How could the Crypto World be transformed by loyalty programs?
What exactly are the opportunities from the Crypto World depend on the main interest(s) of the person with whom you are speaking. Bitcoin’s fame has highlighted the potential for (near-) anonymity and privacy in the holding and transfer of wealth. The rise the number of in initial coin offerings (ICOs) over the last year or so shows how Venture Capital (VC) entrepreneurs see the Crypto World as a useful source of funding for new and innovative businesses. Several observers have remarked on how crypto-coins can be used to build communities of like minded people.
As of mid-2018, though, the reality has yet to catch up with the potential. The limited data that is available suggests that the number of active crypto-wallets globally has risen over the last 18 months from about 10mn to 24mn . Although the rate of growth has been phenomenal, the number of wallets remains tiny in the context of the global population of about 7.6 billion. An obvious question is: what will cause the Crypto World to move to the mainstream?
Two conditions need to be met for the Crypto World to become a part of the everyday life of most people on the planet. The first is that the Crypto World can clearly provide really good solutions to problems. Really good in this context means that the solutions are not available - or far less efficient - elsewhere.
For instance, there has been a lot of excitement about the potential for the Crypto World to provide low cost payments services across national borders. This could be particularly helpful for people who are working in foreign countries who want to remit funds to their families and friends at home in poor countries (e.g. Indians and Filipinos working in the Middle East or people from Central America working in the United States). However, the improvements in payments services that are being made by conventional banks, money remittance companies and FinTechs are enormous. By the end of 2018, the European Union’s TARGET Instant Payment Settlement (TIPS) system should make it possible to pay someone in no more than 10 seconds for a cost of 0.2 euro cents.  The Crypto World may not be needed at all to provide cheap and fast cross-border payments. Fortunately, there are many other useful things that the Crypto World can do.
The second condition that needs to be met is that the Crypto World needs to be trusted. In this context, this means that people who buy and trade crypto-coins understand and trust the crypto-coins. The issuer of a crypto-coin can and should clearly identify what are the risks attached. Of course, the risks that are attached to any one crypto-coin can be laid off by holding a portfolio of crypto-coins.
Trust in the Crypto World also means that the crypto-exchange through which a crypto-coin is bought or sold is trusted. Building trust in a crypto-exchange is helped by:
· SIZE AND VARIETY. The greater the trading volumes and the variety of crypto-coins, the more stable and more profitable will be the crypto-exchange
· DIVERSITY OF TRADERS. The more varied are the traders, the more likely it is that there will be willing buyers and willing sellers at any one time
· COMMUNITY AND EDUCATION The greater the incentive for people to visit the website of the crypto-exchange, the more likely it is that they will become traders.
· REGULATION Ideally, a crypto-exchange will clearly be overseen by a first-class regulator. At the very least, there should be evidence of dialogue between the crypto-exchange and the regulator which indicates that the crypto-exchange complies with the spirit of existing rules and regulations.
A separate blog post [Questions of Loyalty – I] explains how loyalty programs could be transformed by the Crypto World. Worldwide, many airlines offer frequent flyer programs, where loyalty points can be redeemed for plane tickets. Many retailers offer discounts or other benefits to regular customers who are members of their loyalty programs. Hotel chains reward regular guests with discounted accommodation. There are plenty of other examples.
Loyalty programs are very similar to crypto-coins in some important ways. Both are bundles of rights. The rights are passed by the company running the loyalty program or the issuer of the crypto-coin to the loyalty program member or the holder of the crypto-coin.
Where loyalty programs differ from crypto-coins is that it is normally difficult or impossible for someone who holds loyalty points to transfer those points or to sell them to another person (except, perhaps, an immediate family member). In most cases, there is no ready market for loyalty points, which means that it can be very difficult to work out what the loyalty points are actually worth. From the point of view of the member of the loyalty program, these can be important disadvantages.
However, these constraints would not apply to a loyalty program if it were based on a crypto-coin which is traded on a trusted crypto-exchange. A loyalty program member could redeem his/her crypto-coins for benefits, or he/she could sell the crypto-coins to another person. It may be that the enterprise running the loyalty program would restrict the market for crypto-coins to existing members of the program. Or it could be that the crypto-coins could be sold to anyone.
Any large retailer, hotel company or airline that chose to run a loyalty program on the basis of a crypto-coin that is traded through a crypto-exchange would be making an important statement. It would be giving its vote of approval to the crypto-exchange(s) through which the crypto-coin can be traded. It would clearly be supporting the general principle that loyalty points can be exchanged for cash or another crypto-coin instead of being redeemed.
The impact on the Crypto World would also be huge. All existing members of the loyalty program would have a strong incentive to sign up with the crypto-exchange. The loyalty program would give large numbers of people a reason to engage with crypto-coins on a day-to-day basis for the first time. As more and more loyalty programs followed suit, the transparency and opportunities for program members would grow further.
Ultimately, loyalty programs and loyalty program members could be the main drivers of growth of particular crypto-exchanges – or, indeed, the Crypto World as a whole. Given the numbers of people worldwide who are members of loyalty programs, program members could become the overwhelming majority of people who are trading crypto-coins. That would definitely change conventional views of crypto-exchanges. It would definitely bring the Crypto World into the mainstream.
 Dr Garrick Hileman and Michel Rauchs, Judge Business School, University of Cambridge, Global Cryptocurrency Benchmarking Study, 2017; Statista (May 2018).
Yves Mersch, European Central Bank (ECB), Virtual or virtueless? The evolution of money in the digital age, 8 February 2018