Blockchain can have a green future independent of crypto
This month may not seem like the perfect moment for an institution like Goldman Sachs to champion the benefits of “blockchain” or “tokenization.” After all, these buzz words first became known in the cryptocurrency sector, which has lost two-thirds of its value over the past year. And the recent implosion of Sam Bankman-Fried’s FTX empire is likely to cause many traditional financiers to shy away from digital assets – if they don’t deride them as scams.
But as green activists, politicians and scientists gathered at COP27 this month, Rosie Hampson, a managing director at Goldman Sachs, spoke happily of both. In recent months, the Wall Street bank has teamed up with the Hong Kong Monetary Authority, the Bank for International Settlements and other financial institutions to launch a capital markets initiative known as “Genesis” (a name it unfortunately shares with the struggling cryptobroker). This Genesis aims to use blockchain and digital tokenization to help investors who buy climate-related bonds track the associated carbon credits in real time.
“[With] At Genesis, we are thinking about how you can use blockchain, smart contract technology and IoT devices to support green bond contracts,” Hampson told a COP side event. She noted that this could change the process from “book building all the way to primary issuance, asset servicing and . . . the secondary market component.”
Or as Bénédicte Nolens, from BIS, repeated in a recent podcast: “It is actually difficult to sell a green bond [today]. But if you can attach future carbon offsets [with tokenisation] then it becomes much more attractive for the end investor.”
This did not cause a splash at the COP. No surprise, perhaps. Many green activists hate the whole concept of blockchain technologies, since early iterations of this gobbled up energy. And the kind of young(ish) anti-establishment evangelists who have rushed into cryptocurrencies in recent years generally dislike the idea of central bank involvement.
But investors should take note. Because while Genesis is still just a pilot, it’s symbolic of a much larger point: While the crypto collapse has left investors reeling, it hasn’t stopped experiments with blockchain and tokenization.
Moreover, these are now reaching into some unexpected places, with increasing government support. The World Bank is currently developing a carbon credit registry tool that uses a blockchain system called Chia. And in ordinary central banking operations, tests are ongoing for wholesale (ie bank-to-bank) central bank digital currencies.
The HKMA, for example, is currently working with the People’s Bank of China and other central banks on a so-called mBridge project to enable them to exchange assets instantly. In Europe, Banque de France and the Swiss National Bank have unveiled Project Jura, a foreign exchange CBDC pilot.
And while these initiatives are still only pilots, they represent “a completely new architecture,” as Ousmène Mandeng, an Accenture consultant, recently told a meeting of the Euro 50 group in Washington. Or as Adrian Tobias from the IMF reiterated: “The most important things we have gotten from crypto are the ideas of tokenization, cryptography and distributed ledgers. They are very important technologies and there is a lot of experimentation going on.”
Unsurprisingly, the players running these experiments are keen to distance themselves from scandals such as the FTX implosion by emphasizing that they operate with extensive establishment oversight. They also stress that they’re trying to deploy these technologies to solve real-world problems — rather than just using them for their own sake.
The Genesis initiative, for example, is trying to solve the problem that today the carbon credit market is so fragmented and opaque that it is difficult for investors to track potential greenwashing. While Chinese issuers have sold $300 billion worth of green bonds, transparency around this is very low.
But by using a coordinated distributed ledger (i.e. blockchain), BIS and Goldman Sachs say it would be possible to eliminate double counting and verify the carbon credits at source. Likewise, digital tokenization should make it possible to simplify bond distribution and draw retail investors into the market for the first time, by dividing bonds into small fractions. Or so the argument goes.
Can this be done without digital asset technologies? Maybe. Banks could theoretically sell fractions of green bonds using existing processes. They may also be able to create a single computerized global ledger of carbon credits if they cooperate with each other and the public sector.
But the hard truth is that these sensible initiatives are not in place right now, while just the advent of cryptocurrency is triggering a re-evaluation of existing practices among legacy players as well as digital evangelists. And this could end up providing benefits, even if the blockchain itself is never adopted on a large scale.
This will not make mainstream investors less suspicious of crypto. But it illustrates a larger theme: When disruptive technologies have appeared in the past, whether it’s the railroad or the Internet, it’s not always the first-order consequences that matter. It is still too early to assess whether digital assets can change the world – or make it green.
