This month may not seem like the perfect time for an institution like Goldman Sachs to champion the benefits of “blockchain” or “tokenization.” After all, these buzzwords first came to prominence in the cryptocurrency industry, 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 leave many traditional financiers shying away from digital assets, if not deriding them as a fraud.
Yet when green activists, politicians and scientists gathered at COP27 this month, Goldman Sachs executive director Rosie Hampson spoke happily of both. In recent months, the Wall Street bank has joined forces 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 that unfortunately shares with struggling cryptocurrency broker). This Genesis aims to use blockchain and digital tokenization to help investors buying climate-related bonds track associated carbon credits in real time.
“[With] Genesis we are thinking about how to use blockchain, smart contract technology and IoT devices to support green bond contracts,” Hampson said at a COP side event. He noted that this could change the process from “building the book to primary issuance, asset management and . . . the secondary market component.”
Or as Bénédicte Nolens of the BIS echoed in a recent podcast: “It is actually difficult to sell a green bond [today]. But if you can attach future carbon offsetting [with tokenisation] then it becomes much more attractive to the end investor.
That didn’t cause a dip in the COP. No surprise, perhaps. Many green activists hate the whole concept of blockchain technologies, right from the very first iterations of this consuming energy. And the kind of young (sort of) anti-establishment evangelists who have rushed into cryptocurrencies in recent years generally don’t like the idea of central bank involvement.
But investors should take note. Because while Genesis is still just a pilot project, it symbolizes a much bigger point: While the cryptocurrency crash has left investors reeling, it hasn’t stopped experiments with blockchain and tokenization.
Furthermore, these are now reaching unexpected places, with growing support from the government. The World Bank is currently developing a carbon credit ledger utility that uses a blockchain system called Chia. And in traditional central banking, wholesale (i.e. bank-to-bank) central bank digital currencies are being tested.
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 allow them to trade assets instantly. In Europe, the Banque de France and the Swiss National Bank unveiled Project Jura, a foreign currency CBDC pilot project.
And while these initiatives are still only pilot projects, they represent “an entirely new architecture,” as Accenture consultant Ousmène Mandeng said recently at a meeting of the Euro 50 group in Washington. Or as the IMF’s Adrian Tobias echoed: “The key things we’ve gotten out of cryptocurrencies are the ideas of tokenization, cryptography and distributed ledgers. These are very important technologies and many experiments are underway”.
Unsurprisingly, the actors spearheading these experiments are keen to distance themselves from scandals like the FTX implosion, emphasizing that they are operating under broad establishment oversight. They also point out that they are looking to implement 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 the carbon credit market today is so fragmented and opaque that it is difficult for investors to track down potential greenwashing. Thus, while Chinese issuers have sold $300 billion worth of green bonds, transparency about it is very low.
However, using a coordinated distributed computerized ledger (i.e. blockchain), the BIS and Goldman Sachs say it would be possible to eliminate double-counting and verify carbon credits at source. Similarly, digital tokenization should make it possible to streamline the distribution of bonds and attract first-time retail investors to the market by dividing bonds into tiny fractions. Or so the argument goes.
Could this be done without digital resource technologies? Perhaps. Banks could theoretically sell fractional green bonds using existing processes. They may also be able to create a single global computerized registry for carbon credits if they collaborate with each other and with the public sector.
But the hard truth is that these sensible initiatives are not in place right now, while the mere advent of cryptocurrency is triggering a rethinking of existing practices among legacy gamers and digital evangelists. And this could end up yielding benefits, even if the blockchain itself is never widely adopted.
This will not make traditional investors any less suspicious of cryptocurrencies. But it illustrates a larger theme: when disruptive technologies have emerged in the past, be they railroads or the Internet, it’s not always the first-order consequences that matter. It is still too early to judge whether or not digital assets can change the world or make it green.