In September, XDC Network and Tradeteq launched what they described as the world’s first trade finance-based NFT transaction with invoice finance company Accelerated Payments as the asset originator.
As a unique unit of data or token stored on the blockchain, a non-fungible token can be used to represent any assets, including trade finance assets. To ensure a secure migration of these assets from an off-chain product to an on-chain token, Tradeteq and XinFin partnered with a traditional off-chain asset custodian as well as a digital-asset custodian.
“A token-based, non-fungible financial instrument focuses on ownership and contract specifics, and transforms paper-based contracts typically held by relevant investors incorporating expensive legal frameworks/compartments with no version control – or dubious signature pages – into a cloud-based digital blockchain format that is verifiable, tamper proof, shareable and cost effective,” says Ian Duffy, chief executive of Accelerated Payments.
An NFT can be embedded into a smart contract, giving that transaction a specific authentication or proof of being genuine, observes Rob Gaskell, founder and partner at Appold, an advisory and investment company in the digital assets sector.
“Many people think that NFTs are just about digital art, but this is certainly not the case,” he says. “Digital art has just happened to make use of NFTs, and the coverage of digital works of art selling for dizzying prices has dwarfed the true technology story.”
Specifics
At first glance, NFTs appear to replicate the functionality of smart contracts, but they are separate functionalities of the blockchain, says Alisa DiCaprio, head of trade at enterprise blockchain technology vendor R3.
“A smart contract is a digital contract which executes once specified conditions are met,” she says. “By contrast, an NFT is a specific type of tokenization. Once a trade-finance document or obligation has been tokenized, it can be referred to as an NFT. In the case of trade-finance asset distribution, both smart contracts and tokenization would work together to facilitate this activity.”
Trade finance is a practical implementation of NFTs agrees DiCaprio.
“Marco Polo is one platform which already tokenises payment obligations and invoices,” she says. “Storing ownership data on blockchain reduces the costs and complications of paperwork that is otherwise required to verify the process.”
NFTs will evolve into fungible instruments as the market matures
Ian Duffy, Accelerated Payments
According to Jose Neif, head of BCB Labs at digital financial services group BCB Group, NFTs offer the opportunity to create mechanisms for value transfer in the trade-finance sector that are entirely bespoke. “For example, an individual NFT can be created that is tied to, say, one unique cargo crate, or one individual consignment of wine,” he says. “This allows for the creation of a perfect – and immutable – means of transferring ownership at different points of the delivery of an asset in a way that the use of smart contracts cannot achieve.”
This is because smart contracts are better suited for fungible assets or commodities, such as one barrel of oil out of a million identical barrels (where it does not matter whether a buyer gains ownership of a specific barrel), rather than one unique consignment, where ownership of that specific consignment is important.
Transfer of rights
Thanks to smart contracts, the market has already implemented the automatic exchange of supply registers. Transferring a token is equivalent to transferring the rights to the assets it contains – for example, it would be possible to digitize a monetary claim for a sale or a delivery and sell it to a wide range of investors.
“The advantages include the emergence of a new secondary market with a new source of funds, leading to lower cost of financing and higher financing acceptance rates for small and medium-sized enterprises who are rejected by banks,” says Andrei Maklin, chief executive of blockchain trade-finance platform Factorin.
The NFT could also be used to record the transfer of rights to a particular product. For example, commodity and chain of custody tracking (certificates of origin) will enable companies to confirm compliance with environmental, social and governance standards and develop green investments.
“NFTs will evolve into fungible instruments as the market matures,” says Duffy. “Key benefits will be lower transaction costs, greater investor accessibility, and increased repeatability as it will be easy to replicate and repeat funding contracts.”
