The manual doesn't say anything about it being tied to modulation – it references that it smooths out the delay when there are changes to the delay.
Here's what the manual says "Xnob/Crossfade: When delays change, TimeFactor performs a crossfade function to prevent abrupt changes that could result in glitching or clicking. Xnob sets the speed of the crossfade. Small values result in fast crossfades, larger values more gradual crossfades. Xnob sets the crossfade rate (XFADE) from 2 ms to 200 ms. "
So, I guess my question is still, when would the crossfade actually be used / needed?