(Bloomberg) -- An increasing number of digital-asset startups are offering airline-like loyalty points as they seek to attract more devoted users, even though most have yet to define what the rewards actually entail.

Loyalty programs have sprung up in response to a once-favorite marketing ploy — the token airdrop — in which projects give away crypto tokens to users. But the industry is rethinking this tack because many airdrops have done little to retain users while regulatory scrutiny has swelled over tokens themselves. 

The fledgling points programs already have their detractors, with many users bemoaning a lack of transparency — most haven’t explained how their points can be used — while experts warn they may pose regulatory risks of their own.

The trend took off in November when new blockchain project Blast lured users by rewarding them with points. Even without a live blockchain, Blast has since attracted more than $1.3 billion worth of crypto from users who can only speculate what the points can be used for later. In a post thread on social-media platform X, Blast said only that the points can be redeemed on May 24. 

The crypto community has criticized the Blast points program as a marketing ploy to get people to commit their tokens and refer new users. Some critics have even said the approach is reminiscent of a Ponzi scheme, which Blast’s founder Tieshun Roquerre has denied. He didn’t respond to direct messages on X seeking comment.

Despite the initial backlash, Blast’s success has led other new blockchain projects to kick off loyalty points programs, including Manta and Mantle — both of which saw dramatic growth in the past few months in the total value of cryptocurrencies sent to their platforms, with Manta attracting $1.59 billion worth of tokens and Mantle receiving $312 million, according to data from L2beat.

The rookie points programs could be a sign that the industry is maturing, according to Christopher Newhouse, an analyst at digital-asset venture fund Cumberland Labs.

Marketing Shift

“It’s kind of a shift in terms of the product and strategy and marketing side of crypto really starting to take over,” Newhouse said in an interview. “You’re starting to see people be like, ‘Oh, OK, how can we actually gamify this and get more people interested in using our protocol?’”

While loyalty points programs are nothing new outside the crypto world, they hadn’t taken off in digital assets because of the popularity of token airdrops and their ability to bootstrap new users easily.

However, token airdrops have also led to some unwanted consequences, namely low loyalty from users since some — known as airdrop farmers — only use a project to get the free tokens and then move on. Regulators have also had an eye on them. 

The issues are taking a toll. In 2023, the number of major token airdrop events slumped from a year earlier, according to data compiled by tracker CoinGecko.

At issue is whether tokens are considered securities and, according to the US Securities and Exchange Commission, most are. Yet none are registered, as required, with the regulatory agency. By switching to point rewards from airdrops, the situation becomes a little more vague.

Read more: SEC Says Backers of Crypto Token Hydro ‘Airdrop’ Broke Its Rules

“If they are truly points, there are fairly well-established rules projects can follow,” said Emily Meyers, general counsel at crypto venture fund Electric Capital, adding that a points launch can be cheaper and faster than trying to comply with US securities laws for a token launch. But if the points are designed as a cryptocurrency just without being on the blockchain, then “there’s no difference in regulatory risk,” she said.

Indeed, many projects that started loyalty programs have been vague about the role of their points. That has resulted in even more speculation on their real value from crypto traders. Platforms like Whales Market let users trade points of different projects. For example, people can buy and sell points of crypto project EigenLayer, which are valued at an average $0.1 each on Whales Market, without even knowing what the points can be used for. The project’s document said EigenLayer’s points are a measure of a user’s contribution to the project.

They are basically saying, “we want to incentivize people but be very non-committal on what those incentives actually are and like what they’re actually gonna get out of it,” said Matt Kunke, research analyst at digital-asset investment firm GSR.

At the same time, past successful token airdrop events have proved they are a quick way to decentralize the token supply of a project, something that loyalty points haven’t been able to do. Furthermore, most loyalty points programs aren’t recorded on the blockchain, making them more obscure. So unlike airdrops, it’s hard to estimate the size of the points market. 

“Tokens are meant to convey ownership, they’re bearer assets and can operate on decentralized systems without relying on the issuer,” said Electric Capital’s Meyers. “But points are under exclusive control of the issuer and can be revoked or have their value changed at any time.”

(Updates with value of crypto sent to two projects in sixth paragraph.)

©2024 Bloomberg L.P.