Frequent flyer miles are proprietary currency where the issuer offers the promise of redemptions (although airlines at least have no obligation to honor that promise).
What if a retailer created their own currency but didn’t promise to accept it for redemptions? That seems to me like a bad idea, but there’s a company promoting just such a thing. Somehow other businesses would still accept the currency as payments for their merchandise.
RibbitRewards are tradeable, blockchain-based loyalty tokens…
[E]ven if regulators ignore “crypto-reward” tokens, accountants could have a hard time with them. That’s because, under one Ribbit.me model, founders Sean Dennis and Greg Simon claim to effectively make disappear the loyalty program liabilities that merchants have traditionally had to carry to recognize their future obligation to deliver goods and services against those points.
With a viewpoint that upends the centuries-old principles of double-entry bookkeeping, Messrs. Dennis and Simon argue that if reward points are generated by an algorithm and issued in the form of a digital token on the blockchain, it creates an asset for the individual holder but the countervailing liability resides with the entire blockchain itself.
That means “there’s no liability on merchants’ balance sheets anymore…and that’s what’s huge,” says Mr. Dennis. “We can take millions of dollars in liabilities off their balance sheets.”
As Mr. Simon concedes, this kind of thing could blow a bookkeeper’s mind. “We tell them the liability disappears, because the blockchain belongs to no one,” he says.
If I’m creating my own currency, but I’m not liable to redeem it, someone else has to be willing to take it. For that to happen the currency itself needs credibility. The analogue offered it to Bitcoin, but Bitcoin has credibility because it’s not being mined by a single retailer and it’s limited in quantity so can’t be inflated.
Traditionally, private currencies had to have some kind of backing (liability) in order to gain trust. They had to be exchangeable for something… if not goods and services (redemptions) then gold or US dollars (exchange).
My gut is that if you let someone print money without having any liability the currency won’t have credibility, it won’t be accepted as payment (even bitcoin itself has limited adoption, you can spend it at Overstock.com but how many other big retailers?).
So while I’m fairly bullish on cryptocurrencies, and alternate payment mechanisms generally, I’m a skeptic here.
(HT: God Save the Points)