BLOCKCHAIN is a term that investors usually associate with the cryptocurrency market. But it may soon be used in loyalty schemes as well. And today I’ll be discussing this solution with blockchain technology expert Jacek Malinowski. Please join us. Katarzyna Nawrocka, „Loyalty Schemes by Night”. Good evening, Jacek. I’ve already introduced you a little and we know each other, but perhaps you could tell our viewers a bit about yourself.

Transcript – Blockchain technology and loyalty schemes

Good evening, everyone. My name is Jacek Malinowski. I am a co-founder of JMMJ Software, which recently joined the international Uptime Group.

Jack, this is a tricky topic for me today. I’m not sure if it’s just me, but BLOCKCHAIN seems like a very new technology to me. We’ve already talked about this off-camera, and you’ve made me realise that’s not the case. That it’s not a new solution at all, so perhaps to start with, let’s focus on explaining to people like me what BLOCKCHAIN is. Because, as far as I’m concerned, up until now, BLOCKCHAIN and cryptocurrency were essentially one and the same.

This is a very common perception. Most people view blockchain technology in this way – as being solely associated with cryptocurrencies. Of course, this is because the main, and so far the largest, use of blockchain technology has been for cryptocurrencies, but let me explain this with a simple example. Blockchain can be compared to an operating system, whilst a cryptocurrency is an application that runs on that operating system. That is why further applications can be built on top of blockchain technology for other business purposes. They are, however, just as securely encrypted and store a complete history of all transactions that have taken place within that additional blockchain-based application.

I’ll go ahead and repeat this in my own words, and please confirm or clarify if necessary. So, BLOCKCHAIN was created to support systems such as cryptocurrencies, but it turned out that it also has other applications.

The story is a little different, but the result is indeed exactly the same. When Bitcoin was created, the word ‘blockchain’ hadn’t even been coined yet. However, the technology that was used was later named ‘blockchain’. That implementation was used exclusively for cryptocurrencies. However, after some time, it was realised that this method of encryption and data security could be used in other technologies. And another very well-known cryptocurrency, in people’s minds, is Ethereum. In reality, however, it is an entire system – a network of computers – which, as well as supporting the Ethereum cryptocurrency, can also be used to build highly complex applications, business applications and various related ventures.

In that case, perhaps you could tell us what your company does, given that you’re now an expert on BLOCKCHAIN.

Since 2008, we have been implementing bespoke software for our clients. This is mainly B2B software. However, around four or five years ago, we began to take an interest in blockchain technology. At that time, it was still a niche technology. We kept an eye out for a solution that would, at some point, allow us to introduce our business clients to this technology so that they could utilise it to meet their needs. We noticed just such a development when there was a clear distinction between cryptocurrencies and smart contracts – that is, contracts which are capable of implementing business applications digitally and automatically. However, they do not necessarily have to be linked to any particular cryptocurrency.

I’m going to keep saying here that, off-camera or during our initial conversations, you explained something to me. I hope our viewers will forgive me for this, but I’ve tried very hard to prepare thoroughly for today’s episode, bearing in mind that this is a completely new subject for me. And you were talking about your work, about what your company does. And one sentence really stuck in my mind: that there are situations where a potential client comes to you asking to use this technology in their operations, in their company, in their field, and you’re in a position to turn them down. Not because you don’t want to work with them, but because, after a thorough assessment, you don’t see a place for this technology in their operations or their sector.

Yes. We always begin with what is known as the ‘discovery’ process to understand the nature of our client’s business and why they want to develop such an application in the first place, so that we can select the most suitable technology. If it turns out that the project our client is bringing to us is a typical project that can be based on a database, where they will be the sole owner and administrator of that data, but for marketing or other reasons they would like to use blockchain technology, then we discuss together whether there really is a point in using this technology. Sometimes it does. If we’re talking about wanting to involve other companies in collaboration on the same project or within the same ecosystem, then it’s sometimes worth developing an application using blockchain technology, even if there’s only one data owner to begin with. However, after a while, further contractors and partners may join, and that is when the use of blockchain technology makes sense. However, there are many cases where, following our analysis and after explaining what blockchain technology entails – and clarifying that in this particular situation a standard database application would be entirely sufficient – we are able to persuade the client to opt for the traditional approach instead.

And this is where I’d like to ask you whether you can see any use for blockchain technology in loyalty schemes – and if so, what form that might take? We’ve discussed how, when considering this question, an example that really struck me was that of a central bank, which controls a country’s currency, and the organiser of a loyalty programme or a lottery – let’s not shy away from the word – manages the points, the rewards catalogue and everything associated with that lottery and loyalty programme. Do you see any role whatsoever for BLOCKCHAIN in loyalty programmes?

This is a very broad question, and I suspect one could come up with many different ways of implementing it. First and foremost, one would need to sit down and consider whether it makes sense. It seems to me that this is more of a business question than a technical one, because the owner of such a programme should consider whether they want to collaborate with other companies, and on what terms – whether on a partnership basis, or on the basis that they act as the administrator of a particular IT network, to which further contractors join. Both of these implementations can be carried out on the blockchain, but one needs to understand the underlying business need. There is no need to force the use of blockchain technology into such programmes. However, from what you’re saying, there are many such loyalty programmes, so there are many companies that have their own independent points systems, and the business question is: would it be worthwhile to link these points systems in some way, or at least exchange them on certain terms?

Is this a good time to ask you about how BLOCKCHAIN works, given the differences we can see at first glance when it comes to loyalty schemes? I mean, loyalty schemes operate on the basis of a centralised database. We collect data, manage it, protect it, but we also work with it and use it. And blockchain seems to be the complete opposite when it comes to data collection, because it isn’t a centralised database.

Right. In that sense, in a full blockchain network, all data is, of course, shared. However, it is possible to implement a smart contract, within which data is collected, and in that case there is a single administrator who collects and manages that data – just as you said. However, under certain conditions, it grants access to users, end-users or partners. This allows it to establish its own rules, as set out in this smart contract, which are automatically triggered. It is then possible to translate the business logic – which developers currently have to programme in the traditional way – into the implementation of such a contract, which will operate in a manner that is clear and understandable to all users and participants in the solution.

I’ll be asking you a lot about the use of BLOCKCHAIN in loyalty schemes, for obvious reasons, and I wanted to ask whether such a solution might be useful in a world where we could exchange points from different schemes?

Sure. It’s a very interesting concept that fits in very well with blockchain technology. I’ve already mentioned smart contracts. Few people are aware of the technical detail that all tokens exist within a smart contract. So, by building this solution on a smart contract, we could add a layer of so-called tokens that would represent points. It’s even possible to enable communication between different smart contracts, so one can imagine that several loyalty programme operators have their own smart contracts. They build their own user databases, as well as their own tokens representing points. However, under certain rules described earlier, they could exchange these tokens between their programmes, and the use of this technology would enable this to be carried out in a highly reliable, transparent and very clear manner.

Jack, let’s explain the difference between a private and a public blockchain. I’ve already read a bit about it.

Sure. People who are familiar with cryptocurrencies know that this kind of BLOCKCHAIN is public, and they are absolutely right. However, similar technology can be implemented on private servers in a typical business-to-business (B2B) configuration. In this case, several organisations link their servers together in a blockchain network, using technology similar to that of Ethereum.

And this is where I associate Ethereum with cryptocurrency.

And you’re quite right, because the Ethereum blockchain not only hosts a cryptocurrency, but is also a fantastic platform – an infrastructure – on which smart contracts can be deployed. And, as I mentioned at the start, smart contracts are applications built on a specific ecosystem. However, these smart contracts do not necessarily have to involve cryptocurrencies. That said, smart contracts deployed on a public blockchain will be paid for using Ethereum. So, in a sense, the person who deploys their application there is dependent on the cryptocurrency market, because they’re effectively paying for that server space. I don’t want to draw a one-to-one comparison, but just to help you understand what’s going on. In a sense, they’re paying with cryptocurrency to run their application on that network. However, as you mentioned in your question, a private blockchain doesn’t have to be based on cryptocurrency – in fact, it shouldn’t be. In that case, we can implement only business values that are secured in the same digital, cryptographic way. However, these values relate solely to the business in question. In this instance, we would use this technology to process and store loyalty points. Furthermore, as I have mentioned many times, we could add a business layer which, automatically via smart contracts, would oversee the appropriate flow of these tokens, as well as their addition to the system, removal or exchange for rewards. This is because we can introduce an additional type of token representing rewards issued to participants, thereby maintaining a complete history of which points were converted into which rewards and from where. I believe this also provides quite useful analytics on how users utilise these tokens and loyalty points, and over what timeframe. We’re still on the subject of private and public blockchains. Public ones, such as Ethereum, Cardano and Stellar. Private blockchains, on the other hand, involve players and partners who have agreed on business relationships amongst themselves and wish to map these onto a private blockchain network. It is worth noting that within such a private blockchain network, it is also possible to create a cryptocurrency which will, for example, represent loyalty points. These points can then be freely exchanged between partners.

Exactly, because BLOCKCHAIN, at least for me, is very much associated with cryptocurrency. And now this question has popped into my head. Could we create a central currency that would be able to link various programmes from different partners, and which would act as the equivalent of those points?

That’s a great question, and it’s worth looking into if we’re talking about a global currency in the sense of what current cryptocurrencies represent, because even people who buy and trade these cryptocurrencies don’t think about the fact that each cryptocurrency has its own additional purpose. Whether these are tokens linked to attention – meaning that someone is watching adverts – or tokens that can be used for a specific purpose in the future. They also have a monetary value, which is all anyone ever talks about. In this case, however, it would be possible to create a cryptocurrency that would have some intrinsic value. So if someone didn’t want to exchange it for a reward, they could potentially cash it in at a set exchange rate. In that case, such a global cryptocurrency linked to loyalty points could be exchanged by everyone without any restrictions.

So what advice would you give to someone who approaches your company wanting to implement BLOCKCHAIN, given that your company specialises in organising loyalty schemes? How should they prepare? How would you assess whether blockchain is a suitable solution for loyalty programmes? What steps would such a client need to take?

As I mentioned, we actually ask each of our new clients about their business needs. Why they want to create a particular solution in the first place. And at this stage, we very quickly get to the question of whether there will be collaboration with other companies, or whether this application or software is intended solely for that one company. If it appears that collaboration with other companies would be possible, I would start by suggesting that our client first look for business partners with whom this can actually be implemented. This is because there are a great many projects and ideas that are developed on a ‘proof of concept’ basis, simply to demonstrate that something can be done. However, afterwards there is a lack of business partners to actually put the technology to use. Even the best technology, without business partners, simply won’t deliver the desired results. It will simply remain a dead technology. That is why I would recommend building a broader coalition of companies interested in creating such a shared network; once that is in place, I would suggest organising workshops with a larger group, where everyone wishing to participate could share their vision of how such a solution might look in the future. What business functions would need to be fulfilled? Only then could we develop a concept, on the basis of which we would select a specific technology.

Let’s focus on security for a moment. Because we’re talking about loyalty programmes, we’re talking about BLOCKCHAIN, and loyalty programmes are, first and foremost, about user data. And, of course, when we talk about user data, we have regulations such as the GDPR to consider. And now you mention that blockchain is a viable option for organising loyalty programmes. It may be a new, innovative solution, but we’d need to find contractors and partners who’d be willing to implement this solution with us and operate in accordance with it. So my question is: how can we ensure the security of this data at this stage, and how can we protect ourselves against potential situations that are not entirely within our control? Apart from CCTV, to mention this again, we’ve discussed, for example, a fire at a huge server room where data was stored. BLOCKCHAIN is not a centralised database, so we don’t need to worry about that here, but perhaps there are some risks, or perhaps we can protect ourselves in some way.

You mention two very important topics here, which are somewhat independent of one another, but can be linked. One topic is data security in the event of the loss of a server room. In such a scenario, with a distributed ledger such as blockchain, this risk is much lower. The second issue, however, is more closely linked to the law, specifically the GDPR, and to ensuring that users of such technology retain the option to opt out whilst retaining their full history. As I mentioned, in blockchain, everything is recorded in the ledger from the very beginning, and this data cannot be directly deleted. However, there are many solutions that allow us to store this data securely. Without going too deeply into the technical details – personal data is stored separately in traditional databases, whilst a key, which subsequently identifies this data, is recorded in an appropriate cryptographic manner; and it is only this key that we place on the blockchain, together with a record of point exchanges. And when a person wishes to remove their personal data from this history, we delete that personal data from the traditional database, whilst only a meaningless token remains in our records – one that cannot be linked to a specific individual. So this implementation is possible, compliant with the GDPR, and, as you mentioned, secure in the event of a fire in a single server room, as the data is distributed.

I’m just really glad you mentioned that you’ve been watching previous episodes on our channel. And one of those episodes was an interview with Tomek Witt, who’s an expert in mobile apps, including loyalty programmes. I cheekily asked him about BLOCKCHAIN in mobile apps, and he didn’t exactly have a positive view of the future of mobile apps in relation to BLOCKCHAIN technology. Perhaps you have a different opinion?

I watched that episode and I agree with Tomek on this point – as he said, it’s difficult to link a mobile app directly to the BLOCKCHAIN. This is because a blockchain is a network of computers that are constantly connected to the internet and exchange information, cryptographically verifying the flow of data. However, there are various ways to access such a blockchain network. Among other things, you can set up a secure API that will be able to read and write this data. And in that case, it is certainly possible to connect a mobile app to the blockchain network via an API and securely read from, as well as write data to, the blockchain network. It is also possible to integrate the two, but not in the sense of transferring part of the blockchain to a mobile app, as that would not be feasible.

Jack, I’ve asked you many times whether blockchain can be used in loyalty schemes. But if we were to step away for a moment from organising loyalty schemes or lotteries and talk about some of the challenges you face in your work, or the most interesting implementations. Obviously without giving away any secrets, but I was wondering if you could tell us about a situation where a client comes to you and asks you to implement this solution. And it’s such a difficult task for you, which later turns out to be a success.

There have been many implementations. For the time being, these are mainly pilot projects, although they are operating in a production environment with a view to subsequently integrating this data and this network with third-party companies, or even, in the future, with certain government departments responsible for specific areas. Here, I can cite an example of a project that records exposure to toxic substances. Under Polish law, if a person is exposed to toxic substances in a factory, this data must be retained for several decades. If we keep it on paper, as you mentioned with the fire – everything could burn down. If we keep it in a database or in a single server room, something could also happen to that server room. However, using BLOCKCHAIN would, firstly, distribute this data; and secondly, provided, of course, that a private network was used, where only authorised persons had access to this data, to the register, and also to generate the various reports that are necessary. The vision behind this idea, however, was that in future, the relevant government department would have direct access to this data in order to extract certain anonymous statistics regarding which toxic substances employees had been exposed to, as this is strictly regulated by law.

Right then, before I ask you about the future of BLOCKCHAIN – because I’m really curious to know how you see it in 5, 10 or 20 years’ time. In loyalty programmes too, but not only there. Generally speaking, the future of this technology. I’d like us to step away from loyalty programmes for a moment, because unfortunately – and I say ‘unfortunately’ for experts like you – blockchain will continue to be associated with cryptocurrencies for a long time to come, strictly with cryptocurrencies. So perhaps we could explain how this ties in – how blockchain is used in cryptocurrencies.

Yes, exactly as we discussed, BLOCKCHAIN is very strongly associated with cryptocurrencies. And, for better or worse, rightly so, because most projects and most developers working in this industry are building or programming either cryptocurrencies or exchanges for trading those cryptocurrencies. That’s where the bulk of the activity lies when it comes to new projects being launched. However, the way I see it in the context of the next 5 or 10 years… It seems to me that this boom in cryptocurrencies themselves, in relation to BLOCKCHAIN, will fade somewhat and things should stabilise at some point. Instead, projects related to blockchain – but not linked to cryptocurrencies at all – will come to the fore. The first elections in an African country, based on blockchain technology, have already taken place. It’s possible this will spread to a European country, and if so, there would certainly be positive press coverage of this technology, given that you’ve just been asking about cryptocurrencies and the whole surrounding hype. Unfortunately, there’s been some bad press, but rightly so, as there has been a lot of abuse. As for ICOs, that’s a separate topic; I won’t go into the details here. Well, but it was a typical case of milking people for money for some idea that was supposed to materialise. I mentioned the proof of concept – that this technology is used to make a copier, but then nobody actually uses it. Similarly, with ICOs, even those projects often never materialised, whilst the money simply vanished; that’s why there was so much bad press and people concluded that, OK, so this cryptocurrency market in general is dangerous, or could be dangerous. It can potentially be associated with losing money. So blockchain technology could potentially lead to the same thing. However, the way I see it, things will even out over time. Cryptocurrencies will certainly remain, whilst the projects that interest me most – that is, typical business projects that deliver value to business clients, as well as to the users of their technology – will be promoted more strongly.

But before we reach the end of the episode, I’d like to ask you a bit more about that interesting fact you mentioned. Elections using blockchain technology?

Yes, of course. It is possible; it has already been done in one of the African countries. It is possible that it will also be introduced on a wider scale in the future. Thanks to this technology, and the cryptography used, we can be certain that this data has not been manipulated or altered in any way. As a result, no one should subsequently have any grounds for disputing these results.

Once again, this is taken from your last reply, but I couldn’t have done otherwise. We won’t go into the details, but perhaps we could expand on the concept of an ICO.

Right. This is an Initial Coin Offering, which is the sale of a cryptocurrency that doesn’t yet exist. It’s a kind of fundraising for a project – a promise of a project that will come into being. And people exchange money for initial tokens – you could say, the whole idea. However, this should be followed by the implementation of the entire project, with all its features. And then, after a certain amount of time, such a cryptocurrency would be listed on a cryptocurrency exchange, and those who invested at the start would, of course, stand to gain a great deal from it. However, this model has been heavily abused, and some people have raised money for tokens that were completely worthless. Yet they failed to complete the project and simply vanished.

It’s the year 2031. What uses do you see for BLOCKCHAIN?

It seems to me that the time is now right for this technology to be used for the first e-voting in Poland or in another European Union country. Furthermore, most communication relating to legal or formal documents has also been transferred to this technology. Thanks to this, we no longer need to print documents or visit government offices to obtain copies or extracts, as these are now available in electronic form to those authorised to access their own data.

And can we agree that if a few loyalty scheme operators decide to adopt blockchain technology, then in 10, 15 or 20 years’ time we’ll easily find ways to apply this technology to loyalty schemes and lotteries?

Absolutely. That’s what I think, and it will also be possible to integrate it with mobile apps via the relevant APIs.

Thank you very much for our conversation today.

Thank you very much. Good night.

Where on earth did this BLOCKCHAIN come from?

BLOCKCHAIN really took off here in 2017, because we were looking for new clients in the US and realised that, at that time, blockchain technology – and not just cryptocurrencies, but the potential for its use in business applications – was already well known, at least in Manhattan. There was a lot going on in this field. That’s why we flew to New York several times, where at first we attended various lectures ourselves, and after a while we began presenting the potential of blockchain technology ourselves. Thanks to this, we initiated several partnerships with clients from the US.

But does that mean your company used to do something else?

Our company has always done the same thing: we develop bespoke business software. However, whenever a new technology emerges, we always look into whether it can be adapted for our clients. At that time, we realised that this technology could be very useful. In particular – as we’ve discussed at length – in building a platform involving several business partners. That’s why we wanted to include this technology in our range of services. That is why, at that time, we began to engage very heavily with this technology, learning how to utilise it commercially.

Right then, I reckon I’ve got everything out of you for today.

Thanks.

Thanks.