Branded currencies gained significant traction this year with the development of Facebook’s Libra Project, and the publication of Walmart’s stablecoin patent. However, this is not a new concept, branded currencies have been integral to the brand-consumer relationship for over three decades — loyalty points, coupons, gift certificates and rewards are in fact early iterations of branded currencies. With technology growing at an exponential rate, branded currencies look to become much more dynamic. Leveraging established communities and familiar user interfaces, this developing asset class will help pave the way for blockchain adoption where even established digital assets such as Bitcoin and Ethereum have failed.
A branded currency may be defined as — a store of value and a medium of exchange for goods and services from a specific brand or merchant; this includes any physical or digital form of payment from a merchant or brand, such as coupons, loyalty points, and gift cards.
Economists generally agree that currency is defined as a store of value via medium of exchange. Fiat currencies are widely accepted, and are not subject to the “exchange for goods and services from a specific brand/merchant,” whereas branded currencies are limited by what they may be applied to, ultimately impacting utility and perceived value. This and other points of friction have resulted in excessive breakage and the accumulation of idle capital within branded currencies — ⅓ of points generated annually within the United States will go unused, never to be redeemed.
The Evolution of Branded Currencies
Applicability to a specific brand or merchant is becoming less of a limiting factor — technological advancements have seen the lines blurred between what is considered currency and what is not. The world is becoming increasingly digital, only 8% of the world’s monetary supply is held in physical form — 92% exists as data on harddrives and computers worldwide. Similarly, branded currencies have evolved from physical coupons and stamp cards to robust programs that can be managed through mobile applications and wallets. As more assets enter the digital landscape, they become increasingly more efficient mediums of exchange, opening the opportunity to “quantify value in multiple ways, which in turn makes it easier to create new, valid forms of currency” — Paul Kemp-Robertson, Contagious Communications, Special to CNN.
An article from the Harvard Business Review, The Coming Branded-Currency Revolution, suggested that the evolution of branded currencies will take place in three waves:
- It becomes easier for consumers to convert coupons and points to payment. Card-based solutions allow consumers to load coupons directly to their credit cards and automatically apply offers at point-of-sale. Points can be directly applied to purchases, enhancing perceived value in the eyes of the consumer.
- Mobile wallets allow various programs to be managed from a central point. Consumers experience greater convenience, but still have to manage separate programs, along with their respective rules and requirements.
- Mobile Portfolio Manager — combines convertibility with convenience, a mobile hub where coupons, cards, and points can be easily managed and utilized. Users experience enhanced versatility — they can now easily calculate/compare purchasing power, convert currencies, prioritize usage, and combine different assets for payments.
Branded Cryptocurrencies — The New Era of the Points Economy
In the United States alone, users have accumulated in excess of $100 billion in idle points value, with an additional $16 billion generated annually that will go unredeemed. Branded cryptocurrencies look to address issues of breakage and unused value within the legacy branded currency economy by removing friction and other pain points inherent to the current infrastructure. Enhanced liquidity, flexible trading environments, and token standards that allow for easy cross-program value transfer are among some of the ways to better leverage the billions of dollars in value that resides in this economy. By removing silos that constrain what branded currencies can be applied to, certain branded cryptocurrencies feel more like cash, increasing perceived value and utility for the consumer.
However, certain branded currencies such as points and gift cards are still considered IOU’s and are not explicitly collateralized. They may equate to a dollar value but may not be directly backed by the associated fiat dollars. Additionally, tokenization may provide users with the ability to trade certain points, but the success of these operations is based on the activity within secondary markets. This limits utility, perceived value and ultimately, who is willing to accept and transact with these digital assets. In light of this, branded stablecoins are being actively explored, and are discussed below.
The Future of Branded Cryptocurrencies — Fiat-Backed Value by Brands
Volatility is a hindrance to cryptocurrency adoption — highly speculative markets subject many crypto assets to aggressive price fluctuations. As such, many cryptocurrencies are unable to fulfill the three primary characteristics of money: a unit of account, store of value, and a medium of exchange.
Stablecoins introduce the stability and value of cash and combine them with the benefits of blockchain technology. These benefits include, but are not limited to; no single point of failure, immutability, borderless, and programmable money.
Developments in the sector of branded cryptocurrencies suggest that the potential of stablecoins reaches far beyond simply moving traditional assets on-chain. Issuing their own unique assets, brands will be able to enhance the value created within their ecosystems:
Interest in branded cryptocurrencies and stablecoins has led large brands such as Walmart and Facebook to explore the sector:
- Walmart is exploring a digital coin backed by traditional fiat currencies. The suggested technology would facilitate cheaper, faster transactions and loyalty features — transaction information would be overlayed with customer purchase history and savings.
- Facebook’s Libra Project has the potential to connect its 2.7 billion users in a seamless and vibrant digital ecosystem — something no existing financial infrastructure or blockchain project has been able to accomplish.
A Shift in Trust
Along with a wider variety of assets that can assume the role of currency, research has shown that people may also be more inclined to engage alternative forms, specifically those provisioned by a private entity or brand.
In 2014, the Edelman Trust Barometer suggested that people placed more faith in peers and corporations than central banks and governments. In a study conducted by Contagious Communications in 2013, it was found that 45% of people aged 24–45 within the United States would happily engage with a privately issued currency, with 36% saying they would be comfortable with the replacement of sovereign currencies altogether.
These findings suggest a preference for utility and convenience, but also show a shift in trust. Money has assumed various forms over the years, but at its core is simply agreed upon value. If a consensus is reached to utilize an asset issued by a brand in place of fiat currency, this lays the groundwork for the creation of microeconomies based around branded cryptocurrencies. A non-crypto example of this can be seen with Starbucks’ inhouse currency, Stars, which accounts for ⅓ of all Starbucks transactions.
This emerging asset category moves beyond both the traditional points economy and current iterations of stablecoins, creating a digital asset that will allow enhanced engagement between brands, merchants and consumers. Additionally, branded stablecoins are backed by recognized value (fiat currencies), opening up numerous possibilities, including brand-sponsored financial services.
Credit & Other Financial Services — By Brands, for the World
Blockchain has been heralded as a solution to “banking the unbanked,” addressing the 1.7 billion adults worldwide unable to access traditional financial systems. Many lack sufficient capital to initiate a bank account, ultimately leading to an inability to engage in financial services and activities, such as generating credit, applying for a loan or mortgage etc. However, these same people engage with brands on a regular basis — which overtime generates a reliable record of behaviour. The documentation of this behaviour acknowledges the daily actions of millions worldwide currently not considered by traditional systems, and provides an opportunity to engage with systems they are excluded from.
“Retail brands may be the first major catalyst we have seen in supporting the vision of the unbanked — where creditworthiness, storage of assets, and entering into other financial instruments may all be related to your file on hand, digitally stored with the brand. For those without access to a bank, a major brand may suffice to replace this in the near future and branded cryptocurrencies will pave the way for this evolution.” — Michael Luckhoo, DigitalBits VP.
A Dynamic Asset Class with Endless Possibilities
Branded currencies have experienced a rollercoaster ride evolution, looking to become a dynamic asset category with the ability to support diverse microeconomies. In addition to enhancing value for brands, consumers and merchants, branded cryptocurrencies align with a shift in consumer faith, away from central banks and governments towards more trusted entities such as peers and brands. DigitalBits’ envisions the emergence of dynamic new economies based around branded cryptocurrencies, allowing users to interact in ways never before imagined.