How Luxury Brands Prevent Fraud & Backlog with Blockchain

Blockchain can help reduce counterfeiting, verify products, and improve supply chain efficiencies across the luxury goods industry 

With the rise of the internet and social media, people have never been more attuned to the power of brands– and that’s especially the case when it comes to luxury products. Not only have luxury brands captured the global consciousness, but they’ve also carved out a highly lucrative economic niche, employing countless thousands while creating goods available for only the most well-heeled consumers. 

As of 2022, the global luxury goods industry is valued at over $300 billion a year, with a healthy estimated growth rate of close to 5% for the next 5 years. However, despite the growth of the industry, it isn’t without its own issues. Foremost among these problems include counterfeiting and supply chain fraud, unethical sourcing of goods, and the difficulty in verifying used or resold items. This is especially important for the highest-end goods, including items from fashion brands like Louis Vuitton or Chanel, as well as expensive art or priceless antiques. 

Fortunately, blockchain technology can help solve many of these problems in an innovative and efficient manner. Via the creation of immutable, decentralized ledgers, luxury brands can more easily track the goods they produce through the entire supply chain, making it easier to identify fraudulent or misrepresented goods. Brands can also verify the raw materials they use are not misrepresented. Blockchain, of course, can also help verify goods on the secondary market to prevent fraud. Many luxury companies are already employing the technology to improve their operations and tackle these issues head-on. 

Blockchain is already helping combat the growing problem of counterfeit luxury goods in the fashion industry 

Counterfeiting is one of the largest problems plaguing the luxury goods industry today, particularly with regard to fashion items like clothing, footwear, purses, jewelry, and watches. Estimating the size of the counterfeit luxury goods industry is incredibly difficult due to its size and scope, with some placing it at close to $100 billion per year, while some estimates place it at $450 billion per year, which would make it significantly larger than the authentic luxury goods market. Either way, the size and scope of the counterfeit luxury goods industry continues to expand aggressively, with no signs of slowing anytime soon. Statistics suggest that most counterfeit goods emerge from China, and the most copied item is footwear. 

In the effort to prevent counterfeiting, brands have employed enormous resources; LVMH alone employs a minimum of 60 lawyers and spends $17 million annually on anti-counterfeiting legal action. Brands have explored a wide range of anti-counterfeiting technology, including AI and IoT sensors attached to physical goods. However, since the manufacturing of luxury goods has slowly transitioned away from brands’ country of origin and towards the developing world, brands have had even more difficulty preventing the theft of intellectual property and proprietary manufacturing practices. 

Unfortunately, the counterfeit luxury goods industry doesn’t only directly reduce the amount of money brands earn by fooling customers with fake alternatives; when these lower quality alternatives are mistaken for the real thing, it can degrade the reputation of the brand and reduce overall sales. Of course, a fair amount of buyers of counterfeit goods are under no illusion that they’re buying fakes, but a substantial amount is still fooled, particularly when the counterfeit goods are of relatively high quality.  

Blockchain, of course, can help prevent much of this counterfeiting, or at least reveal counterfeit items when they do surface. For example, brands can create individual NFTs for each luxury item, which can be verified using mobile apps that scan a barcode or other type of unique signature on each item. Individualized NFTs can also be combined with IoT sensors, which can help track an item through the entire supply chain process as well as help with the verification process later on. 

The aforementioned LMVH is actually one of the largest proponents of blockchain-based technology tracking, utilizing many of the methods mentioned above. The fashion conglomerate is the primary founder of the Aura Blockchain Consortium, a non-profit organization intended to help high-end brands track and verify their products through a private, permissioned technology. 

Since Aura’s founding, other major luxury brands, including Prada and Cartier, have joined the initiative. Recently, Aura announced that it was offering Aura SaaS, a cloud-based software-as-a-service that will allow other brands to more easily integrate blockchain into their daily operations, including supply chain tracking, legal, and even product warranties.

The Aura protocol is intended to be used by non-coders and offers an easy smart contract creation tool, easy product history tracking tools, and permits the creation of new APIs, allowing brands to create new, customizable tools to better serve their needs, both internally and externally.

It’s interesting to note that while Prada, Cartier, and LMVH are all major competitors, they’ve looked past this fact in order to accomplish a shared goal, a trend that seems to be increasingly prevalent across the blockchain industry. This is particularly the case among large corporations, which may believe that they can each benefit from emerging blockchain tools without decreasing their brand’s competitiveness. 

How blockchain is helping verify the providence of art and antiques 

In addition to fashion brands, art and antiques are another segment of the luxury market that can be fraught with fraud, and which can benefit from blockchain solutions. It’s estimated that approximately $6 billion of the $200 billion in art sold every year is forged (with some estimates going as high as $30 billion), significantly reducing trust in the industry and causing economic harm for a variety of industry participants. To combat this, art galleries and antique dealers are beginning to utilize private blockchains to help verify the legitimacy of the items they sell.  

One company, IOST, partnered with Grimm’s Antiques, a China-based antiques dealer, to help create blockchain records of antiques via the inclusion of verification and appraisal records on a secure blockchain. Verisart, another company in the blockchain fraud-prevention space, uses blockchain to assist galleries and artists verify pieces of art through the creation of individualized NFTs.  Another large gallery, Thomas Crown Art, has also adopted blockchain technology to create individual art verification certificates for the artists it works with. 

How blockchain is preventing counterfeiting in the wine industry 

Much like fine art and fashion, wine is yet another luxury industry prone to significant amounts of fraud and forgery. Unlike a dress or handbag, which must be fully manufactured, it’s relatively easy to switch labels on wine bottles– or even create historic-looking labels to fool buyers. According to industry statistics, wine forgery costs the industry $3.18 billion in direct sales, and likely billions more in resales. Industry experts believe that between 20-50%  say 20% of premium wine in some markets is fake, which both degrades the experience for customers and hurts the reputation of wine brands. 

VinAssure, a network launched by software company eProvenance, is one solution intended to help address wine supply chain problems by utilizing IBM’s Hyperledger Fabric blockchain. VinAssure connects each member of the wine supply chain through a permissioned, shared blockchain, tracking each step as the wine moves from initial production to final distribution. In addition to preventing counterfeiting, companies are using VinAssure for other purposes, such as tracking the temperature of wine to ensure that shipments are not damaged due to heat exposure. 

Everledger, a blockchain digital transparency company that also utilizes the IBM-powered Hyperledger Fabric blockchain, has also expanded into the wine space with a pilot project in Hong Kong. The project utilizes IoT-enabled anti-tamper bottle closures that are tracked on a shared blockchain to help ensure that wine bottles are not emptied and refilled in an attempt to prevent counterfeiting.

In addition, Symbol, a project launched by blockchain company Nem, has also launched a project to combat fraud within the fine wine industry. Much like VinAssure, the project helps verify each stage of the wine supply chain process, starting with raw materials. The project uses disposable smart contracts to track payments, including the payments between retailers and individual customers to plug any and all gaps in a product’s history. 

However, blockchain-based wine verification protocols aren’t only being developed by niche players; Big Four accounting giant Ernst and Young has also launched a wine verification protocol, Tattoo, which is specifically designed to help restaurants and hotels purchase verified wine directly from vineyards. The tool provides extremely granular data, including fertilizer use, grape variety, and delivery. The system allows users to buy and sell products using ERC-721 NFTs on a shared platform, making it easier to buy and sell wine directly without the use of an intermediary. 

How blockchain can help ensure that luxury products are ethically sourced

When it comes to using blockchain to track luxury product supply chains, some brands aren’t only focusing on counterfeiting; they’re also focusing on ethical and sustainable product sourcing. 

De Beers is one major example of this type of initiative. In 2019, De Beers launched the Tracr platform, which it plans to use to eventually track each and every diamond it sells. Beyond the major issue of counterfeit diamonds, the Tracr platform can help identify and exclude “blood diamonds,” diamonds mined in known conflict zones. These diamonds may be produced under unethical working conditions, and more importantly, may be used to fund militia or terrorist groups in places such as Liberia, The Democratic Republic of Congo, Sierra Leone, and the Central African Republic. 

Unlike some other luxury industry blockchains, Tracr is designed to integrate with other protocols. For example, the Richline TrustChain platform is another blockchain initiative that focuses on the sourcing of gold and gold products. A finished piece of jewelry featuring both gold and diamonds could have both its diamond and its gold traced back to the mine of origin to help prove both the authenticity and the ethical implications of the final product. 

Much like LMVH’s Aura protocol initiative, Debeer’s Tracr has recently partnered with other diamond manufacturers Diarough, Venus Jewel, Diacore, Rosy Blue NV, and KGK Group, which are all major competitors in the diamond space. The intention is to have Tracr eventually spun off into a non-profit industry association that will help all major diamond manufacturers verify their products at all stages of the supply chain. 

How blockchain can help resellers and customers verify the authenticity of used luxury products 

There are quite a few initiatives being utilized to track new luxury and fashion products but with the notable exception of art and antiques, not many have tackled the issue of tracking pre-used luxury and fashion goods. 

LuxFi is one major initiative looking to do just that. LuxFi is a marketplace for used luxury goods which allows users to make purchases with cryptocurrency as well as through traditional payment methods. Each product added to the marketplace results in the minting of a one-of-a-kind NFT. 

By purchasing the asset-backed NFT, the user gains access and is shipped the real-world luxury item. While the marketplace can host a wide array of luxury products, it specifically focuses on luxury watches, branded bags, fine jewelry, diamonds, liquor, art, and gold and precious metals. LuxFi uses artificial intelligence tools to prevent counterfeiting and to help ensure the providence and authenticity of items sold on the marketplace. 

How luxury brand NFTs are disrupting the NFT and luxury goods markets alike 

It should be noted that while asset-backed NFTs are increasingly being used to verify the authenticity of luxury products, many luxury brands are beginning to release collectible NFTs untethered to real-world items. 

Some of the most interesting luxury companies and designers to launch NFTs include: 

Karl Lagerfeld: In September 2021, late Karl Lagerfeld’s brand released 777 NFTs on THE DEMATERIALIZED, a digital fashion marketplace. The collection sold out in only a few seconds. 

Jacob & Co.: In April 2021, famed watchmaker Jacob & Co. created a digital NFT version of its SF24 Tourbillon watch, which ended up selling for $100,000 on the ArtGralis NFT marketplace. Instead of showing cities, the watch displayed cryptocurrencies. 

Ray-Ban: Ray-Ban and artist Oliver Latta (ExtraWeg) recently partnered to create a virtual NFT pair of Ray-Ban aviators. The NFT, which was created as a short video of a man wearing the iconic glasses, was eventually sold on OpeanSea for 1.8 ETH, valued at nearly $6,000 at the time of sale. 

Adidas & Prada: In early 2022, Adidas and Prada partnered with well-known digital artist Zach Liberman to create the Prada Re-Source NFT project. The project invited ordinary people from around the world to send in photographs that would later be joined together to create a composite NFT. The NFT eventually sold for 30 ETH, which at the time was worth more than $97,000. 

In-Metaverse luxury NFTs add a new dimension to the market

While the NFT launches mentioned above are certainly notable, perhaps even more relevant is the growth of in-metaverse luxury NFTs– virtual versions of luxury items sold inside virtual worlds. Experts are highly bullish on this trend– with some believing that the in-metaverse luxury items market could reach a staggering $56 billion by 2030. 

For example, in May 2021 the metaverse gaming platform Roblox hosted a virtual Gucci exhibition, selling virtual versions of real-world Gucci handbags and other items. One item, a Dionysus handbag, was later re-sold at auction for $4,100, which was $700 more than the real-world item’s $3,400 cost. Similarly, in September 2021, Balenciaga created and launched Fornite fashion apparel, which could only be purchased with in-game currency. 

In March 2022, massive metaverse and crypto gaming platform Decentraland hosted its first-ever virtual fashion week. Pop-up store operators included veteran luxury brands Dolce & Gabbana, Selfridges, Tommy Hilfiger, Etro, and Dundas World. The sales featured both NFTs wearable inside Decentraland, as well as NFTs that could be exchanged for similar or identical real-world physical items, which could only be purchased in cryptocurrency. The items can be easily tried on by each player’s avatar, closely mimicking a customer’s real-world shopping experience. The virtual stores were also linked to each brand’s traditional online store in order to encourage traditional shopping. 

Of course, the stores and offerings were not limited to traditional luxury brands, with the giant NFT project Bored Ape Yacht Club (BAYC) collaborating with eco-conscious fashion brand Imitation of Christ to produce a line of BAYC-themed sweater dresses. Due to this and similar collaborations, it’s likely that we can begin to expect more fusion projects between hot NFT projects and traditional luxury brands in the near future. 

While most pop-up stores in Decentraland were provided for free, one designer, Philip Plein, went as far as to purchase $1.4 million in virtual land for a permanent store, potentially meaning that Decentraland’s fashion show is just the beginning of a long-term collaboration between the metaverse platform, big designers, and major luxury brands. 

However, it should be noted that Decentraland is far from the only metaverse embracing virtual, NFT-based luxury products. In February 2022, luxury megabrand Gucci announced that it had purchased virtual land in The Sandbox, another virtual land-focused metaverse and a major competitor to Decentraland. Like the brands featured in Decentraland’s fashion week, Gucci plans to soon begin releasing luxury NFT wearables with The Sandbox metaverse. 

Luxury brands are also beginning to accept cryptocurrency for real-world purchases

Outside the electronic glow of the metaverse, some luxury brands are beginning to accept crypto as a form of payment for their real-world, non-NFT or metaverse goods. Previously mentioned designer Phillip Plein announced in August 2021 that his company would take Bitcoin as payment, making his brand the first major fashion house to do so. More recently, luxury Italian fashion brand Michele Franzese Moda followed suit and announced in March 2022 that they would also accept Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), and a number of other cryptocurrencies for their products. 

While fashion megabrands like LMVH and Gucci have yet to follow suit, it’s possible that many will, perhaps as both a way to appeal to younger, crypto-focused audiences, as well as to preserve the anonymity of customers. However, accepting crypto can also have some downsides, particularly due to the increased transaction costs, and the increased potential for money laundering and tax evasion, which we’ll touch on below. 

Blockchain can also help prevent money laundering through the purchase of luxury products 

It should be noted that, for many, luxury brands aren’t simply a status symbol; as luxury items are a major store of value, they also present an ideal way to launder money, whether to conceal funds earned through criminal enterprises or simply evade taxes. While perhaps not the biggest concern for luxury brands themselves, it is a major concern for governments and tax authorities and can be a drag on luxury brands themselves, particularly if they must adopt burdensome KYC (know-your-customer) or AML (anti-money-laundering) protocols when handling larger purchases. This can get particularly complex when buyers themselves pay with cryptocurrency, which is an increasingly popular option that many luxury brands are beginning to offer.

By creating an immutable ledger of all transactions, and, as previously mentioned, tracking supply chains down to the final buyer, luxury brands may be able to discreetly collect a greater amount of information on buyers than without these methods. Of course, many purchasers of luxury products prefer to remain anonymous, but, through the use of private, permissioned blockchains, buyers can retain a strong degree of anonymity while still providing a certain degree of information to help verify their identity, should, say, a luxury brand be served with a warrant or court order to reveal customer information. 

In conclusion: Luxury and blockchain seem to be the perfect pair

From preventing counterfeiting and verifying luxury goods to creating entirely new markets for their products, luxury and blockchain seem to be a natural pair. While blockchain is bringing greater efficiency to supply chains across myriad industries, the additional need for quality control and anti-counterfeiting makes it a perfect fit for the luxury industry; so much so that even major industry competitors have teamed up on shared blockchain initiatives, such as the Aura protocol for the fashion industry and the Tracr protocol for the diamond industry. 

However, perhaps more interesting is the integration of luxury brands into the NFT sector and the entrance of legacy luxury products into the metaverse. The crypto industry as a whole, the NFT sector, and the metaverse, in particular, have all become major status symbols in our increasingly tech-obsessed culture. In that context, it’s also only natural that existing status symbols, along with new ones (think Bored Ape Yacht Club) will begin to increasingly find themselves intertwined into the virtual worlds more and more aspirational participants are beginning to inhabit. 

References: 

1. Fontana, R., Girod, S., Králik, M. (2019, May) How Luxury Brands Can Beat Counterfeiters. Harvard Business Review. 
2. (2021, Apr.) Prada and Cartier join the LVMH Aura blockchain consortium. Ledger Insights. 
3. (2019, Jul.) IOST x Grimm’s Antiques | IOST Drives Enterprise Adoption in Artwork Traceability and Anti-Fakes. IOST: Medium. 
4. Mowrey, L. (2021, May) Blockchain Technology, Fraud Prevention and the Future of Wine. Wine Enthusiast. 
5. Le, K., Galvan, B. (2021, Apr.) How blockchain can cut down fraud in the wine industry. Forkast. 
6. Bates, R. (2019, Jun.) De Beers’ Blockchain Platform Hopes to Track Every Diamond. JCK. 
7. Searle, Z. (2022, Feb.) 8 Times Luxury Brands Jumped on NFTs. GOTHAM. 
8. Kogan, K. (2021, Dec.) Metaverse opens the gateway for luxury NFTs to become a multi-billion market. Cointelegraph. 
9. Hirschmiller, S. (2022, Mar.) How Luxury Retail’s Big Metaverse Fashion Week Experiment In Decentraland Played Out With Virtual Stores, NFT Wearables, A Bored Ape Collaboration And More. Forbes. 
10. C. P., (2022, Feb,) Gucci enters the metaverse with The Sandbox. Medium. 
11. Ligon, C. (2021, Aug.) Philipp Plein Becomes First Major Fashion Brand to Accept Crypto Payments. CoinDesk. 
12. Redman, J. (2022, Mar.) Luxury Italian Retailer Michele Franzese Moda Reveals Fashion Brand Accepts Crypto Payments. Bitcoin.com. 

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