James Corlett, Partner at Beyond Corporate Law and Molly Hackett, Paralegal at Beyond

Corporate Law

Blockchain is a new type of technology that is now ubiquitous thanks in part to crypto currencies like BitCoin and the increasingly common news stories around NFTs (non-fungible tokens).

Blockchain is a database and a means of sharing information across lots of different computers, rather than in one centralised place. This means that it provides a greater degree of security than ordinary, decentralised databases or communication chains. Cryptography authenticates parties’ identities and creates immutable hashes of each ledger record, the current page of records and the binding that links each block to the earlier ones in the database.

Blockchain’s use in demonstrating digital provenance has emerged to help fashion brands counter the threats of counterfeiting, to demonstrate their sustainable and ethical credentials, and to enable brands differentiate in a competitive market through marketing and brand development.

It was reported earlier this year that the UK Fashion and Textile Association has partnered with IBM and retailers including H&M, COS, Next and New Look to pilot a supply chain traceability solution for the UK fashion industry. The platform will utilise IBM’s blockchain technology to share information about clothing products (place and date of production, product composition and environment-related certificates) and make accessible to consumers via QR code.

Proof of creation and tackling counterfeit

Blockchain is currently used within fashion and retail sectors in tracking the movement of physical and digital goods to ensure authenticity. In a physical supply chain, blockchains can be used to verify physical tags on garments. Usually this may be via QR codes, near-field communication chips (NFCs) and radiofrequency identification chips (RFID chips), which can be accessed on a mobile phone and payment methods such as ApplePay.

While for many years holograms and QR codes have been used, they have been subject to extensive copying. However, through the use of blockchain technology it is much easier to identify counterfeit goods because they will automatically check against the centralised database, providing a fuller picture of the garments authenticity.

The additional benefit of this is that blockchain can be directly connected to anti-counterfeiting organisations like brand protection teams or law enforcement agencies. From a consumer perspective, you can in theory use the technology to protect purchases made via online sales platforms, such as eBay, reducing the risks of products being counterfeited, particularly luxury or limited, high-end pieces.

The technology is two-fold in helping identify any counterfeiting within the supply chain, and if copying or counterfeiting has occurred, a brand can use blockchain as “paper trail” evidence to distinguish their goods and their origin from that of the counterfeit to protect their reputation.

Supply chain monitoring

Blockchain connects the apparel supply chain with a real-time flow of data, creating an immutable ledger. The way in which blockchain tracks a product enables transparency in seeing individuals who work on the product right up to it reaching the high street and into the hands of the consumer. A key advantage of tracking is that brands can monitor product volumes, whether any product goes missing and at what stage of the chain this has occurred. This may be attributed to distributors selling some of the goods elsewhere and subsequently breaching distribution agreements. In having access to such data, brands and retailers will be able to streamline their supply chain and improve its efficiency.

In addition, the new technology makes it easy to read exactly what materials are included in a product which can in turn be used for recycling purposes, and it can provide brands with important insights such as whether the product was resold online or ended up in a second hand or charity shop.

Sustainability and social impact

The lifecycle of a single garment alone produces a significant environmental and social footprint – such a cycle includes the sourcing of material, production, shipping, retailing and marketing. Such an extensive lifecycle has caused the environmental quality of a product to be unobservable to both the fashion retailer and the consumer. Blockchain technology tackles this issue through its tracking mechanism and ability to provide retailers with ethical credentials.

Fashion retailers being able to demonstrate their sustainability, environmental accountability and the action they are taking to help the planet has become increasingly important over the last decade or so. Consumers want to know where the goods they’re buying come from, particularly in an industry that has received widespread criticism over unsafe workspaces, low wages and labour abuses. Brands such as H&M have responded to this change in consumer behaviour by releasing sustainable collections. H&M’s innovative collection, “Conscious Exclusive” has been culminated to showcase the brand’s sustainable range in which all said products contain sustainable material. Consumers are able to identify these products by the attached green tags which indicate either at least 50% sustain raw materials or 20% recycled cotton have been used in the production of the garment.

Whilst such innovation is a step towards making the retail sector more sustainable, consumers may be sceptical of such advertising and may question its validity, is it really what it says? Blockchain technology encourages transparency within this industry and provides retailers with the confidence to market products as sustainable and reassure customers about the provenance of their goods. In a similar fashion to supply chain monitoring, greater traceability through blockchain may mitigate the risk of murky and inefficient supply chains and enable retailers to identify suppliers that do not support sustainable and ethical practices.

With enhanced confidence in the origin and composition of their products, brands can also utilise this information to further develop their brand image in this area, improve communication surrounding their support of ethical practices and build consumer facing narratives that demonstrate their sustainability. This in turn will boost their reputation.

Verifying trade marks

Brand and trade mark protection has started to see benefits from blockchain technology by the reduction of counterfeit goods and increasing the efficiency of trade mark registration. Blockchain can offer a level of comfort in relation to the authenticity to luxury brand trade mark owners. Counterfeits can be tackled through QR codes. When a consumer purchases the product, they can use the QR code to access its certificate online that has been cryptographically signed by the brand, as well as all those involved across the supply chain, verifying the authenticity of the product. Counterfeits can therefore be easily identified by the lack of verification through blockchain. In addition, outfits buying, and reselling luxury goods will be equipped with certainty that the goods they are buying are legitimate, as well as providing that comfort to their customer.

The user of a trade mark must be able to demonstrate actual use of the mark – whether that be as evidence in the application process or to show its distinctiveness. By recording information such as the dates of use and frequency of use on a blockchain, a brand can easily demonstrate its genuine use per territory, it can be recorded with the UKIPO (as well as any other relevant trade mark office) and be available for everyone to see. In addition, having the ability to check a registered trade mark for any likelihood of confusion will be made more efficient and reliable.

Smart contracts

A smart contract is a self-executing agreement, such as a trade mark licensing agreement, that is written in computer code and signed by the parties using cryptographic signatures. It can be verified and enforced automatically under event-driven conditions that are set in advance. As it is self-executing, it does not need third party involvement or external oversight.

A smart contract can automatically monitor and calculate each time a royalty payment is due in accordance with the terms of the contract and automatically make a payment to a predetermined wallet owned by a trade mark owner. This therefore provides a stress-free and easily enforceable trade mark licensing agreement.

The blockchain stored contracts can help build a stronger relationship between a retailer and the supplier through real-time communication and increased visibility into the supply chain.

The future of blockchain and its challenges

Though blockchain will bring some benefits in making the fashion industry more sustainable and transparent, adding chips into all products is not the most sustainable of practices, and recording all of the ledgers in a safe environment will require extensive data storage, therefore energy use will be high. There are also practical issues to consider such as QR codes on regularly washed clothes wearing away over time, a feature like this may be best suited on handbags and other similar products.

Monitoring and regulation of a blockchain will be essential for the technology to be effective. Although blockchain will enable retailers to ensure any information has not been altered, it does not have the capacity to check the integrity and validity of the information that is recorded in the first place. This means that if a party along the supply chain inputs false information it will remain in the digital file.

Only a small group of businesses have adopted the technology, so it is yet to be the standardised approach. In implementing the blockchain technology, fashion retailers may have to increase the price of their products, or alternatively reducing the price for the actual chips as they currently add a significant amount to the cost of goods – therefore for smaller value items brands may be reluctant to adopt the chip technology.