Blockchain technology and digital currency offer many opportunities for companies in the hospitality area. The use of this technology, still in its infancy, is exploding. While initial coin offerings have garnered much of the attention, as well as regulatory oversight, there are many other uses of this technology that should be considered by hospitality companies. For example, hospitality real estate projects and properties can use the blockchain to facilitate and provide greater tracking and liquidity of distributed ownership interests, such as with time shares and condos. Digital tokens may be used for loyalty and rewards points, as well as providing an internal form of currency for large venues or chains.
Ownership Interests. The blockchain, and ownership tokens, are cutting-edge tools to track ownership interests and provide liquidity for limited partners (LPs) or owners. For example, each ownership interest in a large project can be recorded on a private blockchain, with a token issued to represent each individual ownership interest. For a $100 million project, there could be 10,000 tokens sold, with each token costing $10,000. If the project is doing well, each token’s value will increase as the property rises in value, and conversely, it will go down as the property’s value decreases. Each token and future sale is recorded on the blockchain, so that future buyers will be assured that the percentage ownership interest they purchased was owned by its seller.
These tokens can be freely sold to new or existing token holders, with the marketplace determining the future sale price. One potential option is through an owner-provided “passive bulletin board” that connects buyers and sellers, to be constructed in a manner not running afoul of securities broker-dealer licensing requirements. Generally, to act as a broker to connect buyers and sellers of securities—such as LP interests in a property—the broker needs a license from the Securities and Exchange Commission (SEC). However, the SEC has issued guidance explaining that if the issuer of the security token creates the equivalent of a bulletin board for the sale of ownership interests, with no middle person connecting the buyer and seller and no fee collected for doing so, a license is not required. Generally, the concept of a passive bulletin board is a decentralized location where sellers may post their tokens for sale, and buyers may directly communicate with the sellers to negotiate their terms. There is no middleperson, and no commission fee.
This concept of transferability also could be applied across multiple properties. For example, a large hotel chain with multiple projects could permit LPs to transfer tokens from one property to another – people who purchased tokens in a golf property could diversify their holdings by trading several tokens with the purchaser of another project.
Another advantage of blockchain in the hospitality industry is the ability to use the tokens as a means of distributing the property’s profit. Through the use of a smart contract, the distributions could be done instantaneously, based on the blockchain’s record of ownership at the time of the distribution (or some other measurement date).
Loyalty and Reward Programs. Loyalty and reward programs are another potential use of the blockchain and digital currency. Rather than “points,” hospitality companies can create digital tokens to reward users of their property or specific facilities, or to permit guests to purchase tokens to play games, purchase food, or earn hotel swag. This can be done via a centralized private blockchain or a decentralized public blockchain.
A centralized private blockchain is a blockchain run by its owner (or agent), and access is gained only by permission. A decentralized blockchain also may be used to facilitate loyalty and reward programs, but in contrast, these transactions are not managed by a particular company, but rather the community. It would allow participants to place their reward program with the decentralized community, permitting others to use the tokens to shop and cash in rewards, possibly across properties.
Booking reservations. One of the problems with the internet is security and multiple passwords. Consumers need to use different passwords and log all their information, including credit card or bank account information, for every site used. And, as we all know, data breaches happen. The blockchain offers a safer, fast alternative. A central blockchain repository for a consumer’s information could be created and held through a foundation, private company, or consortium. The consumers could permit access to their information per transaction, with any vendor of his/her choosing, for each transaction. The vendor would not store the consumer’s information, but rather only be given limited access for each approved transaction. The blockchain would be private, in that only members could use it. Hospitality companies would join to sell their properties (e.g., rooms or condos) and services, and consumers would join to gain access to a large, seamless, and competitive hospitality marketplace. The nodes required to service the blockchain could be provided by the hospitality companies, and mining may be permitted to allow others to gain tokens in exchange for verifying transactions on the marketplace’s blockchain. Further, smart contracts could be used to facilitate fast, secure, and central booking of rooms or services. The consumer would simply need to pick their hotel/car/cruise, agree to the payment terms, and click a button approving the transaction.
Sale of tokens. Hospitality companies may also sell tokens for a profit, much like Chuck E. Cheese’s® token. These “hospitality” tokens may be sold to users of hospitality services, such as drinks, food, or other goods and services, across properties and internationally – indeed, an advantage of tokens is they are cross-border. So travelers can spend their tokens in Hawaii, then in Japan, without ever incurring international exchange rates. Due to the increased use of tokens for fundraising, and the SEC’s guidance that token sales can and often do constitute the sale of securities, companies need to be cautious when selling tokens.
The SEC’s recent informal guidance regarding permissible token sales provides helpful guidance for companies wanting to sell non-security tokens. Specifically, on June 14, 2018, William Hinman, Director of the SEC’s Division of Corporation Finance, shared remarks that, while not the formal views of the SEC, are instructive for companies seeking to sell access to their goods and services. Director Hinman noted that “there are contractual or technical ways to structure digital assets so they function more like a consumer item and less like a security,” and identified the following factors that may influence the SEC toward deeming the digital asset to have been sold “only” for utility:
- Is token creation commensurate with meeting the needs of users or, rather, with feeding speculation?
- Are independent actors setting the price, or is the promoter supporting the secondary market for the asset or otherwise influencing trading?
- Is it clear that the primary motivation for purchasing the digital asset is for personal use or consumption, as compared to investment? Have purchasers made representations as to their consumptive, as opposed to their investment, intent? Are the tokens available in increments that correlate with a consumptive versus investment intent?
- Are the tokens distributed in ways to meet users’ needs? For example, can the tokens be held or transferred only in amounts that correspond to a purchaser’s expected use? Are there built-in incentives that compel using the tokens promptly on the network, such as having the tokens degrade in value over time, or can the tokens be held for extended periods for investment?
- Is the asset marketed and distributed to potential users (customers) or the general public?
- Are the assets dispersed across a diverse user base or concentrated in the hands of a few that can exert influence over the application?
- Is the application fully functioning or in early stages of development?
 This article only briefly discusses complex and fact-based legal issues. Before proceeding, the reader is strongly advised to seek experienced legal counsel.