Loyalty glossary · 8. Technology and architecture (25)
Tokenization
Tokenization is the conversion of loyalty points or rewards into digital tokens on a blockchain, so that they can be transferred, traded, or held outside the operator's ledger.
Tokenization is usually sold as a way to make loyalty points trade like currency. The pitch is that a token on a public ledger frees points from the operator's private database, and therefore from the operator's rules. In practice, the operator still sets the redemption terms, and the token inherits every liability that the point carried, now with a speculative price attached.
The accounting does not get simpler. A point is a deferred liability, and tokenizing it does not extinguish that liability, it reprices it in real time. The accrual that built the point remains on the books, but now the operator also has to watch a market price that can move against its redemption cost. A token worth 0.5 cents while the operator redeems at 1 cent is a 50 percent immediate loss on every conversion.
The member data problem is worse. A token can be bought, and a bought token counts the same as an earned point in most loyalty systems. That inflates active-member-rate without any activity-based-qualification. A member who buys 10,000 points on a secondary market is not a more loyal customer, but the metric cannot tell the difference. This is how tokenization quietly destroys the signal that loyalty programmes depend on.
Work the numbers on a small scale. A member earns 20,000 points through normal accrual. The operator tokenizes at 0.8 cents per point, so the member's balance has a notional value of 160 dollars. If the member sells half, that is 10,000 points for 80 dollars, and the buyer now holds a claim against the operator that the operator never designed for that buyer. The operator has gained nothing, but has added a new creditor.
Tokenization should be judged by whether it improves redemption, not by whether it creates a trading market. Most programmes would get more value from fixing their expiry policy or lowering redemption thresholds. The technology is a distraction for operators that have not yet solved the basics, and it is a risk for those that have.