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What is a Cryptocurrency? How is it Different from Loyalty Points?

Bitcoin, the bellwether of the cryptocurrencies successfully leveraged cryptography by relying on the blockchain as its mode of network. Blockchain aided Bitcoin in being secure, accessible, decentralized and transparent. The proliferation of blockchain in successfully running Bitcoin and other cryptocurrencies garnered attention from other prominent industries. This wide and still increasing adoption of blockchain attracted the attention of loyalty programs and loyalty points – who looked to adapt blockchain technology to counter their decreasing popularity in the market. This strategy was even recognized and backed by major brands like Deloitte

With an increasing number of organisations using blockchains for their loyalty programs, perspectives on the distinction between loyalty points and cryptocurrencies has diminished. This adoption might make current loyalty points and cryptocurrencies look identical but the truth is far from this. Cryptocurrencies and loyalty points are fundamentally distinct in their nature and workings. But before we address the elephant in the room, we need to acquaint ourselves with certain basic terminologies and systems. Let’s start with the following question. 

What Is a Cryptocurrency?

Many types of Cryptocurrencies and gold

A cryptocurrency is a type of a virtual currency. This implies that it does not physically exist, but is digitally available and recognised as a medium of payment. Wikipedia defines a cryptocurrency as a ‘digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a digital ledger or computerized database using strong cryptography to secure transaction record entries, to control the creation of additional digital coin records, and to verify the transfer of coin ownership’. 

This implies that for a digital entity to qualify as a cryptocurrency, it needs to satisfy the following conditions:

  1. It should be recognised as a medium of exchange
  2. All its transactions should be stored in a database / blockchain.
  3. It should rely on strong cryptography to guard the data
  4. Pre-established algorithms should overlook the creation of additional digital coins and validate transactions. 

Cryptocurrencies generally use decentralized concepts like blockchains to operate. Ethereum, Ripple and Litecoin are some popular digital assets that satisfy the above conditions and are recognised as cryptocurrencies.  

What Are Loyalty Programs and Loyalty Points?

Loyalty programs are concepts older than cryptocurrencies. They’re focused on providing incentives to the customers in a bid to retain them or get them to shop again at the enterprise associated with the program. 

Loyalty points, as the name suggests, are points rewarding customer ‘loyalty’. Being a consistent customer of an organisation earns you certain loyalty points with each purchase that can generally be later converted into a discount or a freebie. 

A loyalty program aims at rewarding the commitment of a customer to a particular organisation. So where do we see loyalty programs at work? Organisations employ loyalty program to honour their customers in a variety of ways, such as- 

  • Extra flier miles for frequent fliers
  • Loyalty cards at the mall or grocery store
  • Free tickets for a movie 

As a matter of fact, loyalty programs have been a part of trading since onset of the trades. A loyal consumer base always saw a bit of leverage in forms of extra or free goods in lack of funds. Early establishments and merchants coaxed their regular buyer with goodies to appreciate their buyers loyalty towards them. This helped them retain customers in the long run. So in the present times, why are loyalty points misunderstood as some kind of cryptocurrency? Because many loyalty programs began switching to the blockchain to operate. Let’s look at some similarities between the two.  

Cryptocurrencies vs Loyalty Points: The Similarities

A few key features of loyalty programs established on blockchains match with those of most of the cryptocurrencies employing blockchain as their distribution system. Prominent among these are:

#1 Decentralization

Widely circulated cryptocurrencies such as Bitcoin and Ethereum are based on a system that lacks any central authority. Every member in the network has a say in the functioning of the ledger. There are predefined protocols that govern every aspect right from introduction of newer currency in the network to validation of transactions. 

The new loyalty programs involve customers being a part of a decentralized ledger overseen by  the organisation. Though the organisation awards loyalty points to the customer, their say in the system ends here. The loyalty points then become an asset of the customer who can utilise it as per the protocols specified by the network. But the allotment of the loyalty points rests upon the shoulders of the organisation in concern. 

#2 Cryptography

Both cryptocurrencies and loyalty points are cryptographically circulated that keeps them secure and protected from any malicious activity. 

We should not confuse the similarities between the two entities as a proof of their identicality. Though at a shallower look the current loyalty points might paint them as a kind of cryptocurrency, their similarity is limited to the aforementioned features only. 

Cryptocurrencies Vs Loyalty Points: The Differences

Cryptocurrencies and loyalty points are distinct entities introduced as a solution to counter different problems. The following points highlight the fundamental differences between them:

#1 Virtual Currency vs Utility Token

A cryptocurrency is a type of virtual currency. This implies that they are recognised as a substitute of money. The cryptocurrency is basically a software with protocols coded on supply limit, additional coin creation and other major functions. 

Loyalty points on the other hand are utility tokens. These tokens are created by a central authority for the usage for consumption purposes only.

#2 Acceptance

Cryptocurrencies are accepted and recognised as a medium of payment just like real world money. These digital assets are exchanged for goods and services offered universally by the members part of the network.

Loyalty points on the other hand can be collected and combined together to enjoy services offered by the organisation issuing them. Apart from this, loyalty points are barely recognised as a medium of payment for the job done anywhere else. 

#3 Value Against Fiat Currency

Cryptocurrencies hold value against fiat currencies used in the real world. As of July 05, for example, One Bitcoin equals 9013 USD. These cryptocurrencies can be exchanged into any other cryptocurrency or real world currency through a currency exchange. 

Loyalty points on the other hand can generally only be exchanged for a service offered such as a discount or free good from the company or their affiliated partners and do not hold any value in digital or real world apart from that. 

#4 National Recognition

The major cryptocurrencies of today are recognized by countries globally such as the USA, France, Japan and Germany to name a few. These cryptocurrencies are regulated under special laws and protocols like fiat currency, in the interest of currency holders. Loyalty points on the other hand are not recognized by any country as part of the currency in circulation. 

A natural question arises – if loyalty points and cryptocurrencies are miles apart in terms of their very concepts, then what all is causing such a commotion? The answer lies in the recent evolution of loyalty points. Loyalty programs established on a blockchain hand out utility tokens to the members as part of their marketing strategy. These utility tokens empower their possessor to access services or products offered by the issuing organisation and their affiliated partner. The digital component of these tokens and their ability to procure services or products mimic the features held by cryptocurrencies. Therefore confusion between a digital coin or a digital token might occur. 

The token system uses an existing blockchain network of a popular currency, which acts as a medium to execute the predetermined transactions which a token is capable of. In a bid to capture more market, sales organisations are coming up with tie-ups with popular cryptocurrencies that allow their customers to exchange their loyalty points for the affiliated crypto partner. For example:

  • Japanese e-commerce giant, Rakuten allows its Japanese holders to convert their loyalty points into major cryptocurrencies like bitcoin under their loyalty program. 
  • Tpoint Japan, a technology service company, allows its Japanese customers to convert their loyalty program points into bitcoins. 

From a broader perspective, this can be seen as a bid to attract more customers by riding the success wave of cryptocurrencies. Under loyalty programs, these companies are offering cryptocurrencies in the form of loyalty points to their customers. But the limited reach and nonrecognition of conventional loyalty points distinguishes them from cryptocurrencies. Loyalty points still remain a popular mode of marketing to retain a customer base while cryptocurrencies are providing mankind to enjoy a newer currency which is decentralized in nature. 

Disclaimer: CoinCrunch.in content is informational in nature and is not meant to be investment advice. Buying, trading or selling cryptocurrencies should be considered a high-risk investment and every reader is advised to do their due diligence before making any decisions. © 2020 CoinCrunch
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