Climate change has become a mainstream topic, moving away from the spectre of NGOs and to an agenda among governments and in the corporate boardroom as well. The race to combat global warming has everyone interested, and the scaling of voluntary carbon markets is one of the key areas of interest in this regard.

Where the pledge was to keep global temperatures from rising beyond 2.5°C on average compared to pre-industrial levels, in reality, we need to find ways to prevent the earth’s temperatures from soaring by as much as 3–3.5°C within the 21^st century alone. According to a report by the World Bank, the crisis could drive over 200 million people into forced migration within their respective nations by as soon as 2050.

Currently, less than one per cent of global greenhouse gas emissions are tracked and tackled through the use of carbon credits. There is an urgent need to increase this level significantly, but there are several barriers holding back scaling in this sector.

The problem at hand: Not unknown but little done till date

The issue of reducing carbon emissions is something nearly everyone agrees upon, but in terms of action, little has been done so far. Although there is consensus that there is an urgent need to reduce global emissions significantly, in reality, emissions continue to rise higher at an alarming rate to date.

It’s not just the scientists anymore, but even lawmakers, industries and consumers who know that the mean temperatures across the world are set to rise significantly, causing ice caps to melt faster and send sea levels higher. This, in turn, is set to wash away prominent coastlines globally by as soon as the end of the present century.

There is a pressing need for businesses to transform themselves into becoming climate-positive, but the real challenge is how to achieve this. Not only should organisations reduce carbon emissions and become more responsible about reporting them but also ensure that this trickles down their supply chain for effective change.

The challenge with present-day carbon markets’ infrastructure

Carbon markets are typically decentralised but too distributed to scale up commercially at present. Meanwhile,  most projects related to carbon credits (including ones that use a Blockchain) are also too centralised in their design and lack the resources and flexibility to truly expand on a global scale.

Most of the traditional platforms for carbon markets and even the newer blockchain-based solutions work independent of each other, and there is a lack of standardisation that prevents interconnected operations.

There hasn’t been much focus on innovation and investment in developing decentralised carbon markets till date, despite rising awareness of what a pressing problem this is. The lack of interest in developing such solutions and supplying markets with robust and reliable technology for tracking and reporting carbon credits is one of the biggest hindrances that could prevent it from becoming a bigger concern.

Another major issue is a lack of understanding of how carbon markets function and how businesses can get started with carbon credits’ tracking. The market is highly opaque and very little is known beyond key sectors, although the concern is highly inclusive and all-encompassing.

Also Read: How blockchain is contributing for Scope 3 carbon emission tracking

To achieve true scalability, there must be a way to connect all existing solutions in the carbon market space together or create a whole new solution. The new solution should not function at scale without compromising on the key elements of trust, transparency and verifiability.

While centralised solutions may not be the answer, blockchain and Web3 technology can certainly render such a way out. A blockchain-based carbon markets platform can maintain decentralisation without being fragmented, complex and illiquid.

DeFi for carbon finance

One possible approach that can solve this challenge lies in the already existing worlds of DeFi and Web3. These technologies are designed with decentralisation from the ground up,  while retaining security and transparency.

Decentralised finance has already taken the world by storm and caught the attention of the mainstream financial services industry in 2022. Democratising access to financial services to users, DeFi enables smarter, cost effective and faster peer-to-peer transactions without the need for expensive, opaque and sluggish intermediaries.

A DeFi based infrastructure for carbon markets powered by blockchain technology can significantly speed up efforts by industries across sectors to achieve net zero emissions in a responsible, inclusive and transparent manner. Here’s how such a system could work:

Base layer

The settlement layer would be based on a blockchain network, carrying with it all the benefits the technology has to offer, including decentralisation, immutability and encryption. This layer would have smart contract functionality and run DeFi protocols tailormade to handle carbon markets.

Multi-protocol interface

A multi-protocol interface would help aggregate on-Chain voluntary Carbon credits (bridged via various existing projects) and structure these into novel investable financial products while also providing a set of smart services (identity, liquidity, compliance, and more); all delivered via a host of DeFi protocols

The platform

With a decentralised exchange at its centre, the platform would host marketplace with automated market making for Carbon-based structured financial products. API based integration with enterprise apps, decentralised oracles for access to accurate, tamper-proof real-world data and other external systems via asset wrapper services, relayer networks, liquidity pools and custodial services can create a wholesome and vibrant decentralised ecosystem for Carbon Finance.

An optional DAO could further provide a decentralised reserve currency backed by on-chain Carbon credits to facilitate transactions on the platform and within the ecosystem.

In addition to being accessible to enterprise applications, this layer can also be tapped by other stakeholders, including auditors, investors, aggregators or brokers and corporates or institutions. Both auditors and enterprise apps can leverage data from the system for reporting carbon markets data to regulators with complete transparency and no chance of tampering it.

DeFi protocols for carbon markets

DeFi protocols integrated with verified third-party networks or services can be used to create secure, liquid and scalable decentralised carbon markets infrastructure. They can allow corporate firms and institutions as well as individuals perform transactions with tokenised carbon credits.

Be it trading, investing, yield farming, insurance, and more, all these can be supported by decentralised exchanges that can tap liquidity pools and farms made up of carbon tokens or stablecoins. External services can integrate additional features for security, including identity management, multi sig wallets and even their own liquidity pools and relayer networks into the system.

Also Read: Why the Carbon tax is just a step forward and not a solution

The governance of such a system can also be completely decentralised by forming a DAO. The DAO can be responsible for minting or burning of carbon credit-based tokens, support staking, and even offer tokenised bonds and credits to investors and stakers.

Carbon registries can tokenise their offerings and input their contributions to power such a decentralised system.

Powering accessibility

Ensuring that such a system employs a simple user interface can encourage more stakeholders to partake in such decentralised carbon market applications. Open standards-based APIs to develop the system can make it more scalable and accessible as well.

The benefits

Such a system has several key advantages that make it attractive and enticing for use by stakeholders, including:

On-chain credits

Carbon credits can be stored and managed in a tamperproof, time-stamped and secure manner on the distributed ledger

Carbon trading

A DeFi-based carbon trading platform has its own efficiencies, including speed, transparency and energy efficiencies (as long as it is built on top of a ‘green’ blockchain). Powered by smart contracts, trading and settlement can be automated for improved efficiencies in operations which cannot be implemented in a conventional, centralised model.

Institutional tools

Organisations can innovate on the system further, developing and offering structured products based on tokenising environmental projects that counter climate change. These products can offer higher levels of accountability and end-to-end visibility thanks to blockchain technology, something that traditional systems cannot offer.

Liquidity pools

Carbon markets can be infused with higher levels of liquidity as protocols incentivise providing liquidity to the system. This can not only boost participation but power capabilities for greater scalability.

Making carbon markets more inclusive and efficient

Together these can help overcome the various challenges faced by the current centralised systems and help create a more efficient, inclusive, and vibrant decentralised carbon market. Scalable solutions designed and deployed on the blockchain have the potential to make carbon finance more accessible and attractive for individuals and institutional investors.

Climate change needs scalable and easily deployable solutions

Climate change is a global coordination problem, and blockchain technology can play a pivotal role in boosting climate action by solving many of the underlying challenges of the voluntary carbon market – including democratising participation, increasing transparency and liquidity, and reducing costs while preventing risks of double-counting, hacking and frauds.

With the emergence of Web3 and decentralised finance, we have the opportunity to take this one step further, create truly next-gen smart carbon finance solutions, and effectively accelerate efforts towards addressing the most existential threat of our time.

The time is now!

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This article was first published on September 6, 2022

The post How to scale voluntary carbon markets with DeFi and Web3 appeared first on e27.

Despite turbulence in the crypto space, interest in blockchain technology and the belief that CBDCs are set to be the foundation of the future global monetary system are at an all-time high.

From China to the European Union (EU), governments worldwide are investing increased amounts of resources into launching their own CBDCs in the near future. In fact, there has been resounding agreement from leading financial institutions which anticipate that CBDCs are set to revolutionise money.

The future of global economy

Over 90 per cent of central banks are exploring ways to incorporate CBDCs into their monetary systems. A recent report by the Bank for International Settlements (BIS) even highlighted the structural flaws in cryptocurrencies that make CBDCs a more ideal and viable option.

According to the BIS, CBDCs can “meld new technological capabilities”, which simultaneously removes the associated risks related to unregulated intermediaries used in cryptocurrencies. At the same time, CBDCs can still perform all the features of cryptocurrencies like programmability and tokenisation. 

Beyond safer, faster and cheaper payments, CBDCs have the potential to bring new innovations to the fore and empower transformational change at the industry level, benefitting both institutions and retail consumers.

In a joint report led by the BIS, International Monetary Fund (IMF), and World Bank for the upcoming G20, CBDCs represent a fundamental shift for global cross-border payments as it enables instant cross-border settlements across time zones and drives payment diversity. This will go a long way to create a more vibrant, resilient and efficient payments ecosystem and disrupt the existing landscape where incumbents dominate the field. 

Global associations such as the BIS, IMF and World Bank are not the only ones doing research and experimentation in CBDCs. The CBDC global race is heating up at a regional and national level too, as central banks initiate their own experiments.

Also Read: Could China’s CBDC threaten decentralised cryptocurrencies?

In Asia, we are seeing Singapore leading the region as its Monetary Authority of Singapore (MAS) embarked on milestone collaborative initiatives, from Project Ubin to Project Dunbar, a follow-up to its earlier project, which is now exploring the viability of multi-CBDCs in global cross-border payments jointly with BIS, Bank Negara Malaysia (BNM), Responsible Business Alliance (RBA) and South African Reserve Bank (SARB).

CBDCs and its many benefits

The benefits of CBDCs do not simply stop at cross-border payments. Domestic wholesale payments stand to benefit from CBDCs through the introduction of Delivery vs Payment (DvP) and atomic settlements of digital assets.

On a global scale, securities settlement processes worldwide have evolved at different speeds due to various reasons resulting in market inefficiencies. This has led to the acceptance and reliance on a delay of 2 days (T+2) to conclude DvP processes.

However, with the convergence of interest in achieving shorter post-trade settlements and the need to source liquidity and align financial records, market participants have been actively working towards a move to T+1 post-trade settlements. 

Already at the forefront of finance and technology, R3 recently expanded on its partnership portfolio with their latest involvement in Project Ion, a significant platform led by the Depository Trust & Clearing Corporation (DTCC) to realise .

T+0 settlement cycle as well as instant finality in securities settlement. DTCC’s Project Ion will leverage R3’s flagship DLT product, Corda, to enable resilient, secure and scalable settlement service to clients worldwide. 

The materialisation of the T+0 concept is already within sight with initiatives such as these, but CBDCs play a significant role in accelerating this movement as CBDCs will ultimately allow financial institutions to enjoy improved efficiency for cross-border payments, 24/7 access to payment systems and the potential for a reduction in settlement and counterparty risks. 

Beyond securities settlements, CBDCs can potentially create social impact as it promotes greater financial and digital inclusion through a universal interoperable legal tender payment instrument.  Innovations like offline CBDCs can even work similarly to debit and credit cards which creates an innovative way to reframe the notion of money for the average retail user.

One functional option for CBDCs, which is still being explored, is its programmability for retail use. This means that CBDCs can be designed and programmed for specific uses, which differentiate them from fiat or commercial money.

Also Read: How Web3 will revolutionise borderless banking in Southeast Asia

The potential is tremendous as it will likely open up a whole range of financial services for retail users. As IMF Managing Director, Kristialina Georgieva proclaimed, “the history of money is entering a new chapter” indeed.

Leading countries at the forefront of introducing CBDCs

It is no surprise then that many countries in Asia are actively researching, experimenting and implementing CBDCs to enhance payment systems. Most recently, the Asian Development Bank (ADB) introduced its two-phased project that will serve as a platform to bring central banks and central securities depositories (CSDs) from across the Association of Southeast Asian Nations (ASEAN) and the Republic of China, Japan, and the Republic of Korea together to facilitate associated discussions in the Cross-Border Settlement Infrastructure Forum (CSIF). 

This is in addition to the ongoing Project Dunbar, a collaboration between the MAS, BIS, Reserve Bank of Australia (RBA), South African Reserve Bank (SARB) and Bank Negara Malaysia (BNM), which is exploring the use of multi-CBDCs in the clearing and settlement of payments and securities as well as  Project Inthanon-LionRock, an initiative between the Bank of Thailand and Hong Kong which has since expanded to include the UAE and China to become a multi-CBDC project in 2021.

One thing is clear from all these initiatives: central banks all around the world are recognising the viability of CBDCs in the payments ecosystem, and they are ready to put in the necessary legwork to make CBDCs the future of money.

Of the advancements made so far, it is significant to see so many emerging economies already looking to launch their own CBDCs. These include Cambodia’s launch of Project Bakong, co-developed by a Japanese fintech company in 2020; Nigeria’s eNaira is issued by the Central Bank of Nigeria (CBN), although this is currently encountering low demand challenges from merchants due to a scarcity of users and a lack of user knowledge in rural areas. 

The race is on, and as countries such as China launch the e-CNY and markets such as Thailand and Hong Kong double down on their research efforts in the digital currency space, the question isn’t who will be the first to implement CBDCs nationally but rather: who will get it right?

From The U.S Treasury to the European Central Bank, governments and central banks worldwide have launched working groups and collaborated on projects to identify best practices and make recommendations for the most efficient path forward. It is also becoming imperative that industry experts are involved to ensure that the path for implementation is smooth and sustainable. 

Many industry players are well-positioned to contribute their expertise and combine the principles of traditional finance with blockchain technology to produce groundbreaking and innovative solutions to support ongoing regional and government-led initiatives. With the knowledge of the frameworks and rules that guide the world of traditional finance, these players have been at the forefront of setting industry best practices and building new frameworks to advance CBDCs in the region.

As a leader in distributed software and enterprise technology for regulated industries, R3 plays an active role in providing advisory services to central banks across APAC, which includes the Bank of Thailand, which has been in partnership with R3 since 2020, the Hong Kong Monetary Authority (HKMA), the MAS and RBA.

This is in tandem with its ongoing work with regional institutions such as the ADB.  R3 has also been building a resource base on CBDC development which spans white papers, toolkits such as its  Digital Currency Accelerator that is powered by Corda, and a digital currencies hub to cover the latest in the industry. 

Final thoughts

The global CBDC race is only in its infancy. Though many have already launched their CBDCs, there is still some way to go before we see worldwide implementation. The onus now falls on both private and public entities to work in partnership with each other to shape the future of money and the global economy.

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Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic

Join our e27 Telegram group, FB community, or like the e27 Facebook page

Image credit:  Canva Pro

This article was first September 5, 2022

The post Who is leading the global CBDC race? appeared first on e27.