Blockchain can have a green future independent of crypto

This month does not seem to be the perfect moment for an institution like Goldman Sachs to champion the benefits of “blockchain” or “tokenization.” After all, these buzzwords first became famous in the cryptocurrency sector, which has lost two-thirds of its value over the past year. And the recent implosion of Sam Bankman-Fried's FTX empire will likely cause many traditional financiers to shy away from digital assets - if not deride them as a scam.

As green activists, politicians and scientists gathered at COP27 this month, Rosie Hampson, a managing director at Goldman Sachs, spoke cheerfully about both. In recent months, the Wall Street bank has teamed up with the Hong Kong Monetary Authority, the Bank for International Settlements and other financial institutions to launch a capital markets initiative called “Genesis” (a name it unfortunately shares with the troubled crypto broker). This Genesis aims to leverage blockchain and digital tokenization to help investors who purchase climate-related bonds track the associated 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 covers the process from "book creation through initial offering, asset management and . . . the secondary market component."

Or as the BIS's Bénédicte Nolens reiterated in a recent podcast: "It's actually difficult to sell a green bond [today]. But if you can attach future carbon offsets [with tokenization] then it becomes much more attractive for the end investor."

This did not cause a splash at COP. Maybe no surprise. Many green activists hate the entire concept of blockchain technologies since early iterations of this convoluted energy. And the kind of young(ish) anti-establishment evangelists who have rushed into cryptocurrencies in recent years generally don't like the idea of ​​central bank involvement.

But investors should be careful. Because while Genesis is still just a pilot, it's symbolic of a much larger point: Although the crypto collapse has left investors reeling, it hasn't stopped experimentation with blockchain and tokenization.

What's more, with increasing government support, these are now reaching some unexpected places. The World Bank is currently developing a carbon credit registry utility that uses a blockchain system called Chia. And in mainstream central banking, wholesale (i.e. bank-to-bank) central bank digital currency testing is underway.

The HKMA, for example, is currently working with the People's Bank of China and other central banks on a so-called mBridge project to enable them to exchange assets instantly. In Europe, the Banque de France and the Swiss National Bank have unveiled Project Jura, a CBDC pilot for foreign exchange.

And while these initiatives are still pilot projects, they represent “a completely new architecture,” as Ousmène Mandeng, an Accenture consultant, said at a recent meeting of the Euro 50 group in Washington. Or as IMF's Adrian Tobias reiterated: "The main things we've gotten from crypto are the ideas of tokenization, cryptography and distributed ledgers. They're very important technologies and there's a lot of experimentation going on."

Not surprisingly, the players driving these experiments are eager to distance themselves from scandals like the FTX implosion by emphasizing that they operate with extensive establishment oversight. They also emphasize that they are trying to use these technologies to solve real-world problems – rather than simply using them for their own sake.

The Genesis Initiative, for example, seeks to address the problem that the market for carbon credits is now so fragmented and opaque that it is difficult for investors to track potential greenwashing. Although Chinese issuers have sold $300 billion worth of green bonds, there is very little transparency in this regard.

However, by using a coordinated distributed computerized ledger (i.e. blockchain), the BIS and Goldman Sachs say it would be possible to avoid double counting and verify carbon credits at the source. Similarly, digital tokenization aims to make it easier to distribute bonds and attract retail investors into the market for the first time by breaking bonds into tiny fragments. That's how the argument goes.

Could this happen without digital asset technologies? Perhaps. Banks could theoretically sell fractions of green bonds using existing processes. They may also be able to create a single computerized global ledger of carbon credits by collaborating with each other and the public sector.

But the hard truth is that these sensible initiatives are currently absent, while the mere emergence of cryptocurrency is triggering a rethink of existing practices among legacy players and digital evangelists alike. And this can ultimately lead to benefits, even if the blockchain itself never sees widespread adoption.

This won’t make mainstream investors any less wary of crypto. But it highlights a larger issue: When disruptive technologies have emerged in the past, be it the railroad or the Internet, the first-order consequences are not always important. It is still too early to judge whether digital assets can change the world – or make it greener.

gillian.tett@ft.com