When you hear the word “blockchain,” you probably think of Bitcoin, the virtual currency that has gone up exponentially in value over the past few years. But while blockchain technology is best known for its use in virtual payments and other financial applications, other uses are rapidly being developed across every sector of the economy, and the fashion industry is already beginning to discover its possibilities. As enthusiasm for its uses in the fashion industry for everything from inventory management to brand protection grows among early adopters, it’s also worth pointing out certain pitfalls that come with employing blockchain, which is still largely untested and unregulated.
What Is Blockchain?
In simplest terms, a blockchain is a shared database or digital ledger that automatically updates information across an entire network, without the need for a central intermediary. When a user enters information in the ledger, that entry becomes linked to every other entry, or “block,” and every other copy of the ledger is automatically synchronized via the Internet. The interconnection among all the blocks in the “chain” makes the ledger unhackable, at least in theory, because a hacker trying to alter a single transaction or entry would have to alter every other link in the chain as well. The distributed nature of blockchain also makes it transparent, because every user can see the entire history of entries in the ledger. A blockchain can be public or private, accessible to everyone or only to selected companies and individuals.
Blockchain technology was invented in 2009 by Satoshi Nakamoto (probably a pseudonym) for use as the public transaction ledger for Bitcoin, allowing users to make and receive payments without the involvement of a central bank or other financial institution. But while more and more businesses and consumers are using Bitcoin and other cryptocurrencies to pay for goods and services, virtual payments are only one application of blockchain. Because the technology is essentially a shared digital ledger – it’s been compared to a Google spreadsheet – it can be used for any application in which multiple users need to create and maintain shared records of transactions, events or other information, without relying on a central administrator or interacting directly with each other.
Companies are already using the technology to verify digital identities, enable “smart” contracts that execute automatically, and track shipments of goods around the world. To take just a few examples, Walmart is now using IBM’s blockchain platform to track food shipments as part of an initiative to improve safety, and the diamond industry is using Everledger’s blockchain to verify the source and unique attributes of diamonds. These applications have obvious potential for the fashion industry.
Blockchain Technology Relevance for Fashion
Among the most promising blockchain applications for fashion companies are supply chain and inventory management. Blockchain applications combined with radio frequency identification (RFID) and other Internet-of-Things technologies can instantaneously track shipments of raw materials from source to factory, then track the finished product through its entire distribution chain to the consumer. While other tracking technologies have existed for some time, the distributed nature of blockchain technology means that records can’t be altered, lost or destroyed; if a supplier tries to alter an order, for example, the customer will still have an indisputable record of the original order information.
Blockchain also has the potential to enhance intellectual property protection for designers and brand owners. When branded goods can be tracked through blockchain, their authenticity will be easily verifiable by brand owners, retailers and consumers, reducing counterfeiting and fraud – even when goods are sold second-hand or through discount sellers. Blockchain applications will also enable designers to document every step in the design process, providing unalterable proof of creation in case of a dispute. Brand owners who license their designs or trademarks can use blockchain technology to track sales and royalty payments – similar to a system already being developed by the music industry for tracking royalties, using IBM’s blockchain platform.
The fashion industry is already beginning to test blockchain’s possibilities. In 2017, London designer Martine Jarlgaard, in collaboration with the blockchain company Provenance, produced the first garments with “smart labels” that the consumer could scan to see every step in the production process, from raw material to finished product, complete with time stamps and location mapping for every step – even identifying the source of a sweater’s alpaca yarn. This kind of transparency will likely be a selling point for consumers who increasingly want to know how and where their clothes are made.
In another experiment, fashion label Babyghost teamed up with blockchain platform VeChain to incorporate Near-Field Communication (NFC) chips into its spring/summer 2017 collection, which could communicate with an app on the customer’s phone to tell the “story” of the garment. In addition to tracking the production of a product and verifying authenticity, Babyghost’s blockchain application allows customers to interact with the product, adding their own photographs, videos or personalized messages, which can then be accessed through the chip. So far the largest-scale use of blockchain technology to prevent counterfeiting is by Chinese e-commerce company Alibaba, which is developing a blockchain application to track its products. Every time a product moves from one place to another, its code or tag will be scanned, recording its location with a time stamp. Purchasers will be able to scan the product and trace its journey from the factory to their front door – and to verify whether a branded watch or handbag is the real thing or a knockoff.
Pitfalls and Possibilities
With all the excitement surrounding blockchain, it’s easy to forget that the technology is still largely unproven and unregulated. In the US and most other countries, regulatory proposals have focused on Bitcoin and other virtual currencies, and are still in their early stages. Beyond the financial sector, Malta has been an unlikely leader in regulation, and in February 2018 proposed legislation that would create a regulatory authority to certify blockchain service providers and platforms.
But for the time being, there are no particular standards governing blockchain applications or developers. The few fashion companies that have adopted blockchain have employed developers to write their own applications, which only work with their products and suppliers. An industry-wide standard, or even a single platform, would make the technology more effective and less costly but would require a level of cooperation that may be hard to achieve. For now, companies should select providers that already have a track record in the fashion industry, and should agree clearly on who’s responsible if something goes wrong and data is lost or compromised. Blockchain has the potential to transform the fashion industry, but companies need to think carefully before adopting the new technology on the block.
Jeff Greene and Anne Marie Longobucco
Jeff and Anne Marie practice at Fenwick & West LLP, a law firm that focuses on technology and life sciences companies and start-ups. Jeffrey focuses his practice on strategic foreign and domestic brand counselling and protection, including the development and management of global trademark portfolios, creative brand enforcement strategies, licensing of brand assets and advertising. Anne Marie focuses her practice on U.S. and international trademark clearance, trademark prosecution, dispute resolution, and enforcement.