Global Trade Finance and TRADA
This is a follow up to two previous articles that I published on Global Trade Finance, one focused generally on blockchain and one focused specifically on the XDC Network. This article will be an extension of those two, focusing on Trada, the new XRC20 security token on the XDC Network backed by trade finance assets .
Tradeteq officially announced TRADA, “the first ever fully regulated, trade finance-backed fungible security token” recently (Note that TRADA will be an XRC-20 token on the XDC Network). TRADA will be offered by a new entity called XDCTEQ AG, which has been approved by Liechtenstein Financial Market Authority as a wholly owned subsidiary of Tradeteq Limited. I wanted to take a little time and write up my thoughts on TRADA, how I think TRADA will function, and what I think TRADA means for the XDC Network. The following represents my own individual perspective as an XDC community member and does not reflect the official stance of XDC Foundation.
Trade finance fuels cross-border trade, and trade finance assets, while typically difficult to access, are seen as low risk investments. Quoting an article from February 2022 in Forbes, “Default rates for trade finance products from 2008–2018 averaged 0.36% for import letters of credit (LCs), 0.04% for export LCs, 0.73% for loans for import/export and 0.45% for performance guarantees, according to a 2019 report from the International Chamber of Commerce.”
The low risk involved with trade finance makes owning trade finance assets a great way to diversify investments. Historically the lack of liquidity in trade finance assets paired with the duration risk have made it difficult for non-institutional investors to gain access. Tradeteq aims to open this asset class up to retail investors, allowing retail to take advantage of the low-risk diversification that trade finance assets offer while addressing the liquidity and duration risk issues by issuing TRADA through a legal entity known as XDCTEQ.
XDCTEQ will fractionalize and tokenize pools of repackaged, securitized trade finance assets on the XDC Network and represent tranches of these pools with TRADA. Quoting page 13 of the XDCTEQ Whitepaper:
“By investing in TRADA Tokens, investors do not acquire the underlying trade assets, such as invoices, directly. Rather, the value of the tokens reflects the value of the underlying trade assets. TRADA Tokens digitize and fractionalize larger invoices and invoice portfolios and make them investable, according to the minimum size required by the issuance prospectus. Investors, thereby, have access to small tradable portions of these assets.”
TRADA is a security token, which means that TRADA can only be purchased by qualified investors. A qualified investor will go to XDCTEQ’s website which offers a easy-to-use dashboard and go through a KYC process, which is important because there are jurisdictional regulations around who can purchase security tokens. As per XDCTEQ’s Prospectus (Page 2) which states; the securities which have been issued and are offered to the public in Liechtenstein, Germany, Austria, Czech; Denmark, Luxemburg, Malta; the Netherlands and Ireland (together the “Public Offer Jurisdictions”).
Upon passing the KYC process, the qualified investor will either be able to purchase TRADA in XDC through linking their XDCPay Wallet to the Dashboard, or chose a different payment option as to buy with FIAT. During the Offer Period, the Issuer will offer and sell Trada Tokens at the subscription price, which is USD 1.00 per Trada Token (the “Subscription Price”), with a MINIMUM acquisition amount of 100 TRADA. No maximum is set.
Again, because TRADA is a security token XDCTEQ can’t just send TRADA to the users XDCPay account, the TRADA has to be custodied on behalf of the investor via an institutional grade custodian like Trustology.
Note that as of today there is no secondary market for TRADA. This means that the investor will just own TRADA until a maturity date at which time the TRADA will be redeemed for the original cost plus interest. More on this later.
If you take a look at the Key Information Document for TRADA you will see that XDCTEQ AG has approval to sell TRADA tokens, where each TRADA represents an interest in an up to $5,000,000 USD note. Assuming that Tradeteq is able to sell $5,000,000 USD worth of TRADA through XDCTEQ during this initial offering to qualified investors, XDCTEQ will then take the proceeds and use them to purchase trade finance assets, like invoices.
Let’s look at invoice factoring as an example. If an exporter is selling goods to an importer, but those goods have to be shipped internationally, the importer may not have to pay the invoice until after the goods have been received. However the exporter may prefer to get access to the money sooner so that they can use it to pay for production of a future order. One way the exporter can get access to money immediately is by selling the invoice to a factoring company at a discount in exchange for a lump sum of cash. The factoring company, who purchased the invoice at a discount will receive payment in full from the importer once the importer has received the goods. Invoice factoring allows the exporter to receive money sooner, and the factoring company to earn a yield by purchasing the invoice at a discount and receiving payment from the importer in full.
Tradeteq could serve as a factoring company and use the $5,000,000 USD capital XDCTEQ raised through the TRADA initial offering to purchase invoices at a discount. As those invoices are paid in full the difference between the discounted invoice and the full price invoice would be the yield that is passed on to TRADA holders. This may be an oversimplification of the process, but I think it paints a potential big picture.
Each TRADA token has a target return of 5% per annum, plus an “amount payable in XDC… equivalent to US$0.00125 per calendar quarter.” From the XDCTEQ whitepaper we can see that “Payment of interest on TRADA Tokens will be made to the respective wallet that holds the token.”. Looking at the Key Information Document we can see that “TRADA Tokens will mature on July 3rd, 2023 (Maturity Date)”, meaning that Tradeteq will be able to purchase and earn yield on trade finance assets for about one year.
Currently there is not a secondary market for TRADA tokens, but according to the XDCTEQ Whitepaper, “It is the intention of XDCTEQ to list the tokens at one or more specialized crypto exchanges… TRADA Tokens can be traded freely either over the counter (OTC) or via crypto exchanges once the tokens have been listed.” Payments will be made to the address that holds the TRADA tokens and these addresses must by KYC’d and whitelisted with XDCTEQ, Because TRADA is a security token.
The addition of a regulated security coin as a layer 2 XRC-20 token to the XDC Network is a very big deal. TRADA is technically the second iteration of Trade Finance on XDC Network, following the trade finance NFT’s offered by Tradeteq in fall of 2021. TRADA is the second step of many towards moving trade finance onto the blockchain. A secondary use case that TRADA serves is as a proof point to other institutions that this is really happening, trade finance is gaining real exposure to blockchain in a novel and useful way.
I like to compare blockchains to amusement parks. Different amusement parks have different rides and those rides will attract different types of people. Blockchains are similar, but instead of rides attracting people it is dApps. The more trade finance dApps that are built on the XDC Network the easier it becomes to attract more institutions from the trade finance space to come and build. This is an application of Metcalfe’s Law to blockchain utility, where the value of the network is tangibly related to the square of the number of nodes on the network. In our case, the value of the XDC Network is tangibly related to the square of the number of trade finance dApps on the XDC Network.
Long term the goal is to get as much trade finance on the XDC Network as possible. Today we cannot predict the exact role that the XDC token will play in these trade finance dApps, but I speculate that these dApps will become a huge source of demand for the XDC token, which will encourage the creation of a secondary ecosystem of lending/barrowing/pooling that will have a competitive advantage over DeFi on other chains simply because the XDC Network has a ride that no other blockchain amusement park has. This is step two of the marathon, but we are moving forward, and the cool thing about exponential growth is that it starts off gradually but takes off suddenly.
