Are Frequent-flier Miles the Key to Understanding Bitcoin Fraud?

Virtually every savvy traveler is a member of at least one frequent-flier program. Accrue enough miles, and these programs let you upgrade your flight class, fly for free or purchase consumer goods — Air Canada’s (TSX:AC) Aeroplan points can even be used to pay for university tuition.
Much like bitcoin, these miles have taken on the role of a virtual currency. And, like bitcoin, frequent-flier miles can be abused by fraudsters. Here’s an overview of the surprising similarities between the two, and why bitcoin market participants might consider looking at the ways in which airline loyalty programs combat fraud.

Both virtual currencies

An October 2012 report from the European Central Bank groups bitcoin and frequent-flier miles together as virtual currencies. The report categorizes frequent-flier programs as Type 2 virtual currency schemes, meaning that they convert real money into virtual money (air miles) that can be redeemed for virtual and real goods and services. Bitcoin, on the other hand, is a Type 3 scheme. The key difference is that, rather than a one-way flow of currency from cash to miles to consumer goods, real money and bitcoins can be continually exchanged.
In terms of end products, both of these currencies have significant buying power. Bitcoin Charts estimates that the entire bitcoin economy has a market cap of $4.14 billion, with 14 million bitcoins in existence. Airline loyalty programs are similarly influential. In 2005, The Economist estimated that frequent-flier miles had reached outstanding values, even surpassing the total amount of dollar notes and coins in circulation. Their reach has only grown in the ensuing decade. A 2014 EY report found that Delta Air Lines’ (NYSE:DAL) program SkyMiles has 74 million members, American Airlines’ (NASDAQ:AAL) AA Advantage has 72 million and Japan Airlines’ (TSE:9201) JAL Mileage has 25 million.

Potential for exploitation

Both of these virtual currencies have been subject to exploitation. Bitcoin is widely known for its involvement in illegal drug kingpin Ross Ulbricht’s Silk Road marketplace. More recently, it has garnered attention for its use in high-profile ransom cases. During a meeting with the Standing Senate Committee on Banking, Trade and Commerce, Royal Canadian Mounted Police Superintendent and Director Jean Cormier claimed that bitcoin has “become the near-exclusive payment mechanism for illegal marketplaces” for criminal consumer products, drugs, firearms and the online exploitation of children.
Air miles also have a surprisingly dramatic, albeit slightly less sordid, history of fraudulent usage. Rolling Stone recently profiled Ben Schlappig, a 25-year-old “hobbyist” who has dedicated his life to gaming airline loyalty programs. In the past year, Schlappig claims to have flown more than 400,000 miles (the equivalent of circumnavigating the globe 16 times), recording his travels on the blog One Mile at a Time. Hobbyists use the system by collecting and canceling credit cards that offer travel reward points, using a process called Manufacture Spent to make credit card purchases without actually spending money, and exploiting mistakes in ticketing algorithms.
Schlappig said, “the fact is, we are beating the airlines at their own game … and we’ll always be one step ahead of them.” This rhetoric is similar to the concerns outlined by Cormier at the meeting with the Standing Senate Committee on Banking, Trade and Commerce. According to Cormier, “technology is quickly evolving, and so are the criminals. This is not a system we can detect quickly. Quick identification of fraudsters is a problem and a major challenge.”

New crackdown strategy

The airline industry appears to be responding to frequent-flier fraud by cracking down on small fry in this big industry. In November, Orbitz (NYSE:OWW) and United Airlines filed a lawsuit to shut down Aktarer Zaman’s website Skiplagged. Skiplagged uses an algorithm to search out “hidden city” flights, or flights that have a layover in a traveler’s preferred destination. For example, sometimes it might be cheaper to book a flight from Vancouver to New York with a layover in Toronto, rather than a direct flight from Vancouver to Toronto. Adopting this aggressive strategy of closing down allegedly unethical abusers of the currency may be one way for bitcoin to reduce fraud and rehabilitate its reputation.
Ultimately, both bitcoin and air miles have a lot in common, allowing users to transcend international borders with exceptional ease. If the airline industry has indeed cracked the code to reducing fraud, then the bitcoin market may have a lot to learn from its high-flying neighbor.