Upstart Crypto Carbon Credits Platform Raises $2B to Tap into ‘Internet of Energy’

Carbon offset credits, meet crypto.

Digital asset-focused exchange and carbon credit liquidity provider 1GCX and T3 Trading, a proprietary trading company investing in the space, have entered into an agreement, raising a whopping $2 billion and setting up a $100 million liquidity pool to facilitate carbon credit transactions.

The move, made possible by the unprecedented fundraising for tokenized carbon credits, has been driven by the growing interest of institutional investors in the securities, executives from the firms told Blockworks exclusively. Such securities – proponents say – facilitate the ability for institutional investors, including pension plans and endowments, to put their money where their mouth is when it comes to deriving measurable alpha from ESG investment products.

As an asset class, however, fractional carbon credits carry a lot of risk: The financial instruments are quite volatile, and the verdict is still out, according to critics, on how much good they do in stopping the rampant spread of global warming. And that’s not to mention a conspicuous absence of liquidity, considering that offsets trade more like illiquid structured products than anything else in digital assets, despite coming with far steeper ups and downs in terms of price.

Enter 1GCX, which provides the infrastructure for the ambitious new trading platform.

T3 moves millions of dollars of capital around between a number of major crypto exchanges and also puts money to work in commodity markets. Both firms additionally specialize in equity derivatives and have rolled out a number of related synthetic trading pairs linking commodities with cryptocurrencies. The exact terms of the agreement were not disclosed.

The idea is to set up a series of liquidity pools and associated over-the-counter (OTC) market-making activities that reduce the spread of such transactions in an effort to attract institutions into the markets, including entities from traditional finance accustomed to carbon. assets but still learning when it comes to digital assets.

RA Wilson, 1GCX’s chief technology officer, told Blockworks that the company has been doing due diligence on the feasibility — and costs of quantitatively driven execution — on the initiative for several years. It was particularly driven after finding that there were virtually no other market players approaching both retail and accredited investors when it comes to pairing digital assets with real commodities, plus derivatives.

Even now, according to Wilson, the liquidity consists mostly of bulge-bracket banks snapping up large quantities of the carbon securities at discounted prices, then acting as an unofficial token producer for counterparty trading firms. The banks probably capture a handsome spread for doing so, given that such trades are essentially de facto OTC in nature.

The case for tokenization

Wilson, who has personally invested in crypto since 2011, said he noticed five years ago that while carbon credits — promoted by governments, including the United States, and with tax incentives, in select cases — took off, companies saw the products as more of a good bet, not the “currency” the instruments were designed to be.

“Business development starts with building the right marketplace, making sure there’s liquidity, of higher quality offsets and nature-based solutions,” Wilson said. “Deriving financial assets from land-based projects can actually benefit us globally.”

1GCX is also in the relatively early stages of developing its own blockchain, with a token that draws a parallel between “proof-of-authority” and algorithmic “computational proof-of-authority.”

Proof-of-authority is a method of signing transactions that incorporates elements of proof-of-stake consensus mechanisms, but relies on validators proving their identity or reputation. It is usually found in private, centralized blockchains, rather than public permissionless systems.

The end goal: to build a digital asset-based market powered by the burgeoning “green web mixed with the internet of energy.”

The first-of-its-kind setup would ideally increase the transparency of price discovery and real-world utility—when it comes to combating climate change—two common thorns for institutional investors who have until now had to rely on Wall Street and the commodity hub of Chicago to trade illiquid carbon credits denominated via the unclear pricing of market makers.

Traders using 1GCX already have access to a number of digital assets, such as bitcoin, ether, AVAX and SOL.

There is already a “huge demand” from institutions hungry for carbon offset credits, one that is growing every year, according to Wilson. The launch of the trading platform should increase liquidity, transparency and fair pricing – while reducing fraud – by adding crypto to the mix, he said.

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