Introducing Crypto Credit Enhancement to Trade Finance Industry
As the potential of cryptocurrencies and blockchain technology is being realized worldwide, many companies are investing to incorporate the technology within their systems. The introduction of cryptocurrencies is currently challenging their paper counterparts in certain aspects. However, at this moment, one can expect the two to coexist. Unlike the market of fiat currencies, the cryptocurrency market is extremely volatile and it continues to be a deterring factor for businesses to directly adopt the virtual currency system. Now, a business model has to be constructed that will incorporate the positives of the cryptocurrency world to provide solutions to the mainstream economic issues.
Versara Trade was conceptualized in 2017 with the idea of developing such a business model. In fact, Versara Trade is believed to be the first one providing a solution that will bridge the gap between the trade finance industry and cryptocurrency world by introducing crypto credit enhancement. According to the white paper of Versara Trade, it will benefit the small and medium-sized businesses by “leveraging crypto-assets to enhance credit and mitigate risk for credit providers.” The system has been designed to work hand in hand with the traditional system of lending.
Problems faced currently by the trade finance industry:
Nearly 80% of the global trade finance industry is dependent on credit insurance to maintain a healthy trading system. The problem lies in finding institutions that are willing to lend a hand by providing capital to the traders. Many traditional institutions do not want to offer credit to the economically disadvantaged small and medium enterprises because there is always the risk that they will be unable to pay off the loan. But, this hesitation of the financial institutions actually becomes a deterrent to the growth of these small and medium enterprises. As the white paper of Versara Trade relays, “The global trade finance availability gap is estimated at $1.5 trillion USD and 62% of this gap originates from the Asia Pacific and Americas regions. The gap is most prevalent with SMEs, who face the greatest hurdles in accessing financing on affordable terms, in both developed and developing countries.”
The SMEs from developing countries have to face greater hurdles due to comparatively smaller banking sectors and institutions also are reluctant to approach and lend a line of credit.
Crypto Fin-tech revolution is the solution
Cryptocurrencies have the capability to solve these major issues. The blockchain technology endorsing transparency, privacy and security has made its way towards many institutions and even some governments. Many traditional investors are also looking forward to the crypto fin-tech space.
Versara Trade incorporates blockchain technology to advance the trade finance markets by offering a credit enhancement system. The platform will be able to help numerous small and medium-sized enterprises as well as individuals. Versara plans to improve the system of traditional asset-based lending (ABL) where cryptocurrency would be kept as an extra collateral (crypto credit enhancement). Versara Trade ensures that its model will effectively make trade finance accessible to the retail investor.
Versara Trade offers security from both sides that will ensure that both the borrower and lender are not deprived. Pool-specific credit enhancement acts as a defense mechanism as a pool of cryptocurrencies is created using funds from cryptocurrency guarantors. In case of any default, the loan is repaid by using this fund. Platform-wide credit enhancement is another way of protecting the lenders. It is quite similar to the pool-specific credit enhancement but, in this case, the defaults are paid off by taking funds from a platform-wide cross-collateral pool. However, this mechanism is only applied if there is a lack of funds in the over-collateralized pool of cryptocurrencies.
I reached to the CEO of Versara, Sean Liu, who mentioned about their services,
“Our core business, which is also what distinguishes Versara Trade from other trade finance platforms, is our Crypto Credit Enhancement service. It excited me the most because it’s absolutely the first of its kind. Crypto Credit Enhancement allows crypto investors use their crypto assets (including but not limited to cryptocurrencies) as additional collateral to provide third-party guarantee to the underlying loans. Versara platform applies Crypto Credit Enhancement to the invoice financing business, but it can also be applied to many other type of financing deals.
I came up with this idea because I realized that cryptocurrencies have become a new type of asset and crypto investors are a new type of investors that don’t exist in the traditional financial market. Their unique characteristics, if applied in a suitable way, can actually make the financial market more efficient and solve those problems that can’t be solved before. Then after thinking through a dozen of methods, I picked credit enhancement to utilize this new type of asset.”
The seller of goods will deal with only fiat currencies through this platform. They will have quick access to financing and at a comparatively low-interest rate. “Their loan funding will be a portion (up to 95%) of their entire invoice receivable.” The buyer of goods will be awarded Versara Token (VXR) as a result of verification and authentication of the invoice and providing proof of shipment. The crypto guarantors will also be rewarded with VRX tokens as they contribute to the fund pools with cryptocurrencies. The platform allows them to deal only with cryptocurrencies. The fiat lenders, on the other hand, will deal with only fiat currencies. In case of a default, the fiat lenders will be paid by using fiat currency only. It will first be converted from the cryptocurrencies. Thus, Versara Trade combines blockchain technology with the fiat industry such as to effectively reduce credit risks and give access to SMEs to financial capital.
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