This month may not seem like the best time for an organization like Goldman Sachs to champion the benefits of “blockchain” or “tokenization.” After all, these buzzwords first made their mark in the cryptocurrency sector, which has lost two-thirds of its value over the past year. And the recent collapse of Sam Bankman-Freed’s FTX empire is likely to cause many traditional financiers to shun digital assets, if not ridicule them as a scam.
Yet when green activists, politicians and academics gathered this month for COP27, Rosie Hampson, chief executive of Goldman Sachs, happily spoke about both. In recent months, 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 market initiative known as “Genesis” (a name it sadly shares with the predicament by a crypto broker). This Genesis aims to use blockchain and digital tokenization to help investors buying climate-related bonds track relevant carbon credits in real time.
“[With] Genesis, we are thinking about how you can use blockchain, smart contract technology and IoT devices to support green bond contracts,” Hampson said at a COP side event. She noted that this could change the process from “forming accounting to primary issuance, asset maintenance and… . . secondary market component.
Or, as BIS’s Benedict Nolens echoed in a recent podcast: “It’s really hard to sell a green bond. [today]. But if you can attach a future carbon offset [with tokenisation] then it becomes much more attractive to the end investor.”
This did not cause a stir at the COP. No wonder, perhaps. Many green activists hate the whole concept of blockchain technologies since the first iterations consumed this energy. And those young anti-establishment evangelicals who have rushed into cryptocurrencies in recent years usually don’t like the idea of central bank involvement.
But investors should take note. And while Genesis is still a pilot project, it symbolizes a much more important point: While the cryptocurrency crash left investors reeling, it didn’t stop blockchain and tokenization experimentation.
Moreover, now they reach the most unexpected places with growing government support. The World Bank is currently developing a carbon credit registry utility that uses a blockchain system called Chia. And major central banks are testing wholesale (i.e. interbank) central bank digital currencies.
The HKMA, for example, is currently working with the People’s Bank of China and other central banks on the so-called mBridge project, which will allow them to exchange assets instantly. In Europe, the Banque de France and the Swiss National Bank introduced the Jura project, a CBDC pilot project in the foreign exchange market.
And while these initiatives are still pilots, they represent “an entirely new architecture,” Usman Mandeng, an Accenture consultant, recently told the Euro 50 group in Washington. Or, as Adrian Tobias of the IMF echoed: “The key things we got from crypto are the ideas of tokenization, cryptography, and distributed ledgers. These are very important technologies, and a lot of experiments are being carried out now.”
Not surprisingly, the players conducting these experiments are keen to distance themselves from scandals such as the collapse of FTX, emphasizing that they operate under strict establishment control. They also emphasize that they are trying to deploy these technologies to solve real problems, and not just use them for their own sake.
The Genesis initiative, for example, is trying to address the problem that the carbon credit market today is so fragmented and opaque that potential greenwashing is difficult for investors to track. Thus, despite the fact that Chinese issuers have sold $300 billion worth of green bonds, the transparency of this process is very low.
However, with the help of a coordinated distributed computerized ledger (i.e. blockchain), BIS and Goldman Sachs say it is possible to eliminate double counting and verify carbon credits at source. Similarly, digital tokenization should make it possible to simplify the distribution of bonds and attract retail investors to the market for the first time by breaking bonds into small pieces. Or so the argument goes.
Can this be done without digital asset technology? Maybe. In theory, banks could sell shares of green bonds using existing processes. They could also create a single computerized global ledger for carbon credits if they collaborated with each other and with the public sector.
But the hard truth is that these smart initiatives are gone now, and the mere emergence of cryptocurrency is causing a rethinking of existing practices among old players as well as digital evangelists. And it could end up being beneficial even if the blockchain itself is never adopted on a large scale.
This will not make mainstream investors less suspicious of cryptocurrencies. But it illustrates a broader theme: when disruptive technologies emerged in the past, whether it was the railroad or the Internet, first-order consequences didn’t always matter. It is still too early to judge whether digital assets can change the world or make it green.