Are reward points going to become an alternative currency? Are we going to exchange time, goods and services for something other than government issued money? Bloomberg recently hosted a summit on new finance and liquidity with Hub Culture, home of asset backed digital currency Ven, where these potential trading capabilities were discussed by some of the industry’s key players.

During one of the panels entitled “Authorities and the Digital Currency Ecosystem” Andrew Tarver of CAPCO and Bold Rocket proposed a scenario where consumers will have the ability to trade reward currencies into a base exchange currency linked to Ven. What’s more they would be able to cash out to credit cards and other spending methods via Ven — essentially freeing up reward points to have virtually the same liquidity as cash.

There are still some similarities that can be drawn between digital currencies and their fiat counterparts such as Sterling, despite the media focus on the wild price volatility of Bitcoin and its potentially nefarious uses. Both assets require a digital ledger to monitor and manage payments and deposits. In traditional currency systems these ledgers are maintained by a trusted third party, such as your bank, and then by the central bank. The money itself is held as a digital record and we simply place trust in the centralised third parties that this will be administered accurately.

In contrast Bitcoin’s ledger is decentralised and therefore effectively owned and administered by all users connected to the network (known as the blockchain). Trust is managed through sophisticated cryptography to ensure that transactions are accurately represented and can be verified by everyone on the network.

Of course Sterling has immediate inherent value as a government-sanctioned currency used to pay taxes. But with any currency, value comes down the users’ perception. Perceived value could come through the asset’s functionality as a medium of exchange, its trustworthiness as a store of value over time or as a unit of account that can be used to measure any particular transaction.

So you could argue that reward points are a currency, although perhaps operating within a ‘closed loop’. They are attained through specific behaviours, with the value issued directly in relation to your ‘effort’; be this buying behaviour, frequency or other interactions with the issuer. This makes it a medium of exchange although one for which the value is completely dictated by the issuer i.e. the retailer, vendor or other business entity.

These points, however, clearly have a number of pitfalls. They have relatively low liquidity — you can have lots of loyalty currency, points or miles from lots of programmes, but essentially they are in silos. They cannot be moved, shared or aggregated easily. Of course they can be converted into forms of value, set by the parameters of the issuer, such as travel/flight discounts or gift vouchers, but the transaction costs for this can vary, making the exchange in many cases less attractive.

But let’s look at a loyalty currency as an actual currency — a retailer issued, closed loop monetary system. As a retailer currency, what should stop me from purchasing currency upfront? Why can’t I exchange this currency with others? If it’s too liquid, then does it lose its relevance to loyalty? If I can simply give my points to someone else, am I less likely to try to build a balance? If my points can be shared with others will this increase breakage and cause a huge increase in the number of points redeemed?

The answer is likely yes to many of these questions at present and many corporations would, at least initially, find this kind of development to be highly disruptive of their existing model. However disruption is inherently a side effect of innovation.

Yet, despite this disruption, if people can ‘pay’ each other in loyalty points, will this increase the attractiveness of the currency (and hence the retailer)? In 2011, Stan Stalnaker, founding member of the Ven currency, wrote an article entitled Bitcoin, Ven and the End of Currency built on this theme:

“To be traded, they must be assigned a value. And if it can be assigned a value, it can be interchanged with anything else of assigned value. The Internet is enabling exchange of all types of value, and helps us to measure and publish these values[…] How many Likes is a Facebook Credit worth? How many Credits make a Ven? How many Ven make a lasagna at the Olive Garden? How much do you have to like the Olive Garden to get a lasagna? We’ll know soon.”

As alternative currencies come to the fore, an increasing number of people will exchange their time, goods and services for something other than government-issued money. Reward currencies have a part to play in this developing economy as they mimic cryptocurrencies in their transformation to the point of decentralisation.

@BudgieBurg