Carbon credit standards body Verra consults on crypto tokenization – Ledger Insights

In May, Verra, the Washington-based non-profit body that sets voluntary carbon credit standards, placed restrictions on the tokenization of carbon credits. Today, Verra launched a consultation, which runs until October 2, with proposals for how blockchain tokenization might work. The aim is to address fraud, double use of carbon credits and lack of know-your-client (KYC) processes in the crypto sector.

The Toucan protocol was launched in late 2021, and by May of this year it had tokenized 21 million tons of carbon, estimated to represent 2.25% of total credits. Several other blockchain initiatives are based on Toucan tokens. When Toucan became aware of the planned consultation, but before the details were made public, it was receptive.

“We welcome the opportunity to contribute to a productive dialogue leading to a clear strategy for how we can work with Verra to make this a reality,” a Toucan blog post said. “We encourage transparency and speed in this process to ensure that all market players can engage in and benefit from ongoing innovation in the space.” Verra banned the way Toucan tokenized credits in May.

Verra plans to carry out due diligence

One of the boldest and most valuable proposals is a plan to conduct due diligence on token issuing platforms. Crypto attracts many grifters and outright scammers. And the appeal of green tokens to end users makes it particularly fertile ground for those with nefarious intentions. But due diligence is not a trivial task. Ledger Insights is often hesitant to write about some interesting carbon token projects due to concerns that they may be scams. An even bigger issue is that if an unsavory platform makes it through the Verra process, could Verra be legally liable?

In addition, given the composition of the blockchain, some platforms rely on tokens issued by others, especially those issued by Toucan. Will these secondary platforms also be considered?

Verra said it would analyze the legal basis and the platform’s business model as part of its due diligence. It cited concerns about what happens in the event of an insolvency of a token issuer or holder.

Another key issue relates to KYC. Verra wants to perform KYC on all token issuing platforms, and it wants the platforms to perform KYC on entities that receive newly issued tokens or use them.

Control, transparency of tokenized carbon credits

One of the biggest problems for Verra is that tokenization has reduced the degree of control over the carbon credits that appear in the Verra registry. For example, prior to the existence of tokenization, the status of “retired” for a carbon credit meant that it had been consumed.

However, when some blockchain firms like Toucan tokenized Verra credits, they marked them as retired at the point of tokenization. For blockchain companies, that doesn’t mean the credit has been used, just tokenized. The purpose is that the status of the tokenized credit – whether it has been consumed – is logged on the blockchain.

Verra doesn’t like marking tokens as retired for that reason and banned the practice in May. By using the designation “retired” without any wrongdoing, crypto companies make the status of the credits in the Verra registry less useful. Therefore, Verra proposes that tokenized credits should be “immobilized” in the Verra register.

It also wants to be updated on transaction information related to tokens, including any fractionation. It is concerned about the potential for double issuance or double use of tokens. While blockchains are designed to prevent double spending, there is a risk that someone could issue a token for the same credit on multiple blockchains and other potentially fraudulent actions. Verra is seeking input on how to prevent fraud more broadly.

While many crypto startups are targeting carbon credits, often aimed at consumers, some are targeting more established markets, such as the AirCarbon Exchange, which received funding from Deutsche Boerse. AirCarbon Exchange’s carbon credit certificates are tokenized on the public Polygon blockchain network.

There are also several institutional initiatives, including Carbonplace, involving the National Bank of Australia, Natwest, BNP Paribas, Standard Chartered and others. In Singapore, Standard Chartered, DBS Bank, Singapore Exchange and Temasek are involved in Climate Impact X.