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?”