Combating Illicit Markets With Blockchain: Why Smart Supply Chains Solutions Are Needed

Even if you carefully check the labels, stickers, and stamps on every product you buy at retail stores or online shopping websites, chances are high you’ll still end up purchasing a product from today’s booming illegal economy.

From eyeshadow containing unknown allergens to phone chargers that catch fire, counterfeit and fake items are everywhere.

The steady rise in global consumerism has fueled these illicit markets, making it even more profitable to engage in activities that harm the environment, health of individuals and society as a whole.

As former President of the OECD Task Force on Countering Illicit Trade, David Luna said:

“The size of illicit markets is massive. An array of consumer goods are impacted, from medicines and electronics to shoes, apparel and auto parts. They’re extremely profitable, so we see a tremendous amount of fake goods, and some, possibly dangerous. Smart products, cosmetics, movies, watches — you name it, there are counterfeits. The reality is that every IP product can be counterfeited by criminals and illicit networks.”

Most companies aren’t thrilled with illicit products, either. They can harm brand names, deplete profits and tarnish reputations for years.

That’s why diversion and counterfeiting are the most frustrating roadblocks legitimate companies face. And crucially, blockchain is poised to reduce both of these issues in supply chains around the world.

Here’s why these issues matter and how they can be stopped:

The top illicit trade markets are becoming larger every day.

1. Pharmaceuticals: The World Health Organization reports that in developing countries, 10% of medical products are either falsified or substandard. That’s an alarmingly large chance a medication may be unhelpful at best — and life-threatening at worst.

2. Food: With the world’s grocery market set to reach $11.8 trillion by 2020, there’s ample reason for bad actors to counterfeit or divert food products. With more foods than ever potentially involved, consumers are learning to take a second look at everything from the olive oil on U.S. shelves to the seafood in supermarkets and restaurants.

3. Luxury Apparel And Consumer Goods: The 2017 Worldwide Luxury Market Monitor report by Bain & Company predicts the annual sales for personal luxury goods will reach $312 billion by 2020.

And with almost half (47%) of brands losing sales revenue to counterfeit or pirated goods — according to new research from brand protection firm MarkMonitor — that’s no small loss. For consumer goods, a 2017 report by the ICC’s Business Action to Stop Counterfeiting and Piracy (BASCAP) and the International Trademark Association (INTA), in partnership with Frontier Economics, estimates global economic value of counterfeiting and piracy could reach $2.3 trillion by 2022.

4. Tobacco Products: According to the OECD, lost revenue to governments from illicit cigarettes are estimated at $40–50 billion dollars every year. In Europe, the illicit cigarette market is estimated at over 9% of total consumption, representing a €10.2 billion loss in tax revenue every year.

5. Auto/Transportation: There are now more than one billion vehicles on the road around the world. According to the Motor & Equipment Manufacturers Association (MEMA), the global automotive industry loses $12 billion annually to counterfeit auto parts including, brake pads, brake discs, tires, radiators, alloy rims, filters, cables, airbags and master cylinders. And again, the incentives to make a profit from counterfeit parts is enormous.

6. Environmentally-Sensitive Goods: Every year, an estimated $133 billion of fuels are illegally stolen, adulterated or defrauded from legitimate petroleum companies. And goods such as oil, timber, diamonds and gold can be especially susceptible to diversion due to their value in secondary markets. It’s also difficult to track where these commodities came from once they’ve been extracted.

7. Corruption And Money Laundering: The estimated amount of money laundered globally in one year is 2–5% of global GDP, or $800 billion to $2 trillion in U.S. dollars. Money laundering is often directly related to the rest of these issues, because the money earned from illicit activities must be “cleaned” before it can be used for legitimate purposes.

8. International Foreign Assistance: Sadly, foreign aid isn’t safe from thieves and counterfeiters. In fact, governments and organizations face massive challenges when it comes to making sure aid actually reaches those who need it most. And with the global aid business at $158 billion in 2016, the potential for loss is incredibly high.

9. Defense: In 2015, the U.S. Department of Defense’s budget was nearly $600 billion. The DOD gives out billions of dollars worth of contracts every year. And as we recently saw with the Pentagon’s Defense Logistics Agency — which couldn’t account for more than $800 million — it’s not always clear where the money goes.

Counterfeiting is also a serious concern. When parts are being manufactured for aircraft, weapons and highly-specialized items, it’s of the utmost importance that inauthentic items stay out of the supply chain.

10. Art, Wine, High-Value Collectibles Fraud And Theft: High-end products and collectibles are naturally targeted by counterfeiters due to the potential for equally high returns.

Fine art is one of the most notorious spaces, with the Fine Arts Expert Institutein Geneva, Switzerland estimating that half of all artworks in circulation are fakes. With the global art market measured at $63.7 billion USD in 2017, it’s easy to see why thieves and counterfeiters are so attracted to the art world.

But the fine art market isn’t the only one counterfeiters flock to. The U.S. market for online antiques and collectibles sales is $2 billion, with an annual growth of 7.2% from 2013–2018. Meanwhile the global animations collectibles market is estimated to be worth $6.5 billion by 2021.

Sports memorabilia is also particularly susceptible to fraudulent schemes. According to the Federal Bureau of Investigation, roughly 90% of sports collectibles are counterfeit. Even renowned trophies like the Heisman aren’t immune.

And amazingly, even wine has become a favorite target of counterfeiters, who’ve opened up a booming market in China.

Blockchain technology is incredibly useful for identifying and registering goods in these markets.

The blockchain is ideal for helping with counterfeits and diversion because of its ability to create unique identities for individual items.

By using barcodes, serial numbers, or cryptographic seals, companies can create a link between the physical object and its digital life on the blockchain.

This one-to-one link results in greater transparency and trust in the authenticity of goods. When an authentic product is first manufactured, it can be registered on blockchain. That item now has an identity attached to it, and the blockchain is updated every time the item changes hands — from a manufacturer to a distributor or from a wholesaler to a retailer.

A verifiable chain of custody makes it much easier to detect where the gaps in the supply chain occur.

If diversion is happening because a certain distributor is selling products to an unauthorized dealer, the disappearance of those items from the supply chain can be detected and traced back to the last party to have custody of the products.

Counterfeit goods will also be easier to identify, because they’ll lack a registered blockchain identity. Many will offer visible clues if they’re missing the cryptographic seal that appears on authentic goods.

Combating illicit trade will take more than just one technology, but blockchain is uniquely positioned to help suppress the two biggest issues contributing to the growth of these markets.

For now, that’s a good place to begin.

This article originally appeared on Forbes.

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