Cryptocurrency – Bitcoin, Ethereum, Ripple, among others – seems to be driving the plane in Financial Technology (FinTech) development these days, making many of us curious, confused, and wary. What is it? What are the benefits and risks? How and where can it be used? Is the use of cryptocurrency going to improve access and security in finance activities (which is the main purpose of FinTech) in the aviation industry? More importantly for us, what, if any, is the potential for use in aviation escrow transactions?
To begin, the technology that allowed for these virtual currencies to develop and is running everything behind the scenes, blockchain, has four main pillars. They include: a distributed ledger, a decentralized database, immutable records, and smart contracts (digital contracts of data agreed upon). These features are important to understanding how cryptocurrencies work and their viability, but we’re going to save any further discussion of blockchain technology and its own potential applications in aviation escrow for the next blog.
With this foundation, let’s answer the basics, without too great of detail: cryptocurrency (with the first and most notable being Bitcoin) is a digital currency using a decentralized, encrypted database in the Cloud (blockchain) which is essentially owned by all its participants. It is open to all, and anonymously, with access for everyone to view its immutable records (permanent and time stamped with each new transaction or alteration) but not retrospectively change.
Each of these aspects creates a high level of transparency in regard to the accuracy of records, but the possibility for illicit activity too. Cryptocurrencies are also subject to a high degree of exchange rate volatility. This is the ultimate crux for weighing the benefits and risks of using cryptocurrency in aviation escrow transactions.
Bitcoin specifically has seen significant rise in value over the past year and is accordingly gaining traction as a payment option. For the airlines, travel agencies, and charter companies who have already begun doing so, it makes sense given the nature of those transactions. Many have cited the ability for 24/7 transactions, faster processing times, cheaper fees (if any), and increased customer service as reasons for accepting cryptocurrency.
Some of these businesses have attempted to limit the exchange rate risk by adding a “buffer” when converting prices. Mitigating risk can also be done by immediately converting the cryptocurrency’s cash value into fiat currencies (legal tender backed by the government that issued it) through crypto trading platforms like Coinbase or BitPay. Partnering with these exchanges so payment can be accepted at the exact market value at the exact time of transaction is yet another option.
Given the huge difference between airfare sales and the process of transacting aircraft sales and purchases, does it make sense for aviation escrow companies to accept cryptocurrency in closing? The international scope of today’s business aircraft transactions makes this a difficult notion. With so many different parties involved in a transaction, often from different parts of the world, currency exchange is already an issue. Normally, foreign currency is exchanged BEFORE it enters into the escrow account so the entire transaction is handled in the same currency (often US dollars). Imagine trying to close a transaction sending US dollars to one party, Euros to another, and Pound Sterling to yet another. Imagine the headache and risk to the escrow agent to try and convert that money herself before sending to the respective parties.
Instead, the currency is processed through the banks on the way in and out of escrow so everyone involved in the transaction is on the same page when discussing costs and associated fees.
Cryptocurrency is no exception to this rule. If escrow is not keen to inject foreign currency into the transaction, then why would they suddenly allow Bitcoin to enter the fold. In order for that to work, all parties to the escrow agreement would have to agree to conduct the transaction in Bitcoin, and accept the associated risks with exchanging the currency on their own. Bitcoin (and other currencies like it) are not easily exchanged and have volatile values, so the idea of an entire transaction being conducted with Bitcoin is difficult to imagine.
Having said that, it is easier to imagine a buyer and seller individually dealing in cryptocurrency for the sale of a plane. Absent all other interested parties, a cryptocurrency “cash” transaction is much more conceivable. In the simplest of terms, it’s easy to imagine a buyer saying, “Hmm, I wonder if I can buy a plane with this Bitcoin I have?”. And the seller responding, “That’s an interesting idea, but I think I prefer cash, thank you”.
A few cases of large asset transactions using cryptocurrency for payment have been noted, specifically in real estate. If the seller can quickly liquidate the currency to avoid huge shifts in the market, then there is relatively minimal risk in the transaction. It is possible then that aircraft could be sold or purchased in the same way, effectively mitigating exchange rate risk. Jurisdictional factors need to be considered as well to avoid unnecessary fees. However, lack of regulation and integration currently remain deterrents. And the risk of exchanging the currency and recovering the cost of the plane is entirely on the seller.
The general consensus is that progress is being made in regard to the use of cryptocurrency in bigger markets with large asset transactions, such as the aviation escrow industry. The United States and others are beginning to develop regulations regarding cryptocurrency transactions, but for the near future it will remain a rapidly evolving legal environment. How and when any measures will be enforced is unknown.
Some experts believe the change to a more encompassing use of cryptocurrency in the aviation industry needs to begin with the airframe and engine manufacturers, who could attach the purchase price for an aircraft to a specific currency. It is assumed that the companies at the forefront of this cryptocurrency revolution will bear the cost of the unknowns, but also have a competitive edge and increased value in the market.
Since aviation escrow in particular has to consider all aspects of the aviation and financial industries, it is unlikely that the use of cryptocurrency will be a viable option until all the other ducks – education, regulation, integration – are in a row. However, there are a myriad of uses being discussed for blockchain technology in the aviation industry that could majorly streamline the transactional process, and possibly open the door for the use of cryptocurrency.
We’ll be discussing those possibilities in our next blog – “Blockchain in Aviation Escrow Transactions: What is the Potential?”
This article was originally published in Wright Brothers Aircraft Title's blog on March 27, 2019.