Blockchain & Wine Fraud
A (not so) timely article on wine fraud as I am a few months late on this post: China’s Jiangsu province police dismantled a major cross regional fake wine production ring with counterfeit bottles of my favorite Penfold’s that was worth nearly $1.6million. This isn’t new – the wine industry has been a victim of fraud for centuries. Even the world’s first wine critic during the Ancient Roman times, Pliny the Elder, bemoaned “today, not even our nobility ever enjoys wines that are genuine. So low has our commercial honesty sunk that only the names of the vintages are sold, the wines being adulterated as soon they are poured int the vats” (Pliny the Elder, Natural History). Counterfeiting grew so rampant that producers looked to protect their reputations with the system of Appellation d’Origine Contrôlée, a certifier of origin in France with other like-minded organizations globally that verify wine today.
More recently, the world learned of Rudy Kurniawan. You can learn more by watching Sour Grapes or you can read the book In Vino Duplicitas:
A TL;DR – in 2006, our boy Rudy was the go-to for good wine. The young twenty-something charmed his way into the inner circles of critics and collectors. He made a name for himself as a wine expert – hosting lavish tastings, spending $1million a month on fine wine. He loved Burgundy (can’t blame him) and sold over $35million worth of his wine through the wine auction house, Acker Merral & Condit. Silly boy drew too much attention. Kurniawan claimed to be selling Domaine Ponsot’s a coveted Clos Saint-Denis. While the labels looked authentic, the years weren’t. He was consigning bottles 40 years before the estate started producing it. That landed him behind bars and a hefty multi-million dollar fine. Yikes!
To frame the problem, of the $374 billion of wine sold worldwide each year, $60 billion is estimated to be fake. The situation will worsen. As mentioned in Wine Investing 101(link back) Knight Frank has deemed fine wine to be the best-performing collectible, outpacing classic cars, jewels and even art—making the industry ripe for fraud. To make matters more complicated, wine fraud is rarely caught, and even when caught, carries an incredibly light sentence compared to the dollar values of the crimes. As a result, wine fraud in the forms of counterfeiting and theft are on the rise globally.
How Verification Works Now & Sole Solution to Fraud
Sommeliers, vintners, collectors and other connoisseurs of the stuff go to great lengths to determine authenticity. From the weight of the bottle to eyeing anomalies in the year of production, right down to inspection of the bottle glass, the stamp on the cork and the label glue, the tiniest discrepancy can be the biggest red flag. However, every year thousands of bottles of counterfeit wine slip the net… because wine forgers also go to great lengths. Manufacturing a brand new bottle of burgundy disguised as a 60-year-old vintage is no easy feat. It isn’t always about the bottle’s aesthetic either; the taste is just as, if not more, important. Fraudsters have been known to recreate every single note, using a hybrid blend of wines that mimic the flavor of an original — like modern-day alchemists creating gold.
QR codes have long been the standard to tie the physical bottle to the digital. The problem is that they can be created by anyone and fake codes cannot be distinguished by consumers. Counterfeiters simply copy the landing page or app from a real QR code and redirect users to a fake URL via their own QR codes – in a process called spoofing or ‘click-jacking’.
What is Blockchain?
Enter blockchain. How it answered some of the authentication challenges in wine came from an entirely different industry with an entirely different product –diamonds. Nonetheless, the process of capturing the descriptive characteristics of a particular stone, and recording them in an indelible, tamper-proof, timeless, and distributed digital ledger, is analogous to the work with, and desired solution for, bottles of wine. As cut, clarity, color, weight, and laser inscriptions are the uniquely defining features of a gem, so glass, label, ink, glue, foil, fill level, engraving, and other markings identify a particular bottle. As conflict and synthetic stones sully the supply chain of the diamond trade, fraudulent bottles of counterfeit wines damage the wine market.
In its simplest definition, blockchain is a digital ledger of transactions. When a transaction occurs, a record of it is added to every participant’s ledger, or block in the chain, across a network of computer systems. This decentralized form of recordkeeping makes it difficult for individual parties to manipulate the results. It creates a time-stamped record of every single transaction and addresses the quandaries of immutability and longevity for the electronic portion of the solution. There are both private and public blockchains
There are both private and public blockchains. The similarities for both include:
Decentralized peer-to-peer networks, where each participant maintains a shared digital ledger
“Replica” ledgers synchronized through a “consensus” protocol
Guarantees for the immutability of the ledger
6 Reasons to Use Blockchain to ID Counterfeit Wine
Tokenizing the asset at the source: once the wine is tokenized, distributors will gain value from your investment as it is possible to view the entire chain of custody through to the end customer (or consumer).
Play the long game: Measures taken today to mitigate fraud will have a lasting effect on future and growing generations of asset buyers and their interaction with a brand. As bottles age and increase in value, the true benefit (such as increasing the value of genuine bottles and tracing the number of bottles in circulation) of these measures will become apparent.
Visibility of the chain of custody: this enables a better understanding and effective management of distribution partnerships, stock management and sales/marketing resources globally.
Create a gold standard for a brand to reduce fraud risk for customers: To deliver market confidence to buyers, brands need to quickly process data that is trusted from the source. It is imperative that this standard is verifiable by the consumer, not only by specially qualified auditors (such as auction intermediaries) who are currently barriers to high-frequency stock movement, liquidity, price competition and accessibility.
Grow your customer base and market reach: Gen Y and Z by transacting through a faster, flatter mobile settlement platform that integrates supply chain and brand. Sales speed drives consumption (and trade), creating demand (and possibly liquidity).
Communicate more effectively with your customers: By knowing who they are, where they are and leading them to your brand. Control and customization are two prevalent behaviors to take note of with all consumers in Gen Y and Gen Z. Tokenization delivers control to the consumer because it removes the need to use trusted sources as intermediaries. Commercial transactions can still be channeled through current global distribution systems, but no one relies solely on the supply chain to be watertight anymore. Customization is delivered by creating choices for customers around supply chain flexibility: does the stock need to move? Are there equivalent tokenized units available locally?
What challenges exist when applying blockchain to wine?
As with other products, a layering of physical – not just digital – protection is needed.
A fundamental limitation of authentication had been that authenticity is valid only one time –in and of the moment of issuance.
Many of the traditional tools have showed themselves to be vulnerable in their track-and-trace abilities. Because of this uncertainty, each time a bottle is presented for sale, it must be reassessed—painstakingly examined anew. While this churn is in theory good for the secondary market, it is not ideal for sellers, buyers, and consumers. Not only is authentication time consuming, but it is also costly.
Some solutions and their limits:
Challenge 1:
There absolutely needs to be a way to tie a physical or electronic document of authenticity to a specific bottle for the duration of that bottle’s life. Once either leaves the room, how does one prove that any certificate of authenticity, or authenticated bottle was once certifiably linked? Moreover, how to prove that neither has been altered. For wine, protection includes rendering a bottle tamper-proof. Bottles are easily emptied, then refilled. Not only are corks removed and replaced, but needles are often used to drain, then substitute the original wine, leaving almost no visible evidence of the swap.
An Idea on how to tie the physical with the digital:
a thin, plastic covering, with several highly sensitive, layered, and serialized security features placed over the top of the cork can provide the physical component necessary to fully securing a bottle in the blockchain. Not only would this cap show proof in a case of tampering by either cork removal or piercing, but it would also allow tracking of the bottle’s location. The combination of these methods creates a permanent, indelible record that ensures authenticity of older wines in the secondary market and tracks provenance for a new wine as it moves from producer to direct consumer.
This must happen in partnership with the bottle manufacturers, cork producers, labeling. Super early in the supply chain. There are many solutions like WiV and Blockbar that “tie the physical bottle to an NFT on blockchain” but there is nothing to prevent fraud before these companies get the wine to their warehouse or during their buying process.
Challenge 2 & 3:
We can digitize the wine supply chain on a blockchain to create a system that can verify the authenticity of any wine from the vineyard to the retailer. At each stage of the supply chain the transaction is recorded as an immutable block in the chain which is transparent to all actors in the supply chain. The huge advantage lies in the fact that transactions cannot be altered as any attempt to defraud a transaction becomes immediately transparent
Limitation of Wine Traceability Solutions: molecular analysis of wine is possible via a system known as Raman spectroscopy and can expose any wine. The caveat is rolling out this process on a broad scale would be both costly and inefficient. The same goes for centralized databases already in use for tracing wine. Due to the issues inherent within centralized databases, the scope for corruption and subversion is relatively broad.
A blockchain that can track many transactions per second, enabling raw materials and their end products to be traced efficiently. From grape to bottle to the journey on to its destination, everything tracked through this chain is recorded on an immutable blockchain, ensuring authenticity at every stage. Smart contracts ensure data privacy while requiring confirmation of authenticity before payment is released incentivizing supply-chain intermediaries to verify authenticity independently. The approach can similarly be extended between retailers and customers closing any remaining gaps in the supply chain. It could go even further with IoT sensor data to include PH balance, chemicals, pesticide usage, ripeness, temperature, moisture content.
Limitation: For this to work, the entire industry would have to track “notes” on itinerary or product including bottle, box, crate, or pallet of wine tracking; serial-number tracking and access to IoT sensor data. However, this doesn’t solve the wine in private cellars or at auction now (or even 5-15 years from now).
Interesting Approach: Vinsent partnered Laava Smart Fingerprints®, which are unique per bottle trust marks. They seem better than a simple QR code. Once a bottle is “Vinsent Certified” using the Laava Smart Fingerprint®, consumers can simply scan the Fingerprint with their iOS or Android phones and see a certificate of authenticity recorded on the Ravencoin blockchain. Each bottle has its “token” residing on the Ravencoin blockchain.
Blockchain Can’t Block them all:
While these solutions may tackle the issue of counterfeiting between merchants and retailers, there’s little in the way of stopping refilling once on the private market. There’s hardly anything blockchain can do in this regard. One missing piece of the puzzle for blockchain in the use of wine verification is another actor to secure the bottle and ensure that it hasn’t been opened and replaced with something else. There really are no safety systems which can’t be subverted – the goal of blockchain-based traceability is to make counterfeiting more difficult and expensive so that it will be less profitable and, eventually, not worth the risk. Another unique alternative could be a mandatory KYC-centric app introduced in private purchases, a stage where the most counterfeit refilling goes unimpeded. You would have established, verified identities for merchants, brokers, and consumers with blockchain tied to unique labels and seals, along with non-fungible tokens you could have an immutable record of provenance that could not only prove at point of purchase but at point of opening. With KYC-verified customer ID coupled with blockchain’s immutable ledger, not only does the counterfeiter run the risk of capture, but subsequent reseller’s chance reputational damage. Really, the hope is that there is a reduction in counterfeiting numbers by leveraging technology.
Blockchain Companies focused on Wine:
There are several blockchain partnerships to optimize the global supply chain like IBM and Maersk. The following are focused on wine:
Ernst & Young: Their Ethereum-based blockchain tracks and offers consumer information for Italian wine.
Cantina Volpone: Their Falanghina IGP wine is the world's first blockchain-certified wine. Importers, wholesalers, distributors, and consumers can track harvest date, fermentation tank, lot production, bottling date, and water consumption as well as all vineyard interventions and winemaking processes by scanning a QR code on the bottle with their phone!
VeChain - Shanghai's Direct Imported Goods (DIG) partnered with Price Waterhouse Cooper (PwC) and BitSE to deploy an Ethereum-based platform for imported wine distribution in China, where wine fraud, quality and safety concerns are huge.
Tencent & Changyu Pioneer Wine: the traceability was designed to improve the country’s wine industry standards. They would work through the issuance of a unique certificate recorded on a blockchain platform. Curious consumers would then be able to check the authenticity of the product by scanning a QR code on the bottle which would display relevant information.
Everledger: anti-tamper bottle closures enhanced with the Internet of Things (IoT) and distributed ledger technology (DLT). More on China here.
Cellr: embedding near-field communication (NFC) and radio frequency identification chips in bottle caps. By scanning Cellr-enabled bottle caps with a mobile application, consumers can check the bottle’s provenance and producer.
Counterfeiters will continue to be a threat. Technologies including blockchain are emerging to address this issue in the digital world. It offers producers, sellers, buyers and consumers of wine protection and traceability from bottling line to wine glass. Consumers can also benefit. Shoppers could ensure that producers are exactly who they say they are when it comes to biodynamic practices, sustainable farming, and Sulphur use. They could also pinpoint the exact vineyard plot from which the wine in their hands originated. Collectors could verify that the bottles in their cellar aren't counterfeit. In my opinion, the real game-changer occurs when we have technology that can also verify the provenance of the physical counterpart and be able to connect the two. The journey towards ensuring both the physical provenance and digital ownership will lead to reduction in illicit trade and the ability to restore trust in the industry!