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How the digital assets industry can harness its own tech to set a positive climate example

It’s already been a landmark year for the digital assets sector, with newly approved spot Bitcoin exchange-traded funds (ETFs) in the US drawing in huge cumulative net inflows, spearheaded by asset management giants such as Fidelity and BlackRock.

As cryptoassets become more embedded in the mainstream, we’re confronted with the increasingly urgent reminder of their environmental impacts.

In March 2024, the annualised carbon footprint of all physically backed Bitcoin fund products stood at 4487.93 kilotonnes of carbon dioxide (ktCO2) – equivalent to a person flying from London to New York and back over 1.5 million times. And 2056.86 ktCO2 of that figure comes from just three months of US ETF products being live.

The question is how can this issue be tackled in a way that facilitates responsible adoption long term?

Ultimately, the answer lies in the adaptation of the digital miners who consume electricity at source. This is a work in progress, with reported estimates of the share of sustainable sources in Bitcoin’s electricity mix ranging anywhere from 37.6% to 59.9%. What is clear is there are green shoots developing in this area in the active exploration of potential Bitcoin mining synergies spanning flexible load response, renewable energy expansion, and methane mitigation.

In the near and medium term, however, the burden of responsibility falls on the end service providers who custody and provide access to still polluting Bitcoin investments. At an unprecedented scale, this now includes global institutions, with long-standing ESG mandates and a need to shoulder their share of responsibility as their crypto exposure grows.

Increasingly for such providers, who don’t have direct influence over the electricity consumption of the Bitcoin network itself nor where and how it procures its power, the best solution at hand is to procure market instruments – whether that’s Renewable Energy Certificates (RECs), which are tradable proofs that electricity came from a renewable source, or else strategically sourced carbon offsets – with the aim of determining and addressing the respective provider’s network share of environmental responsibility based on cryptoasset holdings and transaction activity.

This is an area in which blockchain technology itself holds significant promise.

Consider for a moment the elements, and challenges, facing an organisation wishing to make use of market instruments such as RECs or offsets in the voluntary market. There is a measurement component – a step to assess procurement requirements and the instruments best-suited to the business purpose based on relevant data. There is a mitigation component – the process to acquire the desired instruments in line with volume requirements and budget. And then there is a proof component – the ability to back up any subsequent environmental claims made and have these be third-party verifiable.

In all of these respects, blockchain can provide important incremental improvements.

It’s no secret voluntary markets for tradable environmental market instruments are fragmented, non-transparent, and geared to bulk over-the-counter (OTC) buyers. Tokenisation – the act of representing an asset on a blockchain – may sound like a buzzword, but it’s being actively pursued by the largest financial institutions.

In this context, the fundamental value of moving market instruments such as carbon credits onto a blockchain lies in faster settlement that can bring buyer and seller directly together, eliminating complex intermediary chains, removing check-and-compare administrative burden between counterparties, and leaving market participants with a broadly accessible public marketplace through which to trade products.

In principle, upgrading trading markets in this manner also paves the way for the pooling and aggregation of liquidity across tokenised trading venues (a ‘network of networks’) and accessing blockchain-native functionality, such as programmability, that would allow, for instance, for digital applications to instantly and automatically procure carbon offsets at point of user transaction.

At either side of the procurement process, projects continue to work to integrate the pressing concerns of data coupling and data richness. Organisations including the University of Cambridge are actively exploring how tokenised mitigation instruments may be intrinsically tied to real-world observations and the linked proofs of how the tangible climate benefit of any offered instrument has been evaluated; while others work on the data problem, and how verifiable information may be shared among blockchain contexts.

Equally, at the ‘proof’ side, blockchain-based instruments are able to fall back on public blockchains’ native advantages: an immutable record for showcasing chain of custody and ownership; full third-party transparency and auditability; and a globally oriented architecture that can be used to democratise marketplaces and widen reach.

Putting it together, the blockchain proposition is one of data linkage, efficient trading, and transparent audit in one end-to-end package.

This is not to say that blockchain is a panacea to all ills. Ultimately, offering a high-quality tokenised carbon credit still requires figuring out what a high-quality carbon credit looks like in the first place.

And at present, the vast majority of tokenisations are ‘digital twins’ of an existing registry-based asset: in which case the blockchain equivalent inherits all the limitations (regarding quality and transferability) of its underlying asset, though registries such as Gold Standard and Verra are already exploring the opportunities for native digital asset models. Similarly, liquidity is improved only if the technology is adopted, interoperability between implementations is achieved, and the market widened and aggregated. Data sharing poses ongoing blockchain challenges; and so too the regulatory and legal constraints of what are novel market experiments.

What we do have, however, is the outline of an ideal. High-quality, blockchain-native instruments, explicitly designed and created to be tied to real-world impact; fully programmable and immutable; compliant, liquid, public, interoperable, and transferable; globally auditable and held to verified standards.

What’s more, the cryptoasset sector, as blockchain’s origin story, is ideally placed to pioneer such applications. Just the fledgling fund component of Bitcoin’s carbon footprint is equivalent to some half a billion euros of emissions trading under the EU’s Emissions Trading System. With the will of the industry and its increasingly high-profile participants, crypto market actors have a unique chance both to lead in this area and to push forward climate tech development overall.

Teams in this sector are pushing the envelope far beyond the tiny surface area of public Bitcoin discourse. If ETFs were another wake-up call of the need to address cryptoasset climate impact, the progress of digital asset technology in the wider domain is a reminder of how much broader its impact can be.

 

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Nick Jones

Nick Jones

CEO

Zumo

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Edinburgh

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This post is from a series of posts in the group:

Blockchain in Banking and Financial Services

This group is to share any information related to enterprise wide Blockchain technology adaption in different Banking Financial Services sub-domains.


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