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The retail industry is under increasing pressure to offer "sustainable products," i.e., products manufactured according to ESG principles. Demand for "sustainable products" is driven primarily by growing consumer and regulators awareness;
Consumers increasingly want transparency and certainty about the products they buy. And regulators have recently (especially in the EU) placed an extremely strong emphasis on systematising ESG issues, with the most relevant from a retail market perspective seeming to be the "Green Deal," where the European Commission's in the proposed 30 March 2022 regulation proposal states its goal of "making sustainable products the norm."
Currently, the "sustainability" of a product is very often only declared without the possibility of verifying whether the claims made are true. This carries a high risk of "greenwashing" and offers only limited possibilities to verify whether a product is actually "sustainable";
As a result, the market and its participants are looking for a solution to easily track the composition of products and provide consumers, business partners and regulators with confirmation that the products sold are indeed 'sustainable'.
Blockchain Product Passport
From this perspective, Blockchain has the potential to be a real revolution - enabling the creation of a "decentralized" product passport as proof of product "sustainability"
Very different information can be recorded in the passport as required (e.g. level of recycling, origin of materials, their chemical composition, etc.) where a 'stamp' with additional information is added at each stage of its manufacturing;
Ultimately, the consumer will be able to verify relevant information and trace the manufacturing process of a product via the e-commerce retailer's website or mobile app. Similar information will be able to be presented to the regulator
Such a passport can of course be built on any technological solution while it is the blockchain that provides the key components for the existence of a trusted passport:
Product provenance – so the Blockchain is not only the“proof of sustainability”
From a retail market perspective - companies can trace the origin of products, enabling them to build customer loyalty and trust through transparency. If they want to prove that a product is environmentally friendly they can do so.
On the other hand, counterfeit, stolen or contaminated goods can be flagged within seconds.
Greater transparency can make supply chain management easier, cheaper and safer
Smart-contracts can also be implemented on the blockchain, which can automatically fulfil contractual obligations (e.g. payment or shipment of goods)
Within an ecosystem, tokens can be created that represent rights to an asset or product, ensuring efficient execution of transactions between parties in a blockchain ecosystem
Usecase / example from the market
Using Blockchain for product provenance and passporting is no longer just an academic consideration and we are seeing more and more applications in the market
A good example is the French company Carrefour, which as part of the "Quality from Nature" project uses blockchain to confirm the quality and origin of one of the products it sells - in this case potatoes - thus providing consumers in Poland and France with the ability to "follow the food's journey from the field to their plate". On each product package, there is a QR code which, when scanned with a smartphone, leads to a service presenting, in a clear and simple manner, all current information on a given production batch.
A completely different usecase is the application of the smart-contracts function built on the blockchain network by the Canadian branch of Walmarts which has automated the invoicing and payment process in this way.
And from a regulatory perspective, at the level of the European Commission, within the framework of the EBSI (European Blockchain Services Infrastructure) programme, a project is being carried out to create a pan-European platform for handling digital product passports
Distributed Ledger Technology (DLT) is not only about cryptocurrencies, the dominant application for the first years. DLT also opens up opportunities to change business models very broadly in the storage and exchange of value and information in the corporate world. It introduces trust, proof of origin and audit trail. It causes, through distributedness, the technology itself to guard the integrity and resistance to unwanted actions by players - especially those who do not know each other and therefore do not trust each other in business. Blockchain systems place a unique emphasis on the user, using 'client-side encryption' mechanisms, i.e. storing an individual client's keys on their own device, directly connected to e.g. their biometrics, while documents are stored in data chains (all-on-chain processing). These promising features are causing more and more companies to look to blockchain technology as a new IT platform, often referred to as the Internet of Value and Trust.
Smart contracts at the service of solutions
A large part of the solutions indicated require the use of the concept of so-called "Smart contracts". Smart contracts are programs created in the blockchain environment, which are triggered by the fulfilment of certain conditions. Usually, their assumption is to automate the execution of the contract, so that all participants can be sure of fulfilling it, without intermediaries or loss of time. It should be remembered, however, that smart contracts are still nothing more than contracts in the sense of civil law, and the most important thing that distinguishes them from "conventional" contracts is the form in which they are concluded.
This means that they remain within the legal regime set out by the relevant national legislation. Therefore, they will usually have the same effects and be subject to the same restrictions as traditional contracts. It is therefore important to stress the importance of a legal assessment of the content of such a contract. The absence of such an analysis can often generate a variety of risks, such as leading to different outcomes than assumed. It may turn out that, although the code controlling such a contract made some disposition, it was not legally effective. It may also be pointed out that they do not, in principle, exclude other regulations, in particular consumer protection law, such as the right to withdraw from a distance contract. It is therefore worth emphasising that, despite the assumption that the contract is automated, the code of such a contract should be subject to legal analysis.
Upcoming regulations
Despite its ever-growing popularity, the market for the use of blockchain and token-based economics in business is still, with some exceptions, unregulated. However, in light of recent changes introduced by an amendment to the Anti-Money Laundering and Countering the Financing of Terrorism Act, it is necessary to obtain an entry in the Register of Virtual Currency Activities in order to conduct business in the area of cryptocurrencies.
As a rule, the very issuance or trading of tokens is not currently supervised by the Polish authorities. Contrary to some opinions, the lack of regulation is not a favourable situation for entrepreneurs, and even less so for investors and consumers.
For organisations carrying out activities that require the issuance or use of cryptocurrencies, this entails numerous difficulties, and investors and consumers are often deprived of the necessary protection. The need for regulation has been recognised by the European Commission, which intends to regulate the cryptocurrency market through the draft MiCA Regulation (Regulation of the European Parliament and of the Council on crypto markets and amending Directive (EU) 2019/1937). The regulation will be the first act at European level comprehensively regulating crypto activities, including their issuance, trading or other related services. Although the MiCA Regulation has not yet been adopted and, according to current forecasts, will not be in force until 2023, it must already be taken into account when designing new business solutions in this area, or adapting existing ones.
ESG regulation in tandem with blockchain?
The current regulatory policy of the European Union is to develop ESG (environmental, social and governance) legislation. ESG regulations currently apply primarily to financial market players and require them to make appropriate disclosures and assess the sustainability of their operations. This assessment will in many cases also include verification of the customers of financial institutions. In this context, the ability to prove certain characteristics of a product or activity may be crucial for entrepreneurs seeking investment or financing. On the other hand, it is relatively easy to identify blockchain solutions characterised by an increased negative impact on the environment (e.g. due to energy consumption).
Given the above, an assessment of technological solutions should also be considered from the perspective of European ESG legislation. Even if these regulations do not currently directly apply to a given entrepreneur, this may be necessary in the context of cooperation with investors.
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