Optimizing the Fight against Fraud and Loss through Blockchain Solutions

In recent years, the challenge of establishing an item’s authenticity and ensuring that it is sourced properly has become increasingly complex. The proliferation of online marketplaces and advancements in counterfeiting methods have contributed to a growing global problem, with the luxury goods industry losing $30 billion in revenue due to counterfeiting in the years 2017 and 2018 alone. Meanwhile, the global cost of fraud and counterfeiting across all industries is estimated to exceed $1 trillion per annum, according to the Global Brand Counterfeiting Report of 2018. The growing frustration among consumers, in light of health and safety concerns and a desire for transparency in the supply chain, has driven greater corporate and investor interest in blockchain solutions for counterfeit prevention.

The blockchain technology, with its distributed and shareable database architecture, offers unparalleled visibility, traceability, and immutability to its participants. As a result, it is widely considered as a single source of truth, providing an accurate and tamper-proof record of transaction histories. With these properties, blockchain solutions are well-positioned to meet the growing need for anticounterfeiting solutions, providing authorized participants with a complete history of a good or part from source to point of sale. Additionally, digital labels and smart tags can be used to store an item’s unique identifiers, allowing for quick distinction between genuine and counterfeit products.

The potential benefits of blockchain in the fight against counterfeiting have not gone unnoticed, and investment in related solutions has increased significantly. However, the use cases for blockchain vary, and it is important for companies and investors to understand the key considerations when evaluating potential solutions.

Blockchain solutions for counterfeit prevention are most valuable when authenticity and ethical sourcing are essential to an item’s value proposition. This includes industries where ensuring product quality is of utmost importance, such as jewelry, pharmaceuticals, and high-end consumer goods. In these cases, consumers and businesses alike require assurance that the product is genuine, ethically sourced, and worth the premium price being charged.

The issue of mislabeling is also prevalent in several industries, particularly in the food and restaurant sector. A 2018 study by the New York State Attorney General’s Office found that 27% of seafood sold in the state was mislabeled. Other premium food products, such as Kobe beef, extra-virgin olive oil, and organic foods, are also frequently targeted by fraudulent labeling practices. In the pharmaceutical sector, the World Health Organization estimates that counterfeit medicines are worth approximately €73 billion annually. Improper substitutions and defective parts pose significant risks to both companies and consumers, leading to product recalls, lawsuits, and customer disaffection.

Blockchain solutions can bring much-needed relief in these areas, offering customers and businesses protection from the risks associated with counterfeit products, mislabeling, and substandard storage and manufacturing practices. Digital tags can provide proof of provenance, while track-and-trace capabilities can validate end-to-end sourcing information. The integration of IoT sensors with blockchain platforms can also help stakeholders to monitor key storage and transportation parameters, such as temperature and humidity, to ensure that products are maintained in optimal conditions.

Investors should not limit their assessments of blockchain solutions to the immediate investment thesis. Instead, they should consider the broader landscape of adjacent applications and new markets that could be created in the coming three to five years. To make informed decisions, investors should consider three types of benefits that a blockchain solution might offer:

1. First-Order Benefits: These are the direct benefits that a blockchain solution is designed to deliver. Investors should focus on the specific problem the solution aims to solve and evaluate its effectiveness in doing so. They should also consider the size of the market the solution is likely to attract.

2. Second-Order Benefits: These benefits come from additional sources of value that the blockchain solution may offer. For example, the UN World Food Programme is developing a blockchain platform that makes it easier for refugees to access food vouchers. This same blockchain engine could eventually be used to support financial transactions, giving refugees access to cash and the ability to build savings.

3. Third-Order Benefits: As blockchain platforms evolve, new features and solutions may be added that could have significant impact. Some of these benefits may be known, while others may spring from as-yet-unknown innovations. Investors should consider whether the solutions they are evaluating could anchor future marketplaces that have yet to be conceived.

The case of the blockchain platform Tracr, developed by De Beers, is a great example of how these benefits could play out. Tracr is designed to bring greater transparency to the diamond industry by providing a secure and transparent record of provenance and sourcing. The first-order benefits are likely to be considerable, but the platform could also deliver significant second-order benefits, such as reducing the risk of double spending and enabling more efficient communication between industry participants. Additionally, there could be third-order benefits, such as the ability to connect all diamond industry suppliers on a single, standardized platform.

Overcoming Potential Barriers to Success

While blockchain has the potential to prevent fraudulent actors from profiting off counterfeit goods and parts, there are several factors that could slow its momentum if not properly managed.

1. Proof: Blockchain may serve as a single source of truth, but all stakeholders must agree on what constitutes proof. This means that everyone must have a common definition of truth.

2. Regulation: Blockchain applications in heavily regulated sectors such as financial services and healthcare may be subject to more stringent requirements. Regulators may want to ensure that core consumer protections around data privacy and medical records are upheld.

3. Stakeholder Collaboration: Building a successful blockchain platform requires industry peers to set aside their competitive differences and work together. Investors should consider whether the company leading the effort has the necessary resources and authority to bring key players together and whether the right incentives are in place to attract other stakeholders.

Blockchain technology has the potential to address a longstanding issue of counterfeiting that affects a wide range of industries. However, investors must consider all the potential benefits and barriers to success to fully take advantage of this emerging technology. By focusing on first-, second-, and third-order benefits and addressing the challenges of proof, regulation, and stakeholder collaboration, investors can make smarter decisions and maximize their returns.