The retail industry is ripe for innovation. It will see more disruption in the next few years than it has seen in decades. What role will blockchain technology play in that disruption?
While much has been written on the ways blockchain technology can disrupt the retail industry by reducing transaction costs or increasing efficiency, many have overlooked the impact of regulation and compliance. New laws are being adopted in response to the increase in innovation, the desire to protect consumers, and growing calls for transparency. Instead of completely disrupting the retail industry, blockchain technology could be used to aid compliance with new and evolving regulations.
What is Blockchain?
Before diving into where blockchain technology could aid compliance, it is important to understand what we mean by blockchain technology. Blockchain is best known as the technology that underpins Bitcoin, the first cryptocurrency. But Bitcoin is just the first application of blockchain—it can be used for many different applications. Blockchain is a secure and resilient mechanism that allows for peer-to-peer transfer of anything of value without the need for an intermediary. It does that through three key features: a peer-to-peer network for conducting transactions without the need for an intermediary; a distributed, immutable ledger for recording and viewing those transactions; and a consensus mechanism for validating those transactions while detecting fraudulent and false transactions. Together, these elements create a stable, tamper-proof, intermediary-less environment for parties to transact with one another in a trusted manner, with an easily auditable record of transactions. Several excellent resources exist that describe blockchain in more depth; we recommend Coin Center’s article "What is 'Blockchain' anyway?" or its "Blockchain 101" resources. This article will focus on three specific applications where blockchain technology used in the retail industry could provide greater efficiency, effectiveness, transparency, and trust.
Blockchain and Supply Chain
One of the most promising applications of blockchain technology in the retail industry is in the area of supply chain management and tracing the provenance of goods. In the era of the "conscience consumer," customers increasingly care about the origin of their products and transparency in business supply chains is becoming a corporate norm. From private stakeholders to government entities, conscience consumers are inquiring about the systems and sources handling retail goods. Concerns about quality, safety, ethics, and environmental impact have become essential features for many products and transactions. Blockchain technology can be used to increase transparency in supply chains.
For instance, blockchain-based application Provenance provides interactive labels that track the raw materials that go into their product, the processing of those materials, and the product’s manufacturing. Just last year Provenance successfully tracked their sheep wool products end-to-end from artisan breeding and sheering through spinning and retail sale. Other companies, such as Everledger, digitize a host of data points about luxury gemstones and diamonds (e.g. color, carat, clarity, conflict-free status, and certificate number which are inscribed by laser) to create a multi-layered digital fingerprint on the blockchain. Numerous startups have enlisted artisans around the world to hand-make quality goods. These companies – including Soko (jewelry), Nisolo (shoes), Indigo Handloom (scarfs) – could benefit from the transparency a blockchain-based supply chain could provide.
Blockchain technology could make it easier for retailers to comply with new regulations aimed at supply chain transparency. The California Transparency in Supply Chain Act requires retailers and manufacturers who conduct business in California and have worldwide annual revenues in excess of $100 million to disclose their efforts to eradicate slavery and human trafficking from their direct supply chains. They must disclose certain information on their website, including the extent to which they conduct audits of their suppliers and whether they engage in verification of their supply chains to evaluate and address risks of human trafficking and slavery. Implementing a blockchain-based supply chain solution would give retailers much more visibility into their supply chains, which currently are difficult to trace and audit. This could make auditing their suppliers and products much easier in terms of both cost and time. Recently, IBM and Walmart used blockchain technology to trace mangoes in Walmart's supply chain as they transit from Mexico to the US. Where it normally would take Walmart nearly seven days to track a package of sliced mangoes back to the source, with blockchain the same tracing can be done in 2.2 seconds.
Similarly, under section 54 of the United Kingdom’s Modern Slavery Act 2015, companies with a turnover of more than £36 million must produce an annual report detailing their efforts to prevent slavery in any part of their business or supply chain. Currently, approximately 50% of companies that are obliged to report are failing to do so. Implementing a blockchain-based solution will provide these companies with more transparency into their supply chains and potentially make it easier to complete these annual reports.
Authenticity Verification in the Resale Market
The second potential application of blockchain technology in the retail industry is in the resale market. Driven by growing calls for transparency, the resale market has also become a popular area of concern. Blockchain technology could provide retailers with an auditable and verifiable record of their goods and products from raw material to final product to second hand resale.
Leading resale site ThredUP predicts that the resale market will be worth $41 billion by 2022, and that by 2027, resale will surpass fast fashion in terms of retail market share. A common concern with resale products—and especially luxury goods—involves counterfeit or non-functional products. Blockchain’s track-and-trace system can also better position retailors to identify potential trademark violations.
In addition to simplifying trademark violating and reducing counterfeit, implementing a blockchain-based supply chain system could allow retailers to charge more for goods and services based on the transparency. Millennials have shown that they are more willing to buy products offering this level of transparency companies committed to sustainability, positive social and environmental impact. A study by Nielsen in 2015 found that 73% of millennials are willing to pay more for sustainable goods and products—an increase from 50% of millennials in 2014. A blockchain-based ledger can mitigate this risk by recording the item’s history from the time it was originally purchased, or even from the source of the raw materials used, to the final product. Conscious consumers can rest assured that they are buying an authentic item, guilt and conflict free, with "all blocks attached."
Automatic Renewal and Subscription Services
Blockchain technology could also be used for automatic renewal and subscription services. Today, consumers can have a wide range of consumer goods, fashion items, and food delivered to their doors on a recurring basis through a myriad of innovative subscription services. Since 2014, visitation to subscription company websites has increased more than 800%, with 37 million visitors.
Largely because of the increased popularity of the subscription retail model, nearly half the states in the country have passed laws requiring that retailers make certain disclosures, and obtain consumer's express consent, before charging a customer's card on a recurring basis. In particular, California's Automatic Renewal Law (ARL) has been the subject of numerous consumer class actions on questions regarding informed consent. The Federal Trade Commission (FTC) has also been active in this area by bringing claims under the federal Restore Online Shopper's Confidence Act (ROSCA). ROSCA prohibits a post-transaction third-party seller from charging a consumer's financial account in any internet transaction unless the seller obtained express informed consent from the consumer.
Using blockchain technology to implement smart contracts automating renewal and subscription services can make it easier for companies to track consumer consent regarding their financial accounts. The immutable ledger underpinning blockchain technology can create a permanent, auditable record of the disclosures a company made and the consumer’s consent allowing retailers and third-party sellers to easily complying with laws like ARL and ROSCA.
While implementing any new technology, including blockchain, comes with its own challenges in terms of scalability and implementation, the benefits may outweigh the costs. Retailers should consider using blockchain technology to increase transparency of their supply chains, ease verification in the resale market, and create an auditable record of automatic renewals. With an increase in the attention on regulation, blockchain may make it less time consuming for retailers and third-party resellers to comply with existing and new regulations.
Senior Legislative Analyst