Blockchain: Fighting counterfeits through digital means

This article first appeared in Enterprise, The Edge Malaysia Weekly, on April 13, 2020 - April 19, 2020.

The team behind LuxTag

There can only be one digital certificate. It cannot be duplicated, only transferred > Bernard

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Counterfeit goods are on the rise. These products have been growing steadily since 2013 while trade in genuine goods have stagnated and even slightly declined since 2014.

An Organisation for Economic Cooperation and Development (OECD) 2019 report puts the estimated size of the international counterfeit market at US$509 billion, representing up to 3.3% of global trade. Luxury footwear and clothing are the two most counterfeited categories of products, making up 22% and 16% of the total trade respectively.

“These figures are just the revenue from counterfeit products. They do not represent the total damage done to luxury brands. If a fake branded watch costs US$100 by the beach, the loss of revenue for the brand would probably not be US$100, but US$10,000 instead,” says Rene Bernard, founder and CEO of LuxTag.

“But the person who purchased the fake watch is not a real customer, or even a prospective customer of the watch brand. Real watch collectors would not embarrass themselves by wearing cheap fakes. They are a different economic class of customers. So, these brands do not necessarily see cheap counterfeits as their biggest problem.”

The bigger problem is where customers are unwillingly cheated into buying counterfeit products at full price, which hurts the brands’ standing among them, says Bernard. With these factors combined, it is difficult to assess the total damage counterfeits have inflicted on those businesses.

But the damage done is certainly sizeable enough to force the hand of those companies. Luxury brands are actively combating counterfeits by investing in security and anti-counterfeiting measures such as unique serial numbers, certifications, warranty cards with holograms and distinctive markings on the products.

While these measures allow customers to verify the authenticity of the final product to a certain extent, these methods do have their limitations, says Bernard. The measures do not adequately address the weaknesses in the supply chain, where products can still be swapped, changed, duplicated and redistributed back into the market.

Thus, Bernard and his two co-founders started LuxTag in 2016 to help brands and businesses address this issue by digitising physical assets with the use of blockchain technology.

 

Battling fakes

LuxTag secures physical products by assigning them a unique digital identity on the blockchain. Unlike an image or music file, which can be copied indefinitely on the computer, digital items on the blockchain cannot be duplicated, just as bitcoins cannot be replicated and reproduced without mining.

The product is then “linked” to the unique digital identity through radio frequency identification stickers, QR codes, near field communication technology or a unique serial number. The digital identity then tracks the object’s journey through the supply chain until it reaches the customer and beyond into the secondhand market.

Bernard explains how this system can help deter counterfeiting by illustrating the thought process of an unscrupulous counterfeiter. “A counterfeiter buys a luxury watch from a genuine store and registers his personal information before the watch’s digital identity or certification is assigned to him. With the genuine watch, the counterfeiter can make hundreds of perfect copies, along with the serial number.

“But there can only be one digital certificate. It cannot be duplicated, only transferred. The counterfeiter finds his first victim and sells the fake along with the genuine digital certification. Congratulations, he has now made US$8,000 in revenue from a US$10,000 watch.

“But now, he is left with a genuine watch and hundreds of fakes without any certification. He could sell these cheaply by the beach, but it is not economically viable. Even if he manages to sell them all, the fakes have the same serial number. If multiple people try to verify the serial number online, it will be flagged as suspicious activity and alert the brand. The counterfeiter risks getting caught because his information is stored on the ownership records.”

The system also deters counterfeiting within the supply chain because the product leaves a data point on the blockchain at each stage of manufacturing, which can be traced back if the product is found to be fake.

While LuxTag may not be the perfect solution to end worldwide counterfeiting, it can help make counterfeiting less economically viable and riskier for counterfeiters. It also gives customers an easy way to verify the authenticity of the product, which inspires confidence in the brand.

“We currently have a live solution for a luxury watch brand from Switzerland. It has just produced its first batch of Luxtag-secured watches, about 500 pieces. We have yet to experience a counterfeit incident and the client is very happy with the solution,” says Bernard.

 

Beyond anti-counterfeiting

While LuxTag’s anti-counterfeiting measures are a great value proposition, brands are especially keen on its ability to track products beyond the point of sale. The company provides post-sale data analytics and insights into brands, which help open the door to the used products market.

“This is especially interesting for the luxury watch sector because it has come up with the official term CPO, or certified pre-owned. Global sales for new luxury watches are growing at 2% to 4% per annum, but transactions in the secondhand market are growing at 20% to 40% annually — 5 to 10 times faster,” says Bernard.

“The brands recognise this and want to get their foot in the door of the secondhand market. They want to keep tabs on the product after it is sold and serve the secondhand buyers. So, this is not passive but active, living data that follows the product.”

Prospects are bright in the luxury goods sector, but LuxTag is actively exploring different industries in search of its own niche to market its services. Bernard explains that the company does not want to be a jack of all trades but master of none.

“We are still in the market discovery stage. We are a 2½-year-old start-up and we have this cool technology and invention. So, the challenge right now is to identify, address and focus on the most promising sector and actively neglect other seemingly promising activities,” he says.

So far, the sectors Bernard finds promising are luxury goods, fast-moving consumer goods, graduation certificates and collectables such as numismatics. Numismatics is the study or collection of currencies, such as coins and paper money, with an elaborate ecosystem of coin conservation, evaluation and grading, which requires anti-counterfeiting measures. The US-based Numismatic Conservation Services estimates that the market for rare coins in the US to be well over US$3 billion a year and it is growing steadily.

Counterfeit drinks are also a cause for concern in Malaysia. In 2017, Johor officials seized 210 boxes containing fake baby milk powder worth RM42,000 in five separate raids. Last year, 19 cases of methanol poisoning were reported in a span of just 10 days as a result of counterfeit branded alcohol.

Fake diplomas and qualifications are also a prevalent issue in Malaysia. Akhbar & Associates, a Malaysian fraud investigation agency, reported that 5% to 7% of the potential hires they investigated for companies had fake degrees while 10% to 15% had degrees from unaccredited universities.

LuxTag is actively addressing this problem through e-Scroll, an anti-counterfeit solution that validates the ownership of educational and professional credentials or accreditation using blockchain technology. Currently, there are about 20,000 graduates from Malaysia, Indonesia and the Czech Republic who have had their certification protected and secured by LuxTag via e-Scroll.

“There are two kinds of counterfeit certifications out there. One is forgeries using photoshop, or cheap forgeries that you can buy online. The second variant is where, unfortunately, some corrupt people in universities issue a legitimate certificate and add the information to the registrar’s department,” says Bernard.

“e-Scroll will solve both problems. It will verify that the certificate has been signed by the registrar’s department and the co-signer as well as the details of the graduates, the course they have attended and so on. We protect this data at the moment of graduation. So, someone cannot just add an extra graduate later on because Luxtag has secured the entire batch.”

While Bernard is extremely positive on the outlook for LuxTag, he is no stranger to uncertainty, especially in his capacity as president of the Access Blockchain Association (Malaysia). The company was founded by three tech geeks who were driven purely by their enthusiasm for innovation and technology at a time when the blockchain hype was at its peak.

“People are constantly praising the technology. They talk about all the possibilities, the things that can be done using blockchain, but nobody is actually doing it. We wanted to create a solution that uses some of the unique properties of blockchain and we decided to focus on preserving the uniqueness of objects,” says Bernard.

“We thought about cars, people, passports ... but as a small start-up, it is difficult to work with the government. So, we decided to go into luxury products, where we would deal with private companies. We studied the sector and found our first customer, a small European brand. But it went out of business right after we finalised the solution for it.

“That did not work out well. However, we started to venture into other directions, using the same concept of preserving physical and digital uniqueness. That is where we are right now.”

While blockchain technology has yet to fully mature in terms of adoption and use cases, he is hugely positive about its prospects, especially in the world of anti-counterfeiting. “We foresee a future where we no longer have to base our purchasing decisions on assumptions that the products are genuine. Instead, we can have assurances that the product we bought is the real thing because there is a dataset for it. We can scan, check and know with certainty,” he says.

“If we have the resources, we can establish this as an open standard that brands can easily tap into, like an application programming interface. But we have limited resources right now. So, we need to take this one step at a time and address one problem after another so we can move on to the next process.”