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05 July 2017
A key component which promotes growth in the aviation industry is the availability of capital to finance aircraft transactions. At present, aircraft are financed mainly through secured and unsecured loans from commercial banks. Airline operators also obtain operating leases from aircraft and engine manufacturers, as well as secured bonds from banks and other financial institutions. Although these methods are acceptable, they have some notable flaws (eg, the bureaucracy involved in dealing with banks and the huge charges imposed on loans). This update explores the use of digital currency in the aviation sector and the possible benefits for airlines that choose to accept digital currency for financing transactions in the sector.
An option that could be explored for financing in the aviation sector is the use of crytpocurrency. Cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and to verify the transfer of funds, independently of a central bank. The first global digital currency was Bitcoin, which was launched in 2008. This innovative but disruptive medium of exchange quickly gained a cult user network and began to grow rapidly. The use of cryptocurrency as a means of trade has become increasingly widespread and could be appropriate for financing in the aviation sector.
Although digital currency has not yet reached a level of acceptance required to finance projects in terms of the outright sale of aircraft, operating, leasing and sale and leasebacks or other forms of financing, there are some benefits that the use of digital currency and blockchain technology can offer airlines and airline users.
Blockchain is a type of distributed ledger or decentralised database that keeps records of digital transactions. Regarding the conversion of foreign currency, with blockchain, travellers need not carry cash as they can use a digital wallet. Payments using the currency are free from exchange rates, unusable automated teller machine cards and cross-border fees, allowing travellers to spend their money on other travel amenities.
Several airlines have led the charge in accepting Bitcoin as travellers push for the travel industry to embrace digital currencies. Third parties are also leveraging digital currency with frequent-flyer miles by offering travellers the instant conversion of unwanted miles to digital currency units. Similarly, online travel agents (eg, CheapAir and Expedia) which have adopted digital currency payments, can capture those travellers' business via new bookings.
The evolution of digital currency conversions allows industry players to leverage efficiency and improve consumer options that leads to revenue. Further, offering travellers the option to pay with non-traditional currency means issues surrounding exchange rates and currency conversion while travelling abroad are removed. In recent years, industry providers such as AirBaltic are increasingly accepting digital currencies. In addition, a Universal Air Travel Plan partnership with payment processor Bitnet is now ready to enable bitcoin payments for more than 250 international air travel providers. Using a digital currency can mean that customers have one less thing to stress about when travelling.
The Harvard Business Review reports that this technology can potentially store identification and travel documents, including passports, thereby making travelling even simpler.(1) Based on consumer feedback, now is a good time to begin to prioritise digital currency in future-minded strategies.
In general, blockchain technology and Bitcoin have been received positively by the public for a number of reasons, including those outlined below.
Freedom in payment
Bitcoin promotes the instant transfer of money anywhere in the world at any given time. Customers do not have to worry about crossing borders, rescheduling payments around bank holidays or any other issues associated with traditional means of transferring money. Customers also have more control of their money with Bitcoin as there is no central authority in the Bitcoin network.
Control and security
Bitcoin offers a safe network by allowing users to be in control of their transactions. Merchants cannot charge extra fees independently, they must talk with the consumer before adding any charges, which gives the consumer greater control. Payments in bitcoin are more flexible as they can be made and finalised without personal information being tied to a transaction. Due to the fact that personal information is kept hidden, Bitcoin protects against identity theft. Bitcoin can also be digitally backed up and encrypted to ensure the safety of a consumer's money.
With blockchain, all finalised transactions are available for everyone to see, while personal information is kept hidden. A customer's public address is visible, but their personal information is not tied to this. At any time, anyone can verify transactions in the bitcoin blockchain. In addition, Bitcoin protocol cannot be manipulated by any person, organisation or government, as bitcoin is cryptographically secure.
At present there are either no fees or very low fees when making bitcoin payments. With transactions, users can include fees in order to process transactions faster; the higher the fee, the more priority it gets within the network and the quicker it gets processed. Digital currency exchanges help merchants process transactions by converting bitcoins into fiat currency. These services generally have lower fees than credit cards and companies such as PayPal.
Less risk for merchants
Due to the fact that bitcoin transactions cannot be reversed, do not carry personal information and are secure, merchants are protected from potential losses as a result of fraud. When using bitcoin, merchants are able to do business in locations where crime rates and fraud rates may be high. This is because there are less risks when using bitcoin due to its public ledger, otherwise known as a blockchain.
Digital currency remains a relatively new concept and raises a lot of issues that need to be addressed. Most countries are still developing digital currency regulation and therefore the medium is used primarily for trade in consumer goods and services.
Countries such as the United States, India and those in the European Union are now developing regulation for transactions using cryptocurrency. In certain countries, such as Israel, some regulation has already been passed. The Israeli Tax Authority (ITA) put forward draft tax guidelines to treat Bitcoin as a virtual currency for taxation purposes. This means that Bitcoin will be considered as an asset and can be taxed using ordinary fixed tax rates. The Central Bank of Israel does not view bitcoin as a currency or a foreign currency when it comes to taxation. This means that revenue from its sale would be considered capital income for individuals and companies, subject to Israel's 25% capital gains tax. Had the ITA recognised bitcoin as a currency, individuals would not have been taxed on the exchange-rate differentials in its trade. This development shows a general lack of interest in promoting digital currency.
In addition, the Central Bank of Nigeria released a circular in January, which banned all banks and other financial institutions from making transactions in virtual currencies.(2) The director of the Financial Policy and Regulation Department of the bank, Kelvin Amugo, who announced the ban, argued that the ban was necessitated by money laundering and terrorism financing risks inherent in the operation of virtual currencies.
Largely unregulated and volatile exchange rates
Given the recent volatility of Bitcoin, it would not be advisable to convert cash to digital currency. At the moment, the currency does not represent value for money considering the current exchange rate is about $2500 to 1 bitcoin.
Lack of awareness
Many people remain unaware of digital currencies. This means that people would need to be educated about the digital currency system to be able to understand how it can be useful. Although some businesses accept bitcoins, the list of companies that use it is relatively small compared to physical currencies.
Risk and volatility
Bitcoin is a volatile currency mainly due to the fact that there is a limited amount of coins and the demand for them is constantly increasing. However, it is expected that eventually this volatility will begin to decrease. As more businesses, media groups and trading centres begin to accept bitcoins, the currency will stabilise.
At present, Bitcoin's price increases daily mainly due to the lack of regulation and the scarcity of bitcoins due to limited acceptance.
Although there are a few disadvantages associated with using digital currency as a means of trade, it poses advantages in eliminating the numerous costs imposed by intermediaries. Further, it is a secure form of currency as each user is in control of their money and there is less economic risk associated with trading with digital currencies.
Digital currencies are becoming the preferred choice for air travellers as the need to be able to travel without cash is becoming more important, as well as the fact that digital currencies avoid exorbitant exchange rates.
Airlines such as Airbaltic in Latvia, have begun accepting digital currency as a means of payment, exploiting its benefits for both the customer and the airline. Although the currency is currently being used for trading in consumer goods and services, with its expected growth, it is anticipated that blockchain technology will be able to denote physical property. A fraction of a bitcoin would publicly identify the owner of that property and could include a record of past ownership and other history about the property. This would make the transfer of property, including aircraft, less cumbersome and could also be a more efficient and cost-effective way for individuals to directly transfer property without relying on a broker.
For further information please contact Craig Azinge at George Etomi & Partners by telephone (+234 1 462 1660) or email (firstname.lastname@example.org). The George Etomi & Partners website can be accessed at www.geplaw.com.
(1) Hbr.org, (2014), "Bitcoin's Promise Goes Far Beyond Payments" [accessed May 20 2017].
(2) Cbn.gov.ng, (2017), "Circular To Banks And Other Financial Institutions On Virtual Currency Operations In Nigeria" [accessed May 25 2017].
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