Airlines transferring funds via blockchain? Turns out this is not a far-fetched, future vision. It is reality today thanks to a cryptocurrency known as the IATA Coin.
Launched and managed by IATA, the coin aims to deliver all the disintermediation benefits without the volatility such currencies are known for. A handful of airlines participate in the program today and IATA hopes to expand that number moving forward.
As a proof of concept the group took $1000 and moved it between airlines in four different countries through traditional bank transfer means. The process took a month and ate up nearly 20% of the capital. A similar effort with Bitcoin proved significantly faster, though the volatility of that currency resulted in a small loss of the principal capital as well (after showing signs of a small profit during part of the process). The airline community remains risk averse. That volatility proved unacceptable. Hence the launch of IATA Coin.
IATA Coin exists in a closed ecosystem and with a fixed exchange rate to fiat currency, currently the US dollar. This approach eliminates virtually all of the volatility challenges. Airlines buy in to the system and receive cryptocoins of a value equal to their fiat currency payment. From there the coins are fully fungible among participating members with zero transaction costs or currency conversion fees. IATA acts as the liquidity provider – the group is very clear to distinguish itself from a bank in this context – and guarantees the coin value. Airlines are free to convert the coins back into fiat currency at any time and the full value remains, regardless of the number of transactions it underwent.
Eric Leopold, Director Financial & Distribution Systems (FDS) Transformation, acknowledges that the effort today is more of a trial than a full-scale deployment, “We put it in our systems to test and it works for us right now. It still needs to scale up in performance but we expect that will come.” IATA uses the Ethereum as the backbone of the IATA Coin today and admits that it cannot deliver thousands of transactions per second. But, at least for now, it also does not need that level of performance.
IATA processed nearly $57 billion in inter-airline transactions in 2017. As that money moves in and out of the banks of its member countries bits of it erode in fees. Leopold wants to change that. “We’re already sitting on about half of the money in the industry. Part of that will be exchanged through IATA Coins which will be faster and easier than existing methods.” That IATA already processes such a significant portion of the interline funds helps its position with this effort immensely. And because IATA works for (and with) the airlines it can operate the network without adding transaction fees to the transfers.
Transaction and currency conversion fees remain a challenge as the money moves in and out of IATA Coins. The efficiency and cost saving benefits remain only while the money is inside the IATA environment. From that perspective any sort of transactional ledger would suffice to track the funds, so long as IATA vouches for them and the airlines continue to trust the organization. That IATA Coin is a cryptocurrency doesn’t really matter in that context.
But it is a cryptocurrency and a live proof of concept for the industry. It aims to solve a specific problem and does so with a functional and capable platform. The FDS group sees potential for small tweaks as the testing continues. Maybe a shift to a new blockchain such as Ethereum 2.0 for more efficient transaction processing, when that becomes available. Or maybe shifting the valuation from a USD peg to a new basket of currencies that could further reduce valuation volatility. But the IATA Coin is live today and really works. And that happened without the ICO nonsense.