Could Blockchain be the answer?

Providing secure, effective and efficient track and trace is becoming increasingly more important for excisable goods. Simultaneously, various tax stamp providers, security printers and technology providers are focused on improving authentication features for tax stamps. In addition, the question of product authentication of genuine products is added to the mix.

Article originally published in Reconnaissance's Tax Stamp News. View it here.

As discussed in previous articles, these three issues, in this author’s opinion, require three very different approaches. Track and Trace is truly about establishing a secure data chain or e-Pedigree of transport. Tax stamp authentication on the other hand requires a plethora of overt and covert features. And product authentication needs to reside with the manufacturer and be embedded during the product production process. While these three approaches sometimes have areas of convergence, one does not equal the other. Tax stamps cannot authenticate products; Track and Trace systems cannot always deter tax evasion, since they can be circumvented; and product authentication does not guarantee proper tax remittance.

Many technology and tax stamp providers are focusing their innovation efforts on these three areas. They continue to develop ever more complex and sophisticated overt and covert features to authenticate stamps and provide tracking and tracing of these stamps. Simultaneously, product manufacturers continue to develop better ways to authenticate their genuine products and in addition embed codes on packaging to enable tracking and tracing. The competition of ideas is fierce and unfortunately often isolated and pursuing parallel tracks. One technology that might have the potential to add the connective tissue for these competing interests is Blockchain.

Blockchain technology explained Blockchain should not be confused with Bitcoin. Blockchain is the underlying technology for Bitcoin. Bitcoin is a crypto-currency and is simply one manifestation or application for Blockchain technology. Blockchain technology is a public encrypted non-centralized ledger that allows every participant on that system to instantly authenticate the item of value and track its path. Let’s break this down into its core elements.

Blockchain formalized the system of “trust” for transactions and items of value. It all has to begin with a network of registered participants that all trust each other, or want to be able to trust each other. All participants agree on a ledger format, they agree on and share encryption keys and they all make their ledgers available to all in the system. The ledgers are controlled with private and public keys. Each participant has their private key, which allows them to maintain and encode their own information and the system has public keys which allows access to the ledgers.

The blockchain is a system that allows a group of connected participants to maintain a single updated and secure ledger on an item of value. Blockchain is a distributed database, meaning that the storage devices for the database are not all connected to a common processor, but the record of the item of value and its movement are stored as a distributed or decentralized database on the systems of all participants. As the item of value is being tracked, the system from time to time locks the information in and creates a block. The distributed system maintains a growing list of these records, called blocks. Each block has a timestamp and a link to a previous block.

Sounds too abstract? Let me try to visualize with a system of five users A, B, C, D & E. First the participants agree on encryption, decryption and hashing codes. Each participant has the cryptographic private keys to create information and public keys to encrypt, decrypt and hash or scramble the information. Think of it as secret decoder rings.

When participant A creates the item of value, it communicates this creation encrypted across the network and it is recorded in the ledgers of all participants A through E: “Participant A created value item 012345”. This information is now on all ledgers. Participant A now transfers or sells the item of value to a participant. This transaction as well is communicated across the network: “Participant A transferred item 012345 to Participant B”. This information is time stamped. The transfer of item 012345 continues to be communicated and recorded across the network by all participants. The ledgers continue to fill up, until the system “seals” the file, which seals and certifies the info on the public ledger up until that point. This sealing is pre-programmed into the block chain system and is agreed upon by participants.

For example, the participants could agree that the block chain should be sealed every hour, every day, after 10 transactions etc. Once the system seals a block, all transactions for that timeframe are irreversibly sealed. The seal is recorded in all ledgers. Think of it as notary public stamp sealing the ledgers of all participants simultaneously. The key to read or decrypt the key is shared across the network. The information is maintained and cannot be altered anymore. The next block chain picks up from that seal and starts a new block: “Item 012345, which was sealed with seal XYZ is at this time being transferred to Participant E”. On so forth.

To authenticate and verify items of value the system will look towards the distributed public ledgers across all participants to make sure the item it is checking is real and to verify its record of movement. If the records across the system don’t match, the item cannot be verified. Modern block chain systems allow for and help de-conflict, if one of the public ledgers of the system is out of synch (i.e. server was down for maintenance).

The beauty of a distributed or decentralized system is that faking transactions or items of value become virtually impossible. Attempting to introduce a fake item of value identifier into the system will raise red flags across the system. If the item of value was moved out and then reintroduced into the ledger system, multiple ledgers would cry foul. Because the information is intermittently sealed into blocks, which refer to each other, for someone to cheat the system they would need to fake an entire block chain, which is impossible, since the genuine chain is stored across all participants.

The ledger of the genuine item or genuine transaction will be mirrored across the entire system. Therefore, fakes, fraud and copies will be detected. In other words, every block depends on its previous block. If one individual, out of the five we imagined in the beginning, tries to cheat and modify the contents of the Blockchain, he or she would have to adjust several blocks and by that would have to create new seals. In effect, the cheater would create a new block chain rather than alter the existing chain. But that new chain would never match the genuine chain and would be detected.

Potential application to tax stamp programmes: Let’s examine how this could work to improve, augment or even replace tax stamp and track and trace programs. Blockchain would create “chain of custody” in a supply chain with a public ledger. Once the item of value, which could be track and trace code on a pack or a code on a tax stamp, the item would be recorded in blocks. The movement of the item would be recorded across all ledgers. The record of the code would intermittently be sealed to create genuine blocks, sealing in the authentication of that code or that path. Let’s imagine a counterfeit code would be introduced into the system, or even a copied code. The introduced code, either counterfeit or copied would not match the public ledger. For example, Code 012345 was recorded to have gone from manufacturer to wholesaler and is currently in a warehouse in Long Beach. If a counterfeit code, or copied code of 012345 would now appear anywhere else in the network, the blockchain would not match the public ledger of the code and flag the item.

The same for smuggled product. If code 012345 is shown as being sold in Moldova, while all public ledgers show the product to be in France, smuggling could be flagged. The distributed nature of the technology is the beauty of it. It allows all participants to instantly verify authenticity and trace back its path.

However, the weakness of Blockchain is that it requires a network of participants that want to verify the authenticity of product. Blockchain works well for systems where people want to trust each other, but not for the detection of illicit networks. For example, blockchain might work very well for the authentication of Pharmaceutical products, since the pharmacist wants to be sure he or she is dispensing the genuine product.

Many forms of illicit trade, however, occur completely outside of the legitimate distribution chain. If counterfeit or copied codes are introduced to buyers, sellers and consumers who do not attempt to authenticate the product, the system is rendered ineffective. The same for smuggling – product that was diverted illegally from France to Moldova, and is then sold by street sellers in Moldova would not trigger a red flag. If the system is designed well, it could show that some product in France went unaccounted for, since the blockchain would have terminated at a point, but illicit diversion might not be picked up. Take cigarette diversion in the United States as another example. Excisable goods with blockchain technology on stamps or product would move along the supply chain. The Ledger would show that the product was sold legally from manufacture to wholesaler to a retail outlet in Northern Virginia. The ledger would reflect that the item of value has moved to that location. If the product from there is smuggled to New York, outside the legitimate chain, the blockchain system would not alert it. Only, if product is seized in New York, would the blockchain flag that product as diverted from Northern Virginia.

Unfortunately that is not a significant improvement over today’s tax stamp technologies. The most applicable use currently for blockchain would be to utilize it for manufacturer applied codes to authenticate product. The secure blockchain technology would allow trade participants and consumers to authenticate product. The blockchain technology would identify fake and even copied codes. While this still requires the active participation of motivated consumers and retailers, blockchain has the ability to eliminate the issue of fake or copied product authentication codes.

Conclusion Blockchain is a very elegant authentication feature, which enables the quick authentication of any product by motivated parties. They key word here being “motivated parties.” If consumers or other participants do not have an interest in authenticating product, blockchain does not add much value.

But in a system where parties are motivated to authenticate, it adds some very powerful and secure features. Even more interesting, blockchain technology, if applied to tax stamps or excisable products, almost entirely eliminates the need for overt or covert security features to authenticate. Since blockchain is so secure, there would be no need to add various layers of overt and covert features to authenticate.

The blockchain supporting the code due to its distributed nature becomes impossible to fake or copy. This could provide a great opportunity for revenue authorities to add authentication to its excisable goods and stamps without incurring the costs of expensive overt and covert features. Blockchain also has the ability to make product authentication codes applied by manufacturers more secure.

Sven Bergmann is a Managing Partner at Venture Global Consulting and advises brand owners, technology providers and governments on anti-counterfeit strategies, programmes and technologies.

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