Response to Verra's Comments on Crypto Instruments and Tokens

25. Mai 2022

Since October of 2021, over 25 million tonnes of carbon have been tokenized, brought onto the Polygon blockchain and integrated with new demand and use-cases for carbon. KlimaDAO has highlighted the technological benefits of tokenization and blockchain, including the following:

• Data availability and transparency in a way that has simply not existed in traditional financial systems, let alone in the traditional carbon market.
• Reduced market fragmentation.
• Automated Market Maker (AMM) applications for trading assets.

Verra’s Statement

On May 25th, 2022, Verra, the largest carbon standard by number of credits issued, released a statement elaborating their position on how carbon credit tokenization should take place. Namely, they stated the following:

Verra will, effective immediately, prohibit the practice of creating instruments or tokens based on retired credits, on the basis that the act of retirement is widely understood to refer to the consumption of the credit’s environmental benefit. [...] Instead, Verra intends to explore the possibility of “immobilizing” credits in accounts in the Verra Registry so that they can be tokenized with the transparency and traceability that market participants demand, provided that this can be done in a way that prevents fraud and upholds environmental integrity.

KlimaDAO understands that this change in position from November’s statement on crypto market activities comes in response to ongoing discussions about how to best integrate the carbon market with emerging blockchain use-cases. Whilst it is our understanding that no sanctions will be placed on carbon credits that have already been bridged onto the blockchain, the move by Verra to formally open up discussions on credible pathways for carbon credit tokenization is considered as a broadly positive move forward for the Web3 carbon space.

However, KlimaDAO welcomes clarifications from Verra on today’s statement. To-date there has been a significant amount of innovation and growth in the on-chain carbon market, and with no clear way forward for the primary method of tokenizing carbon credits (i.e. using a 1-way bridge) or any clarity around the consultation process or its timelines, it creates considerable uncertainty for this growth area of the market. Given Verra’s role as a Standard Body, more forewarning and developed thinking prior to unilateral decisions that have an impact on the market and those who work in the space would be welcomed by the Web3 space.

In addition, ‘immobilizing’ credits off-chain when they are bridged presents an elegant solution to the double-spend problem. However, it is not clear how Verra intends to implement this nor if this will also allow a 2-way function, wherein credits can be moved onto the blockchain and off again, if a user so desires. KlimaDAO is aware of a number of 2-way bridging entities that have been in discussions with Verra and looks forward to further clarification from them on how this mechanism will work in practice. Importantly, the MCO2 token has the capability to maintain ‘live’ credits on Verra which have not been retired yet off-chain. MOSS utilizes a novel accounting system with 3rd party auditing to ensure that tokens on chain are always backed one to one with credits off-chain. We expect this system to continue business as usual while Verra moves forward with their public consultation on this issue.

Collaboration - or a lack thereof

Unfortunately, Verra has done little to engage with the emerging on-chain carbon market, as evident by the frustration of many working in this space. Though we have yet to see how Verra will enforce a ‘prohibition on tokenizing credits utilizing retired carbon’ any action as such will effectively drown an emerging and vibrant carbon market ecosystem. ICROA’s response to developments in the on-chain carbon market did not cite any specific loss in environmental integrity from bridging credits in the way currently undertaken. Indeed, many companies and individuals have already utilized on-chain carbon for their offsetting goals: thus far, over 360,000 tonnes of carbon have been offset on-chain.

Additionally, Verra’s unilateral action has not offered any clear next steps on how players in this space should bridge their carbon onto the blockchain. Nor, to our knowledge, did they reach out to any players in this space to speak with them about this before they released their statement. This ‘closed doors’ approach to development is quite anathema to the Web3 ethos of transparency, and is clearly a thorn between both sides of this market.

While the industry awaits further clarity from Verra, we will continue to work with our constellation of partners to further develop the on-chain carbon market. The beauty of DeFi is that anyone can build novel applications and integration with existing platforms. On-chain carbon is here to stay, and will continue to serve its purpose as both an offsetting instrument and as an environmental asset for use within the blockchain world.

Looking ahead

Beyond Verra, there are a number of carbon standards which also have the capacity to be brought on-chain. Indeed, based on the past few months activity, it seems there are a plethora of blockchain-enabled carbon markets which have emerged utilizing a variety of internationally recognized standards. While KlimaDAO has thus far focused on ICROA recognized standards, we also see a future where other emergent certification schemes have a large role to play in scaling up climate finance centered on particular carbon removal/mitigation technologies. Ultimately, our goal is to incentivize a highly liquid, well-connected carbon market where interoperability between interfaces and blockchain-enabled applications is maintained. Such a market, in our view, serves as the most robust foundation for building a highly scalable and impactful carbon market.

KlimaDAO looks forward to engaging in further conversations with major VCM players to ensure the carbon market is given the tools it needs to achieve the above.