Making sense of the surreal

The scope of cryptocurrencies is a stumbling block for investors. Many countries have declared cryptocurrencies as illegal and their fate appears uncertain in the near future. Once there is clarity, however, there's a lot of scope for technology to be used to regulate the sector

Heavy discounts on all major brands,” is an eye-catching statement that immediately grabs attention of a lot of people. The footfall in a normal retail store or traffic in an online portal is probably two per cent on a regular day as compared to a discount sale day. The only thought that baffles the mind is whether it’s original or an imitation of the product that was showcased in the advertisement. Often cases have been heard where the customer got deceived for a product’s imitation at a hefty discount amid a large sale.

At times, even high flying doves in the market get duped, right from experienced traders to an amateur start-up and, in the process, the end consumer becomes a scapegoat. A product, for which quality should have been delivered, basically comes out without doing any welfare to the consumer. This further impacts the brand equity for a manufacturer — a single infiltration affects all the expenses made on brand building.

Here’s a scheme on how the presence of faux products in the supply chain can be curbed using technology. A very fine scenario would be to use the blockchain technology to address this issue. What is blockchain? Basically, blockchain is the technology underpinning the Bitcoins and other cryptocurrencies. One can imagine blockchain to be a digital ledger capable of storing data which can include even the financial transactions. It encompasses entries to a massive number of systems at the same time (though encrypted) ie, the information is decentralised, which erodes the chance of hacking the transaction. In a nutshell, 100 per cent safe transactions are assured.

Now, let’s elucidate how it will be implemented in an industry. For example, let’s consider the footwear industry. A shoe manufacturer can create an manufacturer part number (MPN) wallet for each product manufactured. Against each batch of production, a manufacturer needs to buy cryptocurrency in the wallet. Since Bitcoin is more familiar amidst the pool of cryptocurrencies, the idea is explained using it.

The minimum quantity of Bitcoins that can be bought is 0.00000001BTC ($0.000085). Now, suppose the manufacturer produced 500 pairs of a particular article/product type, the manufacturer needs to buy exactly 500 x 0.00000001 = 0.000005BTC ($0.0425) in his account. These Bitcoins will be stored in the manufacturer’s wallet. Now, assume that the manufacturer sells a part of inventory, say, 200 pairs. Along with the 200 pairs, 200 x 0.00000001 = 0.000002BTC will be transferred to the account (wallet) of the distributor to whom the stock is sold. The new buyer will cross-verify the transaction in the blockchain. If the transaction comes from the manufacturer’s wallet and is in line with the date code, the product delivered (or in shipment) is authentic.

With the standard protocol, it’s easy to scrutinise the number of Bitcoins that comes through the manufacturer’s wallet using date code and quantities transferred. Once a system is established, the only way to introduce the faux product in the supply chain is to buy another 200 pairs of an imitation and sell it along with the Bitcoins to the next consumer in the supply chain. However, doing this won’t fetch any value to the infiltrator, since the authentication mark for the original 200 pairs is gone. In other words, it wouldn’t be possible for the fake product to evince authenticity. This makes the system 100 per cent viable and robust. 

An additive to the picture is the transaction cost. A transaction cost is associated with every transaction that occurs on the blockchain. Who would bear the extra burden of a transaction cost? It would be levied against the next consumer in the supply chain network. For instance, the manufacturer sells the Bitcoins to the distributor who pays a nominal fee, which is credited to the accounts of the miners who certify and register the transaction.

Now, the more is the fee, faster would be the transaction registered. As for the footwear industry, the shipment generally takes some time in days to reach the consumer. So, even the minimal transaction fee model could be optimal to implement.

The cost of transaction fee would be added as overheads in the production cost. Further, the cost is independent of the nature of the transaction ie, whether a transaction comprises of one or 10 Bitcoins, the fee would remain the same. Once the end consumers receive the product, they can immediately sell the Bitcoins they receive in their wallet and get the cash. 

No system exists without pitfalls. There are certain hindrances in the implementation of the blockchain technology into the supply chain. Publicly traded firms may not reveal their wallets and transaction details to the customers. There are chances that if the wallet details are declared, analysts may peep through and take intriguing details of the business like revenue and define approximate profits which might affect the market cap of those companies.

Secondly, the scope of cryptocurrencies is a stumbling block for investors. Many countries have declared cryptocurrencies as illegal or they permit restricted trade.  In the Indian scenario too,  the Reserve Bank of India (RBI) warned banks, traders and holders of cryptocurrencies. Thus, cryptocurrency appears gloomy in the near future. Once there is clarity, however, their fate appears uncertain in the near future.

The process is typically for a B2B setup, where the introduction of faux products can be curbed. As of writing, Bitcoin trades at approximately $8,425. Since this is one of the most expensive cryptocurrencies, focus could be put on the other blockchains like Ethereum which trades at about $685 or Ripple whose value is close to 70 cents. Of course, there’s a lot of scope for improvement in the process with the advent and rise of new technology everyday.  

(The writer is student at Great Lakes Institute Of Management, Chennai)