Appraising The Luxury Goods Market With Blockchain Technology
Crypto & Blockchain
Sep 1, 2018
If you were to walk into your closet, attic, or basement, what items would you find? Whether it’s a Louis Vuitton purse, Coach billfold, Rolex watch, or other luxurious item long forgotten, there’s no doubt that these items have retained some value. But, how do you know that the item you're holding is in fact worth the amount you believe it to be?
Absent paying a visit to an appraiser or utilizing an authentication system of sorts, there’s no way to be completely confident in the valuation. That’s where the implementation of blockchain technology comes into effect, which can make a huge dent in this industry.
Traveling Through Time
Over the last twenty years, the market for luxury goods has been valued at approximately $3 trillion and can be found in various forms all over the world. Imagine the types of artwork, jewelry, old school electronics, clothing apparel, and even alcohol that could date back years or even centuries.
Even in the current market, these goods need a trusted, verifiable system that operates to better track a particular item or brand’s life cycle, honing in on potential counterfeiting issues. Additionally, this provides for more transparent transactions and relationships as between buyers and sellers.
As a young attorney and millennial, I have seen the effects of this market in my travels abroad. My thesis? I believe blockchain technology is the most appropriate mechanism to apply in this market because it has the ability to address many of the drawbacks the luxury goods market currently faces.
In my travels abroad, I studied how the technology and the luxury goods industries compared to that of the Unites States. Specifically, I focused on Brazil, Ghana, South Africa, China, Vietnam, and Taiwan, as there is a variation in the economic structure of these nations.
In this article, I’ve identified two examples in which blockchain technology could be applied to the luxury goods market.
#1 –Implementing a Fair Pricing Mechanism
Every man’s (or woman's) trash is another's treasure. The first major challenge I believe the luxury goods market faces is the lack of a transparent, standardized fair-pricing index. Currently, there are two different valuation systems being utilized simultaneously—the value a merchant assigns to an item and the value a consumer assigns to an item. Unfortunately, these systems provide a subjective measure of value, absent another mechanism to help confirm their price.
In this system, consumers receive no guarantee on whether the price they are paying is “fair” or “standard” throughout the industry. The strong likelihood of being cheated out of an honest deal, discourages many consumers from purchasing and even holding onto potentially valuable goods. Without the knowledge and expertise of an appraiser, there is no way to be sure.
Often, consumers typically assign their own measure of value to what they believe an item is worth. But, what index or factors are they going off of? I remember during my travels to Brazil and Ghana, “bartering” was a commonly known practice when it comes to shopping. Many times, it took minutes, hours, and even days to come to an agreement with a vendor on an item. Why? Valuation.
It all trickles down to how a consumer (and a vendor) measures the worth of an item they are interested in purchasing (or selling). Many times in these markets, the vendor is often the artist or creator behind the work.
Regardless of the country you’re traveling to, the economy you’re transacting in, and the good you’re interested in purchasing, the absence of pricing transparency acts as a major deterrent to would-be participants on both sides of the trade.
The Blockchain can provide such a system that can be utilized by both merchants and consumers to help validate and authenticate these luxury goods.
#2 –Recognizing Counterfeit Merchandise
Another issue I encountered during my travels abroad was knowing whether I was purchasing an authentic good or item, or not. The counterfeit goods market is a major source of destabilization when it comes to the luxury goods market as a whole. According to some reports, the counterfeit fashion market may cost consumers as much as $450 billion each year.
Whether you’ve traveled there or heard about it from friends, you are most likely familiar with some of these markets. For example, New York City’s Canal Street, which runs through the neighborhood of Chinatown, or Vietnam’s Ben Thanh Market. These markets are widely known to locals and tourists as the “knock-off” or "bootleg" spots of the area.
Having received my bachelor’s degree at Hofstra University in New York, I was only a train ride away from New York City and the appeal of Canal Street. The excitement of being able to pick up the latest men’s cologne, Oakley sunglasses, or even Hollywood movies still in theaters, was every college student’s dream in feeling empowered (or maybe just mine).
But, it wasn’t until I traveled to Vietnam’s Ben Thanh Market, that I truly found myself bewildered by these international markets. I found anything and everything ranging from branded, custom-tailored men’s suits and sports apparel, to watches and new electronics. I remember picking up a couple Burberry collared shirts, all under $100 USD. Yet, my most treasured acquisition was a University of North Carolina basketball jersey with one name stitched onto the back—Jordan. That’s right, I found a Michael Jordan UNC jersey...for $50 USD.
But, what did all these goods have in common? They weren’t authentic. How can you be sure? You can look to the material, stitching, coloration, or even just the grammatical spelling of certain words on the “official” tag. The more you travel, the better you become at distinguishing authentic from a knockoff.
Online and Third-Party Vendors
Over the years, we’ve even seen online black markets arise such as third-party sites where you can purchase any sports jersey or apparel you want for more than 50% off, or markets similar to that of the original Silk Road.
But, often times, these counterfeit markets exist in plain sight—in markets we use on a daily basis. For example, consider sites such as eBay, Amazon, or other third-party vendor sites. For those consumers who like to purchase technology or electronics off there, eBay and Amazon are good places to target those shoppers who don’t know what they are looking for. A word of caution, because invariably, these products aren’t legitimate. I can’t tell you how many times I’ve gone to a site like eBay, Amazon, or other online consumer-driven market looking for electronics like a Mophie battery case, or a robot vacuum similar to iRobot’s Roomba, eventually discovering they were either stolen or a really good knock-off. To no surprise, all these products stopped working days later.
Another popular example is the diamond market. With today’s technology, daring and unscrupulous sellers are taking advantage of social media platforms like Facebook and WhatsApp to sell “blood diamonds,” often using forged papers from countries like Cameroon and the Central African Republic. The 2006 film, Blood Diamond, is still a perfect example of the current diamond-market crisis.
For the average consumer, it becomes very difficult to deduce the authenticity of an item. Why? Loyalty. We want to trust the merchants we purchase our goods from. Potential buyers have to put their trust in merchants of sometimes dubious credibility to determine the authenticity of the goods they want to purchase.
Notwithstanding the two issues I’ve identified above, how can we transform these issues into sustainable solutions? Applying blockchain technology to appraise luxury. New or old, luxury brands need to recognize the importance of adopting new technologies to help ensure sustainable business practices.
Blockchain technology can serve as a key component in ensuring sustainability because of consumer demand. But why?
#1 –Consumers Are Welcoming Transparency
Consumers are becoming increasingly conscious of where their luxury goods are coming from. More importantly, they are willing to pay extra for one thing in particular: sustainability. According to the 2015 Nielsen Global Corporate Sustainability Report, approximately 66% of respondents indicated that they were willing to pay more for sustainable goods. Specifically, millennials.
As part of that demographic, I agree that we are now entering into one of the most difficult economic climates in over 100 years. But yet, we are still willing to pay more for our goods. Why? Personally speaking, I believe in paying more for a given item because of one major factor: brand loyalty. At the end of the day, I know my products work and do what they were designed to do. Nothing grinds my gears more than when something I pay good money for, doesn’t do what it was intended to do.
One luxury item that makes people’s wallets open are luxury handbags. They have been shown to outperform both the stock market and the gold index in terms of a long-term investment.
So, that one handbag stored away in a bin in a closet, or vintage wine in the cellar, would likely continue to increase in value as demand trends upward. Think about the potentially billions of dollars worth of luxury goods tucked away in “safe places” that could be traded each year around the world—if only we knew more about their hidden character traits.
By implementing blockchain technology, merchants and consumers can track the entire life cycle of a good, which available on a digital ledger, provides all information necessary relating to the sourcing all the way to final production.
#2 –Providing Clear Provenance and Value
The development and utilization of authentication systems, like the Blockchain, helps to ensure clear provenance and valuation, while minimizing the risk for fraud and counterfeiting.
The Diamond Market
Expanding more on my diamond example above, the diamond market is estimated to be worth more than $72 billion each year. But, the global diamond jewelry industry is flooded with unethically produced diamonds, more commonly referred to as “blood diamonds.”
While not blind to this practice, the diamond industry was one of the first industries to begin embracing the 21st century age of technology. This is a prime time to begin exploring the endless possibilities that could ultimately and inevitably take the space leaps and bounds.
Millennials Are The Key
Our generation can watch the unveiling of yet another new phenomenon, similar to the birth of the internet and the “dot-com” era. I believe that once an ecosystem is established, it should be widely adopted across the industry, as organizations, institutions, and individuals will come out of wait, looking to solve the puzzle.
With the emergence of blockchain technology, companies have already began implementing their own ecosystems with the hopes that it will take off and take over as a standard-wide technology.
Everledger, for example, recently launched its Rare Carat Report, leverages blockchain technology in conjunction with artificial intelligence (A.I.) to allow consumers to evaluate and appraise their diamonds for sale anywhere in the world. Operating as one of the first companies to embrace this technology, it has already placed over 1.6 million diamonds on the Blockchain. The entries on the digital record include dozens of attributes for each diamond, such as its color, carat, certification number, and other information.
Digital Assets and Collectibles
Another example is Arianee. The blockchain startup is continuing to address counterfeit goods by tracking any luxury item with a serial number. They are focused on creating a unique user experience through a mobile application where anyone can register, authenticate and track the history of their product. Brands are able to purchase tokens in order to generate certificates of authenticity.
Luxchain, another start-up, believes that converting luxury items into a digital asset, or even a collectible, can allow for its user to track its origins across the supply chain. The company’s Chief Technology Officer, Alex Hung, is a developer and business analyst for HSBC Asset Management and the Hong Kong Police Force, which provides for an interesting strategy in implementing asset-management technology. The company provides a blockchain-based ledger that allows users and owners of items to create such an asset that contains information about the item’s history, origin, ownership, and other character traits. As a frequent traveler, of course I was interested in this company, especially since it's based out of Asia, which I have previously traveled.
I reached out to Kenny Au, co-founder of Luxsens, a company utilizing A.I. technology to connect luxury sellers to consumers, and the core team spearheading the Luxchain project. Au provided his insight on the growing necessity of Blockchain technology in the luxury goods market.
From his perspective, Au believes that having a window into an item’s life cycle allows its users and holders to see any and all instances in which it was handled, including the purchase history.
“Having a real, traceable, digital identity can provide the means for which fraudsters can be easily recognized and held accountable for illicit behaviors,” said Au.
According to Luxsens' other co-founder, Aidaa Wong, utilizing a decentralized blockchain network, helps strengthen data encryption because people care about getting the value they were promised.
At the end of the day, we as consumers need to monitor how this technology continues to grow, providing a mechanism in which merchants and consumers are able to access the many characteristics of these luxury items, while creating a more sustainable system where goods are authenticated and most of all, trusted.