‘FutureFi’: Crypto transforms the green finance universe

How’s your Green Economy IQ? Are you up with crypto, down with green bonds? What is the difference between sustainable finance, ESG investing and impact investing? And how is your Web3, blockchain and AI savvy?

Did the above tests pass? So what about DeFi, NFTs, DAOs, khaki bonds, dual materiality, green shorting, impact insurance, stablecoins and smart contracts?

You can look up the definitions of these and other terms that make up the language of green finance – and you should do so quickly, if you haven’t already. As I heard more than once at GreenBiz’s recent GreenFin 22 conference, this encyclopedia refers to practices, products and strategies in play today – “FutureFi” is happening right now, not at some distant time.

The main driver is cryptocurrency, digital currency that uses cryptography such as blockchain to manage transactions. “Crypto is money built for the internet,” was the mantra of the speakers at “The Future of Finance” panel I attended. “It’s the new baseline for transforming value,” asserted moderator David Bennell, chief sustainability officer at Hyphen Global AG. This is the next generation of value for managing assets, whether stored or transferred: a digital token economy.

The premise is that digitization makes investment more efficient – ​​more accessible to more people, with more transparency via blockchain accounting. Just as the rewiring of the internet, a transformation called Web3, aims to decentralize monopoly controls from Big Tech, so is digital finance. This results in decentralized finance, or DeFi, an umbrella term for financial products and practices developed for use with the blockchain, including many for green finance investment. They include items such as tokenized carbon credits, non-fungible tokens (NFTs) and stablecoins.

DeFi also produces decentralized autonomous organizations (DAOs), which guide allocations through smart contracts executed by artificial intelligence algorithms. An example given by Jamie Chapman, Principal of ESG for Superlunar, was Big Green, a non-profit organization that was originally a school garden project but, under COVID restrictions, turned into a DAO that democratizes their grants, thereby disrupting traditional philanthropy. Big Green claims to be the first nonprofit-led, philanthropic DAO.

The main argument underlying the logic of DeFi is resilience through a widely distributed system. Put another way, it benefits from the wisdom of crowds rather than the guidance of a small, concentrated group of traditional financial professionals (such as those who brought us the global financial crisis of 2008-09). The qualities of increased transparency and data-driven digitization should particularly enhance green investors’ ability to manage risk and volatility while maximizing potential benefits.

This paradigm-shifting investment disruption is well under way.

Sounds good – but there are problems that cast a bit of a shadow on the bright picture of this futuristic financial landscape. Digitization, for example, depends on data – and judging by current concerns about the inconsistency, incompleteness and non-comparability of ESG data, this is a major challenge.

The biggest problem may be the crypto itself. Created as a way to handle money outside of traditional banking systems, it has its own issues with transparency and accuracy. Recent crypto headlines are full of bankruptcies, fines, hacks, fraud, insider trading, and opaque practices within the crypto world. The crypto crash has resulted in a $2 trillion drop in valuation across the sector since January. Crypto companies have lent to other crypto platforms and taken advantage of bullish purchases with insufficient collateral. Some apparently paid early investors with incoming revenue from new indictments, a model similar to a classic Ponzi scheme. This is an industry ripe for regulation, and it appears imminent, with the US Securities and Exchange Commission bringing criminal charges against fraudulent crypto practices.

DeFi – decentralized finance – gets a large part of the blame for the current meltdown. Forced selling by retail crypto depositors who invested for returns are the culprits, Martin Green, CEO of quant trading firm Cambrian Asset Management, told CNBC. “2020 and beyond saw a huge build-up of return-based DeFi and crypto ‘shadow banks.’ and other forced sellers due to margin requirements.”

There are also external issues: Inflation, bearish market conditions and a looming possible recession are macroeconomic dampeners on innovative products and practices.

Then there are skyrocketing energy prices, and the fact that crypto mining is an energy hog of enormous proportions. The tens of thousands of specialized computers that create cryptocurrency and manage trades run 24/7. Bitcoin, the world’s largest, uses an estimated 150 terawatts of electricity annually – more than Argentina, a country of 45 million. And that energy production is also emission-heavy, emitting 65 megatonnes of carbon dioxide, compared to the emissions to Greece. In Texas alone, crypto miners could increase energy demand by the middle of next year by 6 gigawatts, the equivalent of adding another Houston to the grid.

It’s important to remember that this brave new world is a work in progress, and it’s early days. Many of the above issues—transparency, volatility, data accuracy, and regulation (or the lack thereof)—also confound traditional finance as a matter of conducting any investment business. And work is well underway to find solutions to the above problems. For example, the ongoing consolidation and harmonization of ESG data by the Values ​​Reporting Foundation aims to answer questions about the data needed for digitized investing to function properly.

DevvESG, a company represented on the panel, was defined as “a verifiable source of truth for ESG data and tokens” by Belem Tamayo, director of international partnerships for its parent company, Devvio. Its approach, called the AIR methodology, offers ESG “better” baseline analysis, guidance, tools and data through an open platform, according to the company’s marketing materials.

Reliable data, open platforms, democratization – these are characteristics that are particularly suitable for green financial values ​​across the various products and goals. If crypto is to serve as the foundational currency of FutureFi, the issues must be resolved so that these aspects can effectively drive innovation so that the many varieties of green investment products and services based on crypto can flourish to their full potential.

Here’s the thing: This paradigm-shifting investment disruption is well under way. The enthusiasm, smarts and drive to push it forward by a young generation of financiers that I saw at GreenFin 22 gave a good indication of what will drive its ultimate success. I have no doubt that the speed bumps in its development phase will be smoothed out. Prepare for a learning curve as you catch up with FutureFi, which is now underway.