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Blockchain and NFTs Are Smart, But Can They Revolutionize Fashion? – The Fashion Law

Following the worldwide disruption in retail due to COVID-19, sales of luxury goods are expected to grow as much as 25 percent in 2022. Much of this growth has been driven by e-commerce, with online sales totalling 23 percent of all luxury sales in 2020. Meanwhile, consumer sustainability demands have driven growth in luxury resale and rental markets, with the former now worth an estimated $36 billion, and brands are readily expanding their reach into the budding new digital territory of the metaverse – the overlapping digital and virtual spaces in which we increasingly work, play, and consume.
Yet, luxury’s digital embrace has been hampered by a concomitant rise in counterfeit goods in the physical and digital worlds. In 2019, Harvard Business Review reported that fake luxury goods accounted for 60 to 70 percent of the $4.5 trillion total global trade in counterfeit goods sold annually, and in 2016, the Organisation for Economic Co-operation and Development recorded that counterfeit luxury goods accounted for approximately one quarter of the estimated $1.2 trillion total global trade in luxury goods. 
Since the pandemic, these figures have worsened, with brand protection agencies reporting a 56 percent increase in online counterfeit sales in the first six months of 2020. Additionally, there has been an increase in the number of cease-and-desist letters and takedown notices sent to non-fungible token (“NFT”) creators and platforms in response to the rise of unauthorised NFTs. 
The damage goes beyond lost sales. Counterfeit products can tarnish a brand’s reputation and degrade consumer trust. Further, counterfeits produced in unregulated environments can potentially pose risks to customer health and safety, while detracting from brands’ public commitments to sustainability and Corporate Social Responsibility.
Increasingly, fashion and luxury brands have turned to the latest advances in blockchain, nanotechnology, and the internet of things to authenticate their products, combat increasingly sophisticated counterfeiters, and guarantee supply chain transparency. Not without drawbacks of their own, these digital solutions can also pose unique risks for transparency, privacy, and cybersecurity.
Although the concept behind blockchain may appear inscrutable, the technology is as intrinsically straightforward as its name suggests. A blockchain is a form of database or ledger that stores information in blocks, whereby the verified blocks are connected to one another in a chain. When new data is entered, it must be verified and only then can be connected to the existing blocks in chronological order. Each block holds important encrypted information, such as a time stamp, the cryptographic transaction identifier (or “hash”) of the previous block in the chain, and the data of the transaction. 
After the information has been entered into the block, the technology ensures that this information stays there indefinitely and cannot be changed, deleted, or modified. Any attempt to alter information contained in the existing blocks can be easily detected. Therefore, transparency and traceability are safeguarded, and the authenticity of the information can be verified by anyone. 
Blockchain technology may be utilized in conjunction with QR codes, smart labels, near-field communication (“NFC”) tags, and/or radio frequency identification (“RFID”) tags – devices that facilitate the transmission of data from a code, label, or tag to a smartphone or reader device. Blockchains can also be generated for the purposes of use with real-life physical products, like handbags or shoes. When placed onto products, these devices act as a link between the physical item and the digital ledger that contains data, such as the product’s source and ownership history. When a consumer scans the QR codes/tags with their smartphone or with an NFC/RFID reader, the data is instantly revealed, granting the consumer access to relevant information that can assist them in making purchasing decisions or verifying a product’s authenticity.
Blockchain has also inspired innovations in value creation and transfer. Some of those innovations include cryptocurrencies, stablecoins, decentralised finance, and NFTs. NFTs are verifiable, one-of-a-kind, and non-interchangeable digital assets. The unique identifiers provided by creating – or “minting” – NFTs allow for potential buyers to digitally track and trace a physical or digital product’s ownership history and in theory, its authenticity.
As luxury brands turn to digital strategies to protect brand value, NFTs have emerged as luxury goods, themselves, generating millions of dollars in brand value for use largely in the budding metaverse. According to a recent blue-sky analysis by Morgan Stanley, while NFTs in the form of luxury collectables account for less than 1 percent of all NFT transactions in 2021, luxury NFTs could become a $25 billion business by 2030, representing 10 percent of the luxury market.
However, as NFTs become increasingly important for protecting – and generating – brand value, they too pose challenges with respect to issues of authenticity, ownership, and intellectual property protection. For example, a proliferation of NFTs that make unauthorized use of a brand’s trademarks and/or trade dress, for instance, creates the risk for potential trademark dilution, particularly in the metaverse where digital iterations of luxury goods often outstrip the value of physical products. Additionally, NFTs provide purchasers with a digital certificate of ownership that can be bought and sold online, yet generally do not give the purchaser rights to the physical product, or any associated intellectual property, which can lead to confusion among purchasers over the right to display, resell, or engage in commercial use of the NFT, potentially resulting in unauthorized use and/or dissemination. 
Finally, NFTs suffer from the very same basic flaw as blockchain, in which “authenticity” depends on the integrity of the underlying information, and the transparency of supply chain participants.
The digital age and global pandemic have rendered it common practice for consumers to purchase fashion and luxury goods via online platforms, where they are unable to physically inspect products before payment. This has led brand owners to consider new identification methods that can handle the challenges presented by the sale of their goods through online marketplaces. Moreover, trust is considered one of the most important factors in consumer purchasing decisions, making transparency and sustainability two of the hottest topics in the fashion world. With an increasing number of reports in recent years of unethical labor practices, water pollution, overproduction (and subsequent destruction), and microplastics, the fashion industry has come under intense scrutiny. 
While luxury brands must meet consumer demands for consistent novelty, particularly as fast fashion production cycles have become something of the norm, they must also commit to meeting specific Environmental, Social, and Governance standards that consider their impact in the long-term. This poses a major challenge for the fashion industry, as the environmental and social footprint of a finished product can be immense. Often, fashion brands only have sight over suppliers that are closest to them in the supply chain and even less control over how they operates. 
This is especially true for clothing production in what is a hugely fragmented industry and often involves complex global supply chains. This means it can be difficult for luxury brands and retailers to monitor what materials end up in finished products, and where – and under what conditions – the raw materials are sourced, and the products are ultimately made. To help overcome issues resulting from opaque and inefficient supply chains, at least some fashion houses and retailers are turning to blockchain technologies.
For example, suppliers can use blockchain technology to store and share information regarding the source of the raw materials. This creates a permanent immutable record of all the materials used in production. Manufacturing information would usually be stored in an internal or analogue system, but by using the blockchain system, this manufacturing information can be easily accumulated and self-validated and – as the blockchain can be translated to a QR code or NFC and assigned to each product – it is accessible by anyone with a QR code or NFC reader. Therefore, simply by using a mobile phone to read the QR code or NFC, the complete history of the product can be traced, and consumers can start to understand the environmental and social impacts of the product.
Not a novel idea, the first product tracked by blockchain was made in 2018 by Danish designer Martine Jargland. As a result of a partnership between A Transparent Company, Provenance, and the London College of Fashion’s innovation agency, each step of the manufacturing process was tracked via blockchain through an app. This sparked the interest of other major fashion brands and retailers, some of which are working to adopt similar efforts.  
While adopting blockchain can benefit luxury fashion brands, it also presents many challenges. There is a variety of blockchain protocols and systems, each with their own rules and standards, vying for popular adoption in the fashion industry. Without standardization or cooperation between key players, the fashion industry’s adoption of blockchain-based technologies can result in a plurality of incompatible, siloed systems with limited reach or benefit. Fortunately, blockchain consortiums, such as the Aura Blockchain Consortium, and standard-setting organisations (“SSOs”) are addressing standardization issues. In their quest for efficient standards, such parties must share sensitive and confidential information between members/competitors, address standard-essential intellectual property – and the licensing thereof – and tackle potential antitrust concerns.
The cost of adopting blockchain must also be considered; it is not cheap, and this may make it unfeasible for many smaller brands and retailers. (It is worth noting that the Aura Blockchain Consortium recently launched Aura SaaS, a cloud-based solution it says allows for “a quick and easy implementation of the platform with lower costs, helping brands to address authenticity, ownership, warranty, transparency and traceability,” and enabling them to benefit from “lower license and onboarding fees.”)
Still yet, there is the issue of the perceived environmental impact of blockchain technology, itself. Blockchain technology is coming under increasing scrutiny due to the generalizations made as to the allegedly inherent energy intensive nature of the technology. This perception raises concerns about – and may inhibit – the future uptake of blockchain. While this perception might be true for some applications of blockchain technology, such as cryptocurrency, blockchain is not the same across all applications. As such, it seems that the stigma attached to blockchain technology should be treated with caution, and should not deter adoption in the fashion industry, which stands to reap the benefits it provides.
Blockchain can be used as a guarantee of authenticity and traceability and can be effectively integrated into the existing practices of fashion brands of various sizes. This technology can also be used by fashion brands to transparently demonstrate their supply chain to assure consumers of ethical and sustainable sourcing. While sophisticated tech solutions have shown tremendous promise in combating counterfeiting in the luxury space, brands should remain aware of the potential risks and legal pitfalls inherent in these solutions, and continue to deploy multi-pronged, real-world strategies to combat counterfeiting in the physical and digital world. These include implementing effective supply chain controls, maintaining strong intellectual property protections, developing robust online monitoring programs, and collaborating with enforcement authorities to identify and prosecute counterfeiters.
Cindy Yang is a partner at Duane Morris. Kelly Bonner is an associate at Duane Morris. Fiona Rodgers is a senior associate at Penningtons Manches Cooper. Michelle Ray-Jones is a partner at Tilleke & Gibbins. The authors are members of the global law firm network Multilaw.
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