Could aviation finance adopt blockchain?

Blockchain, the data technology underpinning the cryptocurrency bitcoin, has been gaining interest for its potential application in other industries, ranging from fin tech to real estate. Ishka examines its potential use in aviation finance, specifically for the transfer of title of aircraft assets

What is blockchain?
 

Blockchain is a type of distributed ledger that involves transactions being transmitted across a network of computers called nodes. Computers then solve complex algorithms to process and validate these transactions.

Each group of transactions creates a block and any new verified transaction is sequentially added to the block creating an immutable record. Each block forms part of a wider network that is updated every 10 minutes. To alter the block, or any data within it, without permission would require changes to the whole network and would take an extraordinary, and extremely unlikely, level of computing processing power.

In short blockchain technology allows firms and people to use a decentralised database to create private tamper-proof records. In real estate, which shares many similarities with aviation, several firms are exploring how they can use blockchain technology to help improve the quality of their records and deeds.

 

How could it help aviation?

 

Several governments have been actively exploring how they can use blockchain to improve the current land registrations and property title transfers to help avoid missing, or inaccurate records, and cut down on fraud.

Titles in land and real estate fall under two broad categories, either a Torren system under which the state, or a governing body, guarantees the authenticity of the claim, or else a deed based system which relies on a chain of title, also used in aviation, to assess the authenticity of the claim by examining the chain of historic ownership. Both methods of title records currently rely on paper; with the result there is a continuing risk of missing or inaccurate records, fraud and potential legal disputes. 

Blockchain can help both forms of title systems. By creating an incorruptible ledger it can help central registers cut down on costs of guaranteeing the quality of the records. On the flipside, it can also dramatically improve the reconciliation of chain of title queries by perfectly recording each stage of an asset’s ownership.  Aviation suffers from all the risks associated with paper records and anything that could reduce these risks would be welcome by aircraft and engine owners.

 

The promise of blockchain…

 

 At Ishka’s Aviation Finance Innovation Festival - held in Dublin’s Clontarf Castle in July- attendees considered how blockchain could be applied to aviation. “ It absolutely could and it absolutely will,” explained Paul Jebely, managing partner at Pillsbury based in Hong Kong, who presented and led the “Brain Box” session at the conference. “All in the group, which included a leasing company CEO, CFO and an engine OEM representatives agreed this was a good and viable idea. Further, it is something which at this time requires little effort to implement.  The major airframe and engine manufacturers could, and should, start putting new delivery titles on distributed ledger, now.”

“This is level 1 in terms of what the application of the current distributed ledger technology is, today. All it is basic title tracking. Somebody has to start it, and the most rational place for it to start is new equipment manufacturers. There is no good reason way they can’t lead the way, starting now.”

In the manufacturer’s defence, for all the benefits of blockchain there are several good reasons why they might be wary of switching from a proven, if faulty, mechanism of title transfer to a completely new database technology.

Sweden, Georgia, Honduras, Ghana and Chicago`s Cook County, are in the process of testing and developing blockchain for land registry. Sweden has completed a phase one proof of concept and is now undergoing a second phase using smart contracts. Cook County has completed an eight-month project with real estate tech start-up Velox.re to use blockchain for the transfer and tracking of property titles and other public records. Separately the Republic of Georgia has committed to use the bitcoin network to validate property-related government transactions.

 

…and the problems with blockchain

While some of these proof-of-concept land registry efforts appear encouraging, they are not yet a proven solution. Sweden has a third test phase planned for its blockchain experiment but it is likely to be 2019 before they see any transactions completed as they wrestle with how to deal with digital signatures.

Blockchain is also not without its risks. Bitcoin relies on users keeping a private key, a random number generated by an algorithm, but it is entirely possible for users to lose these keys or have them stolen. One analyst estimated that by 2015 nearly a $1 billion worth of bitcoins, ($950 million) had been either lost or stolen. “Any tampering with the aviation title ledger, even the most sophisticated imaginable, will be immediately evident, which is more than what we can say today,” retorts Jebely.

A separate concern is which specific blockchain technology would the aviation industry adopt? Aircraft titles are part of a global business but it is not inconceivable that the manufacturers may experiment with separate private blockchains. If an airline bought an aircraft they might, in theory, be forced to engage with two different private blockchains: one for the aircraft and a separate one for the engines. Aircraft investors could face having a series of competing private blockchains with similar but incompatible databases.

Ishka contacted one engine manufacturer who stated they are in the early stages of exploring the technology, but admitted there were many unknowns with blokchain while a major airframer stated that customers have not yet requested this service off them and that the legal infrastructure is not yet in place  to allow the use of blockchain for title transfer.

“Will it be legally binding in any jurisdiction at the moment? No, and that is not the point or the immediate goal, “ says Jebely, “ but it will, for one, immediately serve as supplemental evidence of the transfer of title, and the key point is that it will evolve from there - yet it needs to start somewhere. I personally also see this as a golden opportunity for the International Registry to further its relevance in the future by being the aviation market’s interface to an open, standardized, and enterprise-grade distributed ledger framework for the decentralized peer-to-peer blockchain network that I have no doubt will be a part of our business in the future.”

 

The Ishka View

Blockchain is an exciting technology and almost certainly represents the future for aviation but it still in its infancy. Real estate and land registry title transfer schemes in Chicago and Sweden have not really gone beyond the proof of concept stage and distributed ledger technology would still need to rely on incorporating existing legal structures with blockchain technology.

One concern for aviation, which deals with multimillion dollar assets, is how to deal with lost or stolen verification codes. As a separate study highlights bitcoin, which is the most advanced application of blockchain technology, does not provide any recourse for lost private keys. Stolen bitcoins are almost impossible to recover, as they are indistinguishable from legitimate transactions.

Moreover, it is not clear who would incur the cost of developing and maintaining a database for aviation. The obvious candidate could be the international registry but it is not clear if it would be willing to incur this cost.  Also there is no sole blockchain platform provider yet that airlines, or even competing OEMs would agree to use for the time being.

The potential for blockchain in aviation is promising, and the future will certainly include some form of smart contracts when purchasing or trading aircraft. Using a tamper-proof database that automatically records each transaction also has tremendous potential use within the parts industry which relies on rich historical records.  Ishka understands that at least one aviation records company is actively exploring the potential use of blockchain.  For the time being, until the technology, or the industry, is ready aircraft investors should accept that paper contracts are here to stay, at least for the immediate future.
 

Photo: https://www.flickr.com/photos/auszerdem/

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