Upstart Crypto Carbon Credits Platform Raises $2 Billion to Unlock the Internet of Energy.”

Upstart Crypto Carbon Credits Platform Raises $2 Billion to Unlock the Internet of Energy.”

Carbon offset credits, meet crypto.

Digital asset-focused exchange and carbon credit liquidity provider 1GCX and T3 Trading, a proprietary trading firm investing in the space, have reached an agreement, raising a whopping $2 billion and establishing a $100 million liquidity pool to facilitate carbon credit transactions.

The move, made possible by the unprecedented fundraising for token certificates, was driven by growing interest in the securities from institutional investors, executives at the firms told Blockworks exclusively. Such securities – proponents say – make it easier for institutional investors, including pension plans and endowments, to put their money where their mouth is to generate measurable alpha from ESG investment products.

As an asset class, however, fractional carbon credits pose many risks: The financial instruments are quite volatile, and critics say the jury is still out on how much good they will do to stop the rampant spread of global warming. Not to mention a glaring lack of liquidity, considering that the offsets trade more like illiquid structured products than anything else in digital assets, despite having far steeper peaks and troughs in price.

Enter 1GCX, which is providing the infrastructure for the ambitious new trading platform

T3 moves millions of dollars in capital between a number of major crypto exchanges and also puts money to work in the commodity markets. Both firms also specialize in equity derivatives and have launched a number of related synthetic trading pairs that link commodities to cryptocurrencies. The exact terms of the deal were not disclosed.

The idea is to set up a series of liquidity pools and associated over-the-counter (OTC) market-making activities that reduce the spreads of such transactions to attract institutions into the markets, including firms from the traditional financial industry that are used to carbon assets but are still learning when it comes to digital assets.

RA Wilson, 1CGX's chief technology officer, told Blockworks that the company has been carefully evaluating the feasibility - and the cost of quantitatively driven execution - of the initiative for several years. It was particularly driven after discovering that there were virtually no other market makers targeting both retail and accredited investors to combine digital assets with real-world commodities plus derivatives.

Even now, Wilson said, the liquidity consists mostly of bulge-bracket banks that snap up large amounts of the carbon securities at discounted prices and then act as unofficial marker makers for counterparty trading firms. The banks are likely to receive a hefty spread for this, considering that such trades are essentially de facto over-the-counter.

The case for tokenization

Wilson, who has personally invested in crypto since 2011, said he noticed about five years ago that carbon credits — promoted by governments, including the U.S., and in select cases with tax incentives — were gaining momentum, with companies viewing the products as more of a boon, not the "currency" the instruments were designed to be.

“Business development starts with building the right marketplace to ensure there is liquidity for higher quality offsets and nature-based solutions,” Wilson said. “Diverting financial assets from land-based projects can actually benefit us globally.”

1CGX is also in the relatively early stages of developing its own blockchain with a token that draws a parallel between “proof-of-authority” and algorithmic “computational proof-of-authority.”

Proof-of-Authority is a method of signing transactions that has elements of Proof-of-Stake consensus mechanisms but relies on validators jeopardize their identity or reputation. It typically occurs on private, centralized blockchains rather than permissionless public systems.

The end goal: Build a digital asset-based market powered by the burgeoning “green grid mixed with the Internet of Energy.”

The unique setup would ideally increase the transparency of price discovery and real-world benefits - with a view to combating climate change - two common thorns of institutional investors who have previously had to rely on Wall Street and the Chicago Commodity Center to trade illiquid carbon credits denominated above the murky prices of market makers.

Traders using 1CGX already have access to a range of digital assets such as Bitcoin, Ether, AVAX and SOL.

According to Wilson, there is already a “huge demand” from institutions hungry for carbon offset credits, one that is growing every year. The launch of the trading platform should promote liquidity, transparency and fair pricing - while cracking down on fraud - by adding crypto to the mix, he said.

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The post Upstart Crypto Carbon Credits Platform Raises $2B to Tap “Internet of Energy” is not financial advice.