Market participants react positively to Verra’s proposal to link tokens to immobilized carbon credits

Market players appeared to welcome Verra's decision to ban all instruments and tokens based on retired credits from its flagship Verified Carbon Standard Program and to propose instead the creation of instruments and tokens linked to "immobilized" VCS credits.

Verra said May 25 that it will prohibit the practice of creating instruments or tokens based on retired credits. The decision is based on the fact that "the act of retirement is widely understood to refer to the consumption of the credit's environmental benefit," Verra said.

The certifier said it would be open to the creation of instruments linked to "immobilized" VCS credits, "provided that this can be done in a way that prevents fraud and upholds environmental integrity."

Climate activist group Klima DAO said in a statement released May 25 the move by Verra to formally open discussions on credible pathways for carbon credit tokenization was a "positive move forward for Klima DAO and partners."

The group though asked Verra to provide clarity on the way forward, as well as around the consultation timeline, since this was creating uncertainty for the on-chain carbon market. It also requested Verra to offer a higher degree of collaboration with the on-chain carbon market when setting up the new product.

Luis Adaime, founder and CEO at bridging company Moss Earth, the creator of the MCO2 token, told S&P Global Commodity Insights that Verra's move was an improvement on the status quo.

"It is not a prohibition, just a different way of doing it. New tokens will just have to incorporate data on the projects and vintages and keep the underlying credit ‘immobilized' instead of ‘retired'," he said.

With this proposal, which is now open to public consultation, Adaime said, "Verra is being open to blockchain usage and has acknowledged to players that blockchain and tokenization are here to stay and have greatly increased volumes."

Asked whether he believed things were over for existing tokens based on retired Verra credits, Adaime said existing tokens would remain and likely simply transition to the new rules: "The past is the past. One can't undo it," he said.

Adaime said major blockchain bridging entities have been calling on Verra to introduce the possibility to attribute a new "state" to an asset belonging to their registry: "tokenized" rather than "retired," to indicate that these assets have been moved onto the blockchain but that they were still alive.

Commenting on Verra's decision, a carbon credits trader recognized the shortcoming of the current bridging systems. "No doubt the perceived value of retired credits is questionable," the trader said.

A second carbon trader also welcomed the improvement promised by Verra's proposal: "Creating another status makes the distinction between retired credits and credits that are brought on-chain a bit clearer for people outside the crypto/blockchain community," he said.

However, he said not much would change in substance. "Already on-chain credits can be traced back to the retirement action in the registry. Also, it will be important that there's absolute clarity about what the new status means, and how credits move from one status to another, otherwise one would just create extra confusion."

The product proposed by Verra seems workable as more transparency in the crypto space would be better for the market, said Jatin Kapoor, head of climate transactions at Emergent Ventures India that develops and trades offsets.

"The problem is there are many smaller crypto traders who don't understand carbon and get into the market. We see this as a risk. But overall, more transparency in the crypto space means more (and better) buyers and the increased possibility of selling," said Kapoor.

Kapoor added that the decision may not have an immediate impact on the market as there hasn't been much activity on tokenized credits after the buying spurt seen last October-November. "Right now, there is a lot of end-user demand being met, so I don't think the decision will have a huge impact on the voluntary carbon market."

Two way API

An industry source close to environmental crypto projects said Verra's "immobilized credits" proposal would entail the creation of a "two-way API" system. An application programming interface is a software intermediary that allows two applications to talk to each other.

At the moment, bridging companies like Toucan Protocol or Moss Earth that want to bring Verra's carbon credits on a blockchain are purchasing the credits in large quantities from the market and retiring them as soon as purchased. They would then mint the credits to create tokens and resell the tokens to multiple buyers. Buyers of tokens can burn their credits when they decide to use them to offset their emissions.

Under the new system, the bridging companies would buy credits in large volumes from the market, mint them, sell them and retire them only when the buyer of the tokens decides to burn then, i.e. to use them for offsetting purposes. "Credits and tokens would coexist on Verra's registry and on the blockchain until they are offset by the end buyer," the source said, adding that under this system blockchains would be linked directly to Verra's registry.

Price reaction

The Toucan Protocol's BCT token was seen trading at a historic low of $2.19 at 1026 GMT May 25, down from $2.49 at midnight, according to coinmarketcap data.

The BCT token was launched in October 2021 by tech-solution provider Toucan Protocol and it has been the main instrument used so far by Klima DAO to back its KLIMA cryptocurrency.

BCT is a standardized contract reflecting VCS-certified credits with a 2008+ vintage. Before being tokenized into BCT, Verra's credits are retired by Toucan Protocol.

The Moss Carbon Credit token (MCO2) created by Moss.Earth appeared to hold its value despite the announcement. It was seen trading at $6.80 at 1002 GMT, down from $6.88 at the GMT midnight, according to coinmarketcap data.

The MCO2 token reflects carbon credits issued by REDD+ projects from the Brazilian Amazon forest with a VCS certification and a 2013+ vintage. It can include both projects with a VCS certification alone and a VCS/CCB certification as well.