Blockchain – A New Trend in the Fashion Industry?

Authors: Jesper Nevalainen, Caroline Sundberg, Itai Coleman, and Anton Pirinen

The use of blockchain technology is an integral part of the fashion industry’s shift from being rooted and slow-evolving to becoming an early-adopting industry using disruptive technologies to meet the demands of the 21st century.

Background

Blockchain technology constitutes a peer-to-peer network in which records of events such as transactions and contracts are stored in blocks. Once an event is verified by every node in the network, the event is added as a new block in a chain of earlier events. Every block contains a unique identifier that is connected to earlier blocks in the chain. Since all nodes in a blockchain are a part of the verification process and have access to the records related to all events, changing information on a blockchain is difficult and expensive, and where it is done it is likely visible to all those having access to the ledger. Thus, blockchains may be used to verify the nature of events and the order in which the events have occurred. Blockchain technology initially provided the necessary means to enable payments with no intermediaries in cryptocurrencies (such as Bitcoin and Litecoin). Although the technology is still in its infancy, it is now recognised that the potential uses of the technology are fundamental and extensive in a wide array of industries, including the fashion industry. It has even been suggested that blockchain may be one of the most important inventions since the internet.

Uses of Blockchain in Fashion Industry

With the recent increase in demand of transparency from consumers, several fashion companies are implementing procedures to enable efficient monitoring of supply and distribution chains. By combining blockchain technology with physical RFID chips or QR codes, companies can track the multiple steps involved between sourcing the necessary raw materials for a garment to distributing the garment to the end consumer. In addition, blockchains can be used to ensure that the process is consistently performed in an ethical, sustainable, and secure manner by monitoring the intermediaries.

Blockchain technology can also be used to protect intellectual property owned by fashion companies from misuse and to increase consumer trust by reducing the risks of fraud and counterfeit products. In order to secure the availability of the information necessary to protect their designs, companies can demonstrate their ownership and creation by recording their creation processes on a blockchain. Furthermore, through the use of distributed ledgers, goods can be tracked and verified by retailers and consumers from the production phase all the way to the second hand sale of goods.

Earlier this year, the luxury goods conglomerate LVMH launched a blockchain platform to facilitate consumers’ authentication of luxury products. The ledger provides consumers with transparent information about the product’s history, including events in the design, production, distribution, and transaction processes. Several Swedish brands, such as Filippa K and Asket, have also initiated the implementation of blockchain technology in order to achieve full transparency towards consumers.

In addition, smart contracts placed on blockchain platforms, such as Ethereum, can be used to automate the actions related to contractual obligations, provided that the set criteria are met. Thus, a smart contract can be described as a software-implementation of an underlying contract that can make the enforcement and performance of the contract more effective.

Outlook

Despite the fact that there are several legal uncertainties related to blockchain technologies, only limited guidance has been provided to date by the authorities and courts. Blockchain technology as such is largely unregulated, but it is subject to existing legislation. Although it is yet to be tried, blockchains could assist in generating compelling evidence in civil proceedings in the fashion industry, considering that the information stored on a blockchain could be argued to be secure and immutable. In addition, it is still unclear how existing contract law will apply to self-performing smart contracts. The non-performance of automated actions under a smart contract may, for instance, due to technical issues, lead to unforeseen challenges. Provided that the performance of such an action is outside the debtor’s control, can the debtor be held liable for the failure to act?

Despite the uncertainties, most companies in the fashion industry are likely to benefit from the implementation of blockchain technology either by meeting customer demands regarding transparency or by protecting intellectual property and counteracting counterfeits, or both, while simultaneously decreasing the administrative costs related to tracking, auditing, and compliance. However, significant upfront investments and uprooting largely functioning administrative processes can compose initial hurdles in implementing new blockchain technologies. To make these investments a long-term success, particular attention should be paid to ensuring that the contracts under which the technology is sourced facilitate change in the company’s business, that adequate rights to the information stored on the blockchain are secured, and that the information stored on blockchains is available and accurate, and, where appropriate, unmodifiable.

More articles from the first edition of Hannes Snellman Fashion Law Review are available here.