The DeFi scenario is ever-growing, and we see new use cases everyday. Thought I'd share something that hit the news last week, but perhaps wasn't fully seen by the crypto community.
The traditional banking system has started to grasp the principles of blockchain adoption, and all the benefits it entails to its adopters. And I'm not talking about your obvious choice of offering crypto assets/coins to your customers - especially via a pricey bitcoin ETF. This time, it's in an also new market, that is voluntary in its origins: the trading of Carbon Credits.
A Carbon credit, according to the Investopedia definition, is defined as:
A permit that allows the company that holds it to emit a certain amount of carbon dioxide or other greenhouse gases. One credit permits the emission of a mass equal to one ton of carbon dioxide.
In essence, it is a non-fungible commodity that can be globally negotiated among the companies that produce them and those that require them to compensate for their emissions. It is a tool for incentivizing the reduction of greenhouse gases (GHG) emissions, as well as benefitting the companies that are more environmentally friendly.
In this way, a market incentive is readily available: those who produce carbon credits can sell said credits and convert this "greener company status" into additional revenues.
Some issues are present, though:
1 - Certifications
In order to be able to sell the produced carbon credits, how does a company assess the produced amount and proves to the buyer that he's getting the right amount? This is where a certifier comes in with what is called a Second Party Opinion. These certifications can be costly, and it is up to the company to judge whether the estimated revenues from selling credits will compensate the certification costs.
2 - Regulations
It is not every company that must adhere to compensate for its emissions, since the market is still mostly voluntary across the globe. However, with the increasing relevance of the ESG agenda, companies that fail to do so are usually frowned upon. Also, governments taking action into passing down legislations for the sector convert the market into a regulated one, albeit usually in a local scale.
3 - Trading Platforms
Nowadays, a producer can only sell his credits locally, if at all. It's only available for certain sectors, in certain parts of the world. Alternatively, some companies have started to bridge the participants globally. And in doing so in a young market, they also get to demand great fees for said service.
4 - Proof of Ownership
In traditional markets, how does a company prove its ownership of a non-fungible commodity? How can a buyer be sure that he isn't purchasing credits that were already sold to another company? With a lot of paperwork, and in a suboptimal manner. Well, that is, until blockchain came along.
It is in this context that four global banks have seen an opportunity for solving some of the issues reported above. On July 7th, Britain's Natwest Group, Canada's Canadian Imperial Bank of Commerce, Australia's National Australia Bank and Brazil's Itaú Unibanco have jointly announced a task force on the so called Project Carbon Initiative for the development of a platform that will "enable buyers to fully trace which projects the carbon credits have come from and act as a record of ownership of the credits", according to a joint statement (Reuters).
Well, that speaks blockchain all over it. Several crypto projects are readily available to harbor this initiative. And which one was chosen for such an endeavour? Ethereum, according to Yahoo Finance: "Pilot built on a private Ethereum platform developed with ConsenSys". For those unfamiliar, ConsenSys is a giant on the crypto sector, and is involved with many projects, like Metamask, as well as participating in creating many projects that raised capital from the public via ICOs.
This is huge, for carbon markets, for banks and even for the crypto world! It has the potential to occupy this lack of a global book of records of carbon transactions. Once created, it is to be expected that existing trades can migrate to this platform, as well as voluntary markets converting into regulated markets due to governmental interest. Only a blockchain operation can run globally without having to directly concern itself with governments, due to its independency.
This also brings additional participants to the crypto space. Any transactions on the Ethereum network will require gas fees and at the very minimum a bit of education regarding how it works. And we are not talking about your regular bitcoin or altcoins investors, nor banks, but people from traditional industries that can adhere to said platform, depending on its ease of use.
It is still unclear whether said project will have a native coin, or how the settlements will be processed. However, I believe this is further proof of the benefits of massive blockchain adoption. I'll be on the lookout for what comes next, and surely bullish on ETH!