The future of IP: blockchain vs. counterfeiting

While there are legal remedies in place for the enforcement of intellectual property rights ("IPR"), counterfeiting has become more creative and requires novel approaches.

Economic impact and beyond

A granular view of the data shows that the clothing industry suffered an annual loss in sales of approximately EUR 12bln (i.e. 5.2 % of the sector's overall turnover), followed by the cosmetics industry with EUR 3bln and the toy industry with EUR 1bln. This means that across these three sectors alone, the total aggregated loss amounted to around EUR 16bln and 200,000 jobs, according to the report "Economic impact of counterfeiting in the clothing, cosmetics, and toy sectors in the EU" published in January 2024 by the European Union Intellectual Property Office (EUIPO).

That said, when asked about counterfeiting, people often assume it only affects clothing or cosmetics. In reality, the phenomenon is more widespread, extending even to food and beverages, which translates into lost sales of approximately EUR 2.28bln and nearly 5,700 jobs, as referenced in the EUIPO's factsheet as part of the "What's on your table?" campaign.

Moreover, due to its questionable production standards, this practice not only affects the economy, but also directly impacts human health. Given the illicit aspect of counterfeiting, it is often difficult to hold those responsible accountable.

This leaves us begging the question: what now?

Peering from the past to Web 3.0

As infringers grow more inventive and find new ways to bypass existing safeguards, IPR holders must adapt to the dizzying pace of innovation. Traditional anti-counterfeiting measures are becoming increasingly vulnerable to replication and manipulation. In this regard, the most common examples include the key placement of labels, holograms, barcodes and RFID tags.

One of the latest approaches is implementing blockchain technology to keep track of the production and distribution chain. While this article does not set out to explore the full intricacies of blockchain technology, we will provide a brief overview for context.

At its core, blockchain is a distributed ledger that records transactions in a secure, immutable and transparent manner. Due its decentralised nature, there is no governing or central body, but each holder carries an exact copy of that ledger.

Despite its buzzword nature and somewhat daunting aura, it can be viewed simply as a list of transactions, set in order of processing after they have been validated by so-called "miners". The validation process takes place by using extensive computational power to solve cryptographic problems.

Once one block has been added to that list, it cannot be changed, moved or altered. This is what makes it such a powerful tool in combatting counterfeiting and protecting intellectual property rights.

Each product can be assigned a unique digital identity (e.g. via QR codes, RFID or encrypted tags) that is recorded on the blockchain, which cannot be altered, as mentioned previously. Holders can therefore verify authenticity at every stage of the supply chain – from manufacturer to distributor to customer. This means that it provides not only easy product authentication, but also secure traceability through end-to-end tracking.

Additionally, since it is decentralised, any of the holders can view the supply chain with its respective anonymisation without the need to rely on a single body or authority.

Given its significant potential, the EUIPO has been a key figure in promoting blockchain adoption as a means to combat counterfeiting. Consequently, it has developed "AUTHENTICview", a decentralised platform aimed at supporting IPR enforcement authorities and streamlining product authentication, by implementing NFT integration, Digital Product Passports, and collaboration with customs authorities.

It must be mentioned that some IPR holders have considered using blockchain technology in correlation with AI to increase detection efficiency and lower risk. As a result, some key players are considering the development of their own Small Language Models, trained for highly specific purposes using curated datasets obtained through direct licensing agreements.

Will the chain get blocked?

While it does appear that blockchain technology can shed some light into this matter, certain legal and regulatory implications must be considered.

In this regard, the transparency of blockchain must be balanced against GDPR compliance whenever personal data is involved. Moreover, the use of "smart contracts" requires a careful contractual framework for enforceability, given their automated mechanisms for licensing and payment.

This could lead to possible implications regarding digital operational resilience, as set out in Regulation (EU) 2022/2554. All of this should be carefully analysed beforehand.

Moreover, the environmental impact of such technology must be assessed, given that it may require vast amounts of electricity to validate each block via its miners, depending on its inherent mechanism and mining equipment.

The known path

Until blockchain technology is broadly embraced, most IPR holders will continue to rely on conventional elements for enforcement. The security of having a portfolio of registered trademarks and designs is the cornerstone in protection and the way forward. At least for the time being.

One thing is certain: regardless of approach, the common goal is to keep the marketplace fair, transparent and, most importantly, safe for all involved.

author: Tiberiu Protopopescu