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Carbon credit standard setter Verra consults on cryptotokenization – Ledger Insights – blockchain for enterprise

In May, Verra, the Washington-based nonprofit that sets voluntary carbon credit standards, imposed restrictions on the tokenization of carbon credits. Today, Verra launched a consultation that runs until October 2, with proposals for how blockchain tokenization could work. Its goal is to combat fraud, double-spending of carbon credits, and lack of know-your-customer (KYC) processes in the crypto industry.

The Toucan Protocol was launched in late 2021 and by May this year had tokenized 21 million tonnes of carbon, which would represent 2.25% of total credits. Several other blockchain initiatives are based on Toucan tokens. When Toucan learned of the planned consultation, but before details were announced, he was receptive.

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

Verra plans to perform due diligence

One of the bravest and most valuable proposals is a plan to perform due diligence on token issuance platforms. Crypto attracts a lot of scammers and outright fraudsters. And the appeal of green tokens to end users makes them particularly fertile ground for those with bad intentions. But due diligence is not a trivial task. Ledger Insights is often hesitant to write about some interesting carbon token projects, fearing that they are scams. An even bigger issue is that if a disreputable platform passes the Verra process, could Verra have legal liability?

Additionally, given the composability of the blockchain, some platforms rely on tokens issued by others, especially those issued by Toucan. Will these secondary platforms also be reviewed?

Verra said it will analyze the platform’s legal basis and business model as part of the due diligence. He raised concerns about what would happen in the event of the insolvency of an issuer or token holder.

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

Control, transparency on tokenized carbon credits

One of the biggest issues for Verra is that tokenization has reduced its degree of control over the carbon credits that appear on the Verra ledger. For example, before the existence of tokenization, the status of “retired” for a carbon credit meant that it had been consumed.

However, when some blockchain companies such as Toucan tokenized Verra credits, they marked them as retired at the time of tokenization. For blockchain companies, this does not mean credit has been used, just tokenized. The intention is that the status of the tokenized credit – if it has been consumed – is recorded on the blockchain.

Verra doesn’t like to mark chips as retired for this reason and banned the practice in May. By using the “retired” designation without any malicious intent, crypto companies make the status of credits on the Verra ledger less useful. Therefore, Verra proposes that the tokenized credits be “immobilized” on the Verra ledger.

He also wants to be updated on transaction information related to the tokens, including any splits. He worries about the potential for tokens to be double-issued or double-used. Although blockchains are designed to avoid 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 target carbon credits, often aimed at consumers, some are targeting more established markets, such as 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 many institutional initiatives, including Carbonplace, which involves the National Bank of Australia, Natwest, BNP Paribas, Standard Chartered and others. In Singapore, Standard Chartered, DBS Bank, Singapore Stock Exchange and Temasek are involved in Climate Impact X.


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