around 2013. Two containers worth of counterfeit luxury goods copied from Louis Vuitton Malletier, Guccio Gucci Spa, Burberry Limited, and Hermes International were seized, detained and subsequently ordered to be destroyed.[8] This proves that border measures can be effective, and have been, in past cases.

However, the efficacy of these border measures depends solely on the question of detection. It assumes that counterfeit goods are easy to detect, and therefore will be promptly seized upon entry into Singapore. But counterfeit manufacturers have gotten smarter, and have started producing “superfakes”. These superfakes replicate the real items down to the tiniest detail. It is reported that the superfakes are “getting so good, to the point that it comes down to inside etchings, or nine stitches instead of eight”.[9] The better these “superfakes” get, the harder it is to detect whether a good is genuine or not.

III.   How effective is the Aura Blockchain solution?

If implemented, the Aura Blockchain solution should be the easy answer to these superfakes, but there are two potential flaws.

First, it is well known that luxury brand owners’ authentication methods, algorithms and software are closely guarded secrets, for good reason.

It is presently not clear whether the Aura Blockchain solution will have front-end applications made available to consumers for the purposes of proving the authenticity of the luxury items, although Aura’s official website does make reference to such “front-end applications”.[10] Even if such applications are available, it is also at the brand owners’ election to decide whether to make it available to consumers.

If the Aura Blockchain solution is inaccessible to anyone else apart from brand owners, then it begs the question; how effective will the Aura Blockchain solution be in addressing the issue of counterfeits?

Consumers that purchase counterfeit luxury products can be divided into two categories. The first category are the innocent victims who purchased a counterfeit product that masqueraded as a genuine product. These consumers will know whether they purchased a genuine product or not only if they bring the said product to the brand owner for authentication. For this purpose, the Aura Blockchain solution, which claims to “provide consumers with a high level of transparency and traceability throughout the lifecycle of a product”, will indisputably be the ideal solution, assuming it is implemented properly.

The larger problem still remains unaddressed. The second category of consumers are those who purchase counterfeit luxury goods knowing that they are counterfeit goods, and do so due to considerations of price. This category makes up a super majority of the demand for counterfeit luxury goods. These consumers who consciously seek out fake luxury goods will not bring these goods for authentication because they know that the goods are fake. Consequently, the Aura Blockchain solution is not a solution at all because the authentication step is skipped altogether.

Since it is difficult to curb demand for counterfeit goods as it entails influencing consumer behaviour, the more effective measure is to starve the supply of such counterfeit goods. To do so, effective detection and detention of counterfeit luxury goods at the port of entry is essential. That is the weak and vulnerable link in the chain of supply for counterfeit luxury products. Customs agents are the “novus actus” in the transaction between a willing supplier and a willing buyer. The Aura Blockchain solution can be the definitive answer to detection of counterfeit luxury goods, but it must be made accessible and available to stakeholders.

Second, according to the website, the authentication marker can take the form of a QR code or an NFC chip. Although the Aura Blockchain solution claims to authenticate the luxury good, it in fact only authenticates the marker that is attached to the good.

It is notoriously easy to copy and duplicate a QR code. It has been observed that “the cheapest way to counterfeit the code would be to copy a real one, then duplicate it … across the fake product line. The customer would do a scan and get taken to the Gucci site, where he or she might even be more duped into buying it, since the website will give authentic product information, leading the customer to think that he or she is truly getting a great deal on the real product”. [11]

The only way to ensure an immutable authentication process is therefore also to ensure that the marker cannot be replicated. While not impossible, it is much more difficult to clone an NFC chip than a QR code since there are certain barriers to entry to clone an NFC chip, such as specialised equipment and knowledge. Further, NFC chips can be encrypted to prevent cloning. By combining the use of NFC chips with blockchain technology, the blockchain is likely to be able to identify whether the NFC chip is a duplicate of the original, since the duplicate will not have an entry on the ledger.

IV.   Concluding comments

Nothing is infallible in the world of technology. But despite the misgivings raised in this article, the introduction of blockchain technology to solve the problem of counterfeit luxury goods should be welcomed and celebrated.

 

AUTHOR INFORMATION

Tony Yeo is the Managing Director of the Intellectual Property Practice and a Director in the Dispute Resolution Practice at Drew & Napier LLC.
Email: tony.yeo@drewnapier.com

Javier Yeo is an Associate Director of the Intellectual Property and Dispute Resolution Practices at Drew & Napier LLC.
Email: javier.yeo@drewnapier.com

 

REFERENCES

[1] LVMH, ‘LVMH partners with other major luxury companies on Aura, the first global luxury blockchain’, 20 April 2021 <https://www.lvmh.com/news-documents/news/lvmh-partners-with-other-major-luxury-companies-on-aura-the-first-global-luxury-blockchain/>.

[2] Elizabeth Howcroft, ‘NFT sales surge as speculators pile in, sceptics see bubble’, Reuters (25 August 2021) <https://www.reuters.com/technology/nft-sales-surge-speculators-pile-sceptics-see-bubble-2021-08-25/>.

[3] Ravikran A S, ‘What is Blockchain Technology? How does Blockchain Work?’, Simplilearn (8 May 2023) <https://www.simplilearn.com/tutorials/blockchain-tutorial/blockchain-technology#:~:text=Blockchain%20is%20a%20method%20of,computers%20participating%20in%20the%20blockchain>.

[4] Aura Blockchain Consortium, ‘Authenticating Luxury Goods with Blockchain’ (23 August 2022),  <https://auraluxuryblockchain.com/insight/authenticating-luxury-goods-with-blockchain>.

[5] European Union Intellectual Property Office and Europol, ‘Intellectual Property Crime Threat Assessment 2022’  <https://www.europol.europa.eu/cms/sites/default/files/documents/Executive%20summary.%20Intellectual%20property%20crime%20threat%20assessment%202022.pdf>.

[6] Singapore Customs, ‘Quick Guide to Border Enforcement Measures for Trademarks, Copyright, Geographical Indications and Registered Designs’ <https://www.customs.gov.sg/businesses/border-enforcement-of-intellectual-property-rights/quick-guide-for-copyright-and-trade-mark-owners-and-licensees/>.

[7] Singapore Customs’ Newsletter ‘inSYNC’ (July – September 2015) <https://www.customs.gov.sg/news-and-media/publications/2015-07-01-Issue37.pdf>.

[8] Louis Vuitton Malletier & Ors v PT Alvenindo Sukses Ekspress [2017] SGHC 305 at [204].

[9] Victoria K. Hunt, ‘How Counterfeiters Got Shockingly Good at Knocking Off Designer Handbags’, Robb Report (4 May 2023) <https://robbreport.com/lifestyle/news/superfake-handbags-1234839862/>.

[10] Aura Blockchain Consortium <https://auraluxuryblockchain.com/solutions>.

[11] Verisum, ‘The Counterfeit Prevention Journal: How safe are QR scan codes?’, Medium (15 April 2019) <https://medium.com/@verisium/the-counterfeit-prevention-journal-how-safe-are-qr-scan-codes-53ec91385108>.