Why The Bitcoin Blockchain Could Make Gift Cards, A Consumer Favorite, Even More Beloved

Bitcoin first became widely known as a currency, but many say the technology behind it, known as the blockchain, is what really has the potential to upend the financial system as we know it.

And that means that many financial services may someday use Bitcoin behind the scenes without the consumer even being aware.

Case in point: the announcement Tuesday at MoneyConf in Belfast, Northern Ireland, that Gyft, an online platform for buying, sending and redeeming gift cards that is owned by First Data , has partnered with blockchain infrastructure provider Chain to run gift cards for thousands of small businesses on the blockchain.

The new program, which will launch this fall, will be called Gyft Block.

“Based on the numbers we have, 95% of small businesses that have point-of-sale systems do not have gift card programs, whereas something like 99% of the large merchants we currently stock all have gift card programs,” says Vinny Lingham, CEO of Gyft, which works with 300 large retailers, which he defined as national or regional multi-store companies. “The reason for that is the cost — it’s expensive to offer gift card programs.” Gyft decided that the blockchain would allow the company to offer its small businesses a “very cheap, very secure and very fast” solution.

Gyft Block

The Forbes eBook To Succeed In A Brutal Job Market
Don’t let a rotten economy spoil your goals. Use the career and money advice in The Millennial Game Plan to get and stay ahead for good.

“What’s exciting about this announcement is that it’s really the first real-world blockchain-based product that’s not Bitcoin that people will experience and understand since everyone understands what a gift card is,” says Adam Ludwin, CEO of Chain.
Gift cards are an excellent candidate for demonstrating the virtues of the blockchain because it should be more secure, cheaper and more flexible than the current system, allowing for innovations in gift cards and combinations with other forms of payment.

Over the years, gift cards such as $10 Starbucks cards, $50 Target cards and $100 iTunes cards have become a handy go-to item for gifts and prizes. According to the National Retail Foundation, they’ve been the number one most requested holiday item eight years running. The amount of money put on gift cards in 2014 was about $125 billion, according to CEB TowerGroup, which provides market insights in financial services.

But the industry suffers from a lot of fraud. The current system relies on trust that the processor, distributor, reseller, gift buyer and gift receiver won’t steal the 16- to 19-digit code on a gift card and use it before the recipient can shop with it. It’s basically like handing a key from person to person, hoping no one makes a copy along the way.

But the system has a lot of leakage, from stealing by employees, counterfeiting and skimming of numbers. According to the National Retail Foundation, 78% of retailers have been the victim of gift card fraud. Usually, it’s not possible to tell a code has been compromised until the gift recipient tries to redeem it, and then it’s impossible to identify who the fraudster was.

Using the blockchain would represent an improvement in security over this system. A blockchain-powered process generates a new address for each transaction, even if the ultimate destination is the same. So, a consumer would receive a gift card into her wallet with one address and send that gift card back to the merchant’s wallet with another address. A fraudster can’t reuse any of these addresses to obtain the value from the card.

Additionally, once a gift card is in a new wallet, the only party who can move it out again is the holder of the private key. If that person wants to move the money to another wallet, which we can think of as a lockbox, she uses her private key to move the money out of her wallet and obtains a public key for the destination wallet. That allows her to perform the digital currency equivalent of slipping money into that lockbox, as head of Gyft Block Guillaume Lebleu put it in this Medium post. (However, without a private key for the second account, neither she nor anyone else, including a fraudster, could take money out of it.)

One of the most novel aspects of Gyft Block will be that the value of the gift card will not be held in Bitcoin, even though the transfers will be recorded on the blockchain. This means each gift card transfer will move a tiny amount of Bitcoin called a Satoshi, which is a hundred-millionth of a Bitcoin (a fraction of a cent), on which is coded metadata containing the value of the gift card (say, $50), the name of the merchant and other information. However, the transaction itself will not be moving $50 worth of Bitcoin.

While this may sound complex, the user experience is anything but. “From the consumer side, at first, it’s not going to feel any different other than paying for something with your smartphone as you would today,” says Ludwin.

Another advantage a blockchain-run gift card system has over a traditional one is that it’s cheaper. Part of the cost-savings comes from the reduction in fraud, but even without that, a blockchain-based system is less expensive — about a penny at current Bitcoin prices — to issue, transfer and settle a gift card. That contrasts with the current rate of about $1.50 per plastic gift card, based on a 2.5% + 20-cent bank card transaction fee. (For various reasons, even if the value of Bitcoin went up, the processing cost for a gift card would likely remain about the same.)

To begin, Gyft Block will only work with virtual gift cards, although the company is experimenting with using the blockchain to issue physical cards. But the flexibility in this new system opens the door to many future possibilities. For instance, Blue Bottle Coffee could create a loyalty points card that would record every time you bought Blue Bottle coffee whether in a supermarket or cafe, and you could spend those points at the Blue Bottle Cafe. Or, if you have a gift card, some rewards points and a coupon, you could use all three together to pay for a purchase without having to go through the current rigamarole of swiping the cards to see how much money is on each. The app would just show you all your your options for payment and you could select whatever combination you like of your coupon, rewards and gift card.

Also, it will be much easier for consumers to swap blockchain-issued gift cards. So if someone receives a Starbucks gift card but isn’t a big coffee drinker, he could post his card in a marketplace that matches him with someone looking for a Starbucks gift card who is offering something he wants, and then the assets could easily be traded digitally.

Noting that, in the current gift card system, each retailer has its own proprietary system, Ludwin says the new system will allow much more flexibility: “What’s happening its that there’s a shift happening away from rigid printed gift cards to digital cards and finally, really, merchant-issued currencies is where we’re ending up …. These currencies can move more seamlessly in social media, video games, in any kind of digital media, can integrate with other applications and apps on your phone more easily, so it’s a much more seamless system.”

[“source – forbes.com”]