cryptocurrency in aviation transactions

  • Tracey Cheek posted an article
    Cryptocurrency in Aviation Escrow Transactions: Is It a Viable Option? see more

    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.

  • Tracey Cheek posted an article
    Cryptocurrency in Aviation Owner Trustee Transactions: Is It a Viable Option? see more

    NAFA member, Debbie Mercer, Owner of Aircraft Guaranty Corporation, discusses cryptocurrency in aviation owner trustee transactions.

    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 aviation? More importantly for us, what, if any, is the potential for use in aircraft owner trustee transactions?

    To begin, Blockchain, the technology that allowed for these virtual currencies to develop and is running everything behind the scenes, 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 owner trusts for the next blog.

    With this foundation, let’s answer the basics: cryptocurrency (with the first and most notable being Bitcoin) is a digital currency that is traded on a decentralized, encrypted database in the Cloud (blockchain), which is essentially owned by all its participants. The database records all transactions of the currency and is open to anyone who wishes to anonymously participate in the exchange.

    While the database allows a high level of transparency and accuracy in regard to the transaction of the currency, it does not prevent illicit activity of the currency. Furthermore, cryptocurrencies are subject to a high degree of exchange rate volatility. These are the two main issues aviation owner trustees must consider when weighing the benefits and risks of using cryptocurrency in their 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 accepting these currencies, it makes sense given the nature of their 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. They can also mitigate risk 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 aircraft registration transactions, does it make sense for aviation owner trustee companies to accept cryptocurrency for payment? The goal in owner trustee transactions is security and efficiency.  In this regard, the aircraft registration process and associated fees present some unique challenges.

    Aircraft registration transactions in the United States currently use US dollars. If a foreign national is registering their aircraft in trust, their currency is generally exchanged before sending funds so the entire transaction is handled with only one currency. If Bitcoin or a similar cryptocurrency were accepted by an owner trustee company, the responsibility for exchanging the currency into US dollars would be theirs, and the risk too.

    There have been a few noted cases of large asset transactions using cryptocurrency for payment, 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 registrations in trust could be enacted in a similar way, effectively mitigating exchange rate risk. However, lack of regulation and government integration (or acceptance) currently remain deterrents to security and efficiency in this type of transaction.

    Nonetheless, the United States and others are beginning to develop regulations regarding cryptocurrency transactions, increasing the odds that it will become more common in the future. In the meantime, however, it will remain a risky currency in a rapidly evolving legal environment. How and when any measures will be enforced is unknown.

    Since aviation owner trustee companies must consider all aspects of the industry, especially compliance and security, 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 radically streamline the aircraft registration process, and possibly open the door for the use of cryptocurrency.

    We’ll be discussing those possibilities in our next blog – “Blockchain in Aviation Owner Trustee Transactions: What is the Potential?”

    This article was originally published on Aircraft Guaranty Corporation's blog. 

  • Tracey Cheek posted an article
    Blockchain in Aviation Owner Trustee Transactions: What Is the Potential? see more

    Blockchain – the highly advanced, decentralized database technology behind every virtual currency you can think of, and that most of us don’t understand – has many companies in many industries making huge strides to be at the front of this digital revolution, including aviation. However, it isn’t in regard to the use of virtual currencies (or cryptocurrencies), like Bitcoin, Ethereum, and Ripple, among others, but the multitude of other applications for which blockchain technology can be used.

    We discussed virtual currencies and their possible use in the aviation industry, and specifically in aviation owner trustee transactions, in the previous blog: “Cryptocurrency in Aviation Owner Trustee Transactions: Is it a Viable Option?” This time the focus is purely on the technology behind it all, and what its potential use is in aviation owner trusts.

    To review a bit, blockchain has four main pillars, which include: a distributed ledger, a decentralized database, immutable records, and smart contracts (digital contracts of data agreed upon). This decentralized, encrypted database in the Cloud is shared by all its participants, open to all (anonymously if desired), with access to view each permanent and timestamped transaction or alteration but not retrospectively change. 

    For aviation owner trustee companies, and the large amount of data produced with every transaction, there is a big opportunity for blockchain technology to be applied and radically streamline the process, possibly opening the door for the use of cryptocurrency in the future. A relatively brief synopsis of key blockchain capabilities will hopefully help in understanding the potential benefits of digitizing and automating the aircraft owner trustee registration process and associated transactions. Increased accuracy and integrity are at the top of that list. 

    There are two main types of blockchain ledgers – open, in which participants are anonymous, or closed, in which participants are identified. Participants have confidence and trust in the accuracy of records because they have access to the same information, and consensus is required to add new inputs, or “blocks”, which are connected to those preceding them. Closed blockchains are also referred to as “permissioned” because certain parameters can be applied, allowing specific participants, and limiting functions like the ability to view, add to, or validate the ledger.

    There is a high level of confidence in closed blockchain databases because the records cannot be changed, and the database can limit access and functions, providing a more private transactional space. Either type can provide a way to carry out transparent, verifiable and secure transactions in real-time, but a closed blockchain database is more applicable to aircraft owner trusts, and even more so the use of “smart contracts” within it.

    Smart contracts, as previously referenced, are digital contracts agreed to by the parties involved. They are already used outside of blockchain technology, helping to efficiently authenticate and conclude agreements, but the increased ability for automation along with a distributed and neutral ledger can offer specific benefits in owner trustee transactions. Not only can certain permissions be applied to the database, but certain conditions can be applied to the contract as well. For instance, if a registration document is simply lacking a signature and that requirement is met, the document could then automatically be processed and filed. 

    Blockchain databases can make the transactions of an aircraft registration filing accessible to the parties involved. Examples of visible transactions can include digital offers, acceptance of terms, filing of documents, and more. Through applying conditions to the smart contract, blockchain databases can automate much of the process, reducing the risk of human error. Accordingly, the amount of time spent and cost incurred retrieving and circulating documents, along with the fees associated with processing transactions, would be greatly reduced. 

    However, blockchain technology is still largely unregulated. Without consensus among lawmakers as to use and enforceability, there could be many pan-jurisdictional issues. There is currently a lack of integration in the aviation industry as well, which could make it difficult to fully realize the benefits of the technology. 

    Aviation owner trustee companies must consider all aspects of the industry, especially security and compliance, so widespread regulation and integration of new technologies is important. However, unlike the use of cryptocurrency and its volatile nature, the use of blockchain technology could mean more security, and a competitive edge. The ability to quickly make informed decisions increases significantly with automated systems, potentially increasing efficiency and reducing costs.

    This article was originally published on Aircraft Guaranty Owner Trustee's blog.