They look real from here.

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A New Tool for the War on Fake Rolexes

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Almost any recent reader of the business press could attest to the near-constant reporting and commentary about bitcoin’s underlying technology, known as blockchain. The conversation has focused almost exclusively on how businesses in the financial-services industries could benefit. So far, most of these conversations have been of little relevance to the rest of the business world.

Bitcoin and the Blockchain

That shouldn’t be the case, because blockchain, an independently validated, distributed and unalterable transaction ledger, has the potential to help all sorts of other industries, perhaps none more than retailing and manufacturing. Let’s consider just one problem these businesses face: vulnerability to counterfeiting. Luxury goods in particular are a choice target, mainly because of their high prices and profit margins. The same is true of sophisticated machine parts, specialty chemicals and a host of other high-value manufactured goods. Because the decentralized nature of blockchains replaces transactional trust with objective verification, it could be the perfect tool for fighting the counterfeiting scourge.

Imagine if there was a way for retailers and manufactures to document the location, manufacturing stage and ownership of any item at any time anywhere in the world. With simple tools like embedded sensors or scannable tags, this functionality is now well within reach. Companies could scan each item as it progresses through the supply chain. Those transactions would be documented in the blockchain and visible online to any interested party. Once a product is purchased, the buyer can update the ownership status by scanning the tag, verifying through a phone app, or manually inputting the required data into a web form. This won’t prevent all counterfeiting, but it would provide a mechanism for consumers and intermediate buyers to establish authenticity. For consumers, they would have confidence that their money is being spent on genuine merchandise. For sellers, they would have peace of mind that their brand equity is secure from poorly made fakes.

According to a MarkMonitor survey, the financial impact of counterfeiting is real -- 86 percent of retailers say their sales are hurt by phony goods. Unfortunately, quantifying that impact is difficult, since counterfeiters aren’t in the habit of touting the scale of their business successes. The Organization for Economic Cooperation and Development and the European Union’s Intellectual Property Office say the annual value of counterfeit goods is as much as $500 billion, or about 2.5 percent of global imports. That number has increased from 1.9 percent since these organizations undertook a similar study in 2008, with U.S., French and Italian brands being most affected.

Most counterfeiting isn’t happening on street corners in major cities. Instead, it largely takes place on online marketplaces operated by companies such as Alibaba Group Holding Ltd., eBay Inc., and to a lesser extent Amazon.com Inc.

Recently, the Office of the U.S. Trade Representative added the Alibaba Group marketplace Taobao.com to its list of “notorious marketplaces” for counterfeit goods. Alibaba, a huge online retailer with a market value of almost $250 billion, is the largest and best-known company with an entity on the list. During the past year it has worked to curb counterfeiting, but so far its efforts have yielded mixed results, and thus its placement on the Trade Representative’s list. To put Alibaba’s size in context, almost 80 percent of all Chinese internet transactions are through Alibaba online properties. Given that 63 percent of all fake goods originate in China, Alibaba has a big problem, one with global implications.

Implementing blockchain technology across all its sellers, or even just those under suspicion, might help curb the counterfeiting practice.

We shouldn’t fool ourselves, however: Robust counterfeit protections require legislative and corporate governance structures that, in many cases, are a long way off. A good example of such structures comes from none other than Alibaba. The group, in conjunction with 20 other manufactures, just announced an alliance to share data and resources to protect brands from intellectual property theft and fight the sale of bogus goods. This problem also has a demand side; there is a share of the population that has become accustomed to buying seemingly legitimate goods at counterfeit prices. Breaking these consumers of their counterfeit pricing habit won’t be easy, but it would be a considerable source of profit for retailers and manufacturers. 

Justifying the cost of blockchain is something that each company would have to figure out on its own. That may not be as hard as it seems if you believe few assets are more valuable than brand. Considering that only 17 percent of buyers over age 55 trust online retailers, perhaps blockchain is the tool that will give those consumers enough confidence to shop a little more on the internet. That alone might warrant the cost.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Zachary Hanlon at zachary.hanlon@oracle.com

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net