Verra, the largest international registry of carbon credits, is launching a public consultation period Aug. 3 to gather guidance on how the registry should allow for the tokenization of carbon credits – a first step in a process that could ultimately incorporate cryptocurrencies into the voluntary carbon market.
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The consultation period is seeking to gather input on the necessary technological and policy framework for bridging carbon credits onto the blockchain while protecting against fraud. It will also seek viewpoints on the extent to which the registry should uphold its know-your-customer ethos, or KYC – where buyer and seller identities are known and verified within a carbon credit transaction.
"The real interest is around KYC, and I think it's going to boil down to a couple real philosophical questions," said Robin Rix, Verra's chief legal, policy and markets officer. "At the end of the day, [carbon markets and cryptocurrencies] are two totally different paradigms. Do you trust authorities, or are you suspicious of authorities? I think that's the nub of the debate."
There's widespread agreement among legacy carbon stakeholders and newer crypto-savvy entrants that know-your-customer principles are fundamental to protecting the environmental integrity of the voluntary carbon market. But where opinions may begin to diverge is the degree to which know-you-customer transparency would be enmeshed in an on-chain market.
Traditionally, registries like Verra, Gold Standard and the American Carbon Registry have verified buyers and sellers in every transaction so that a full accounting of a credit's chain of custody is recorded from the point of its creation to its retirement.
But emerging tokenization platforms like Toucan Protocol and KlimaDAO have turned that principle on its head by introducing core Web3 ethos into the carbon space – anonymity and decentralization. Instead of identifying every party within a tokenized credit's chain of custody, the Web3 community may prefer just two parties be identified – the one who bridges the credit on-chain, and the one who retires a tokenized credit to offset their carbon footprint. All other transactions in between would be anonymized.
"We fully expect there to be a range of views," Rix said. "Fundamentally, I think the key point of distinction will be the KYC throughout the chain."
Other details that will be hashed out include how to build mechanisms through which credits can be brought on and off-chain again, known as a two-way bridge, and how tokenized credits could be divided into smaller fractions.
No 'big rush'
Although Web3 platforms are encouraged by Verra's recognition of the benefits cryptocurrencies could bring to the voluntary carbon market, they have expressed slight frustration at the pace with which Verra is moving through the process.
"They're not in a big rush, it seems," Toucan Co-founder and CTO James Farrell said during a July public meeting.
"The thing with Verra is, they're not a startup," he said. "They've been around a long time, they control a large part of the market, so they move at their own pace. And they're optimizing for safety first – safety to protect their brand, safety to protect themselves legally. They're also not natively technologically comfortable, so they're not the type of people who move too quickly."
Farrell also said that Toucan is taking part in separate working groups organized by Gold Standard to help the registry understand how it can properly incorporate crypto. Those groups are expected to furnish recommendations by the end of the year, he said.
Questions surrounding the incorporation of cryptocurrencies into the voluntary carbon market initially came to a head in April and May when Verra and several other carbon registries banned platforms like Toucan from tokenizing credits. By that point, Toucan had already tokenized over 22 million Verra-issued credits since Toucan's launch in October 2021, representing over 4% of all issued credits.
The decision was an attempt to eliminate confusion in the voluntary carbon marketplace, Verra said, by ensuring that retirement of a carbon credit singularly means that its environmental benefit has been used to offset a company's carbon footprint. The emergence of Toucan distorted that meaning by giving life to a digital ghost of that credit in the form of a token that is traded as a digital commodity.
But Verra and other registries aren't opposed to tokenization. Instead, Verra is exploring ways to "immobilize" credits within its registry so they can be tokenized with some degree of transparency and traceability.
The details of this immobilization strategy will be hashed out through this public consultation window, which will last through Oct. 2.
"We're getting a lot of interest – a lot of people writing in," said Rix. "So we do expect that this will be a topic that will attract a lot of people."