This month might not seem like the perfect time for an institution like Goldman Sachs to champion the benefits of blockchain or tokenization. After all, these buzzwords first became famous in the cryptocurrency industry, which has lost two-thirds of its value in the past year. And the recent implosion of Sam Bankman-Fried’s FTX empire is likely to leave many traditional financiers shying away from digital assets, or even deriding them as a fraud.
Yet when green activists, politicians and scientists gathered at COP27 this month, Rosie Hampson, chief executive of Goldman Sachs, spoke happily of the two. In recent months, the Wall Street bank has partnered with the Hong Kong Monetary Authority, the Bank for International Settlements and other financial institutions to launch a capital markets initiative known as ” Genesis” (a name it unfortunately shares with the struggling crypto broker). This Genesis aims to use blockchain and digital tokenization to help investors buying climate bonds track 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 could change the process from “bookbuilding through primary issuance, asset management and. . . the secondary market component.
Or as BRI’s Bénédicte Nolens echoed in a recent podcast: “It is indeed difficult to sell a green bond [today]. But if you can join the future carbon offset [with tokenisation] it then becomes much more attractive for the end investor.
This did not cause a stir at the COP. No surprise, perhaps. Many environmental activists have hated the whole concept of blockchain technologies, ever since the earliest iterations of this guzzling energy. And the type of young anti-establishment evangelists who have rushed into cryptocurrencies in recent years generally don’t like the idea of central bank involvement.
But investors should take note. Because while Genesis is still just a pilot, it symbolizes a much bigger point: Although the crypto crash has left investors reeling, it hasn’t stopped experiments with blockchain and tokenization. .
Moreover, these are now reaching unexpected places, with growing government support. The World Bank is currently developing a utility for carbon credit registries that uses a blockchain system called Chia. And in traditional central banking, testing is underway for wholesale central bank (i.e. bank-to-bank) digital currencies.
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 allow them to swap assets instantly. In Europe, the Banque de France and the Swiss National Bank unveiled Project Jura, a pilot FX CBDC.
And if these initiatives are still only pilots, they represent “a whole new architecture”, as Ousmène Mandeng, Accenture consultant, recently explained during a meeting of the Euro 50 group in Washington. Or as Adrian Tobias of the IMF echoed: “The key things we took from crypto are the ideas of tokenization, cryptography, and distributed ledgers. These are very important technologies and there is a lot of experimentation going on.
Unsurprisingly, the actors behind these experiments are keen to distance themselves from scandals like the FTX implosion, pointing out that they operate with extensive oversight of the establishment. They also point out that they’re trying to deploy these technologies to solve real-world problems, rather than just using them for their own good.
The Genesis initiative, for example, attempts to address the problem that the carbon credit market today is so fragmented and opaque that it is difficult for investors to track potential greenwashing. So while Chinese issuers have sold $300 billion worth of green bonds, the transparency around that is very low.
However, by using a distributed and coordinated computerized ledger (i.e. blockchain), the BIS and Goldman Sachs say it would be possible to eliminate double counting and verify carbon credits at the source. Likewise, digital tokenization is expected to simplify the distribution of bonds and attract retail investors to the market for the first time, by dividing bonds into tiny fractions. Or so the argument goes.
Could this be done without digital asset technologies? Maybe. Banks could theoretically sell fractions of green bonds using existing processes. They might also be able to create a single computerized global registry for carbon credits if they collaborate with each other and with the public sector.
But the harsh truth is that these sensible initiatives are not in place at the moment, as the mere advent of cryptocurrency triggers an overhaul of existing practices among legacy players as well as digital evangelists. And that can end up yielding benefits, even if blockchain itself is never widely adopted.
This will not make traditional investors less wary of crypto. But it illustrates a larger theme: when disruptive technologies have appeared in the past, whether it’s the railroad or the internet, it’s not always the first-order consequences that matter. It is still too early to judge whether digital assets can change the world or make it greener.
This month might not seem like the perfect time for an institution like Goldman Sachs to champion the benefits of blockchain or tokenization. After all, these buzzwords first became famous in the cryptocurrency industry, which has lost two-thirds of its value in the past year. And the recent implosion of Sam Bankman-Fried’s FTX empire is likely to leave many traditional financiers shying away from digital assets, or even deriding them as a fraud.
Yet when green activists, politicians and scientists gathered at COP27 this month, Rosie Hampson, chief executive of Goldman Sachs, spoke happily of the two. In recent months, the Wall Street bank has partnered with the Hong Kong Monetary Authority, the Bank for International Settlements and other financial institutions to launch a capital markets initiative known as ” Genesis” (a name it unfortunately shares with the struggling crypto broker). This Genesis aims to use blockchain and digital tokenization to help investors buying climate bonds track 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 could change the process from “bookbuilding through primary issuance, asset management and. . . the secondary market component.
Or as BRI’s Bénédicte Nolens echoed in a recent podcast: “It is indeed difficult to sell a green bond [today]. But if you can join the future carbon offset [with tokenisation] it then becomes much more attractive for the end investor.
This did not cause a stir at the COP. No surprise, perhaps. Many environmental activists have hated the whole concept of blockchain technologies, ever since the earliest iterations of this guzzling energy. And the type of young anti-establishment evangelists who have rushed into cryptocurrencies in recent years generally don’t like the idea of central bank involvement.
But investors should take note. Because while Genesis is still just a pilot, it symbolizes a much bigger point: Although the crypto crash has left investors reeling, it hasn’t stopped experiments with blockchain and tokenization. .
Moreover, these are now reaching unexpected places, with growing government support. The World Bank is currently developing a utility for carbon credit registries that uses a blockchain system called Chia. And in traditional central banking, testing is underway for wholesale central bank (i.e. bank-to-bank) digital currencies.
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 allow them to swap assets instantly. In Europe, the Banque de France and the Swiss National Bank unveiled Project Jura, a pilot FX CBDC.
And if these initiatives are still only pilots, they represent “a whole new architecture”, as Ousmène Mandeng, Accenture consultant, recently explained during a meeting of the Euro 50 group in Washington. Or as Adrian Tobias of the IMF echoed: “The key things we took from crypto are the ideas of tokenization, cryptography, and distributed ledgers. These are very important technologies and there is a lot of experimentation going on.
Unsurprisingly, the actors behind these experiments are keen to distance themselves from scandals like the FTX implosion, pointing out that they operate with extensive oversight of the establishment. They also point out that they’re trying to deploy these technologies to solve real-world problems, rather than just using them for their own good.
The Genesis initiative, for example, attempts to address the problem that the carbon credit market today is so fragmented and opaque that it is difficult for investors to track potential greenwashing. So while Chinese issuers have sold $300 billion worth of green bonds, the transparency around that is very low.
However, by using a distributed and coordinated computerized ledger (i.e. blockchain), the BIS and Goldman Sachs say it would be possible to eliminate double counting and verify carbon credits at the source. Likewise, digital tokenization is expected to simplify the distribution of bonds and attract retail investors to the market for the first time, by dividing bonds into tiny fractions. Or so the argument goes.
Could this be done without digital asset technologies? Maybe. Banks could theoretically sell fractions of green bonds using existing processes. They might also be able to create a single computerized global registry for carbon credits if they collaborate with each other and with the public sector.
But the harsh truth is that these sensible initiatives are not in place at the moment, as the mere advent of cryptocurrency triggers an overhaul of existing practices among legacy players as well as digital evangelists. And that can end up yielding benefits, even if blockchain itself is never widely adopted.
This will not make traditional investors less wary of crypto. But it illustrates a larger theme: when disruptive technologies have appeared in the past, whether it’s the railroad or the internet, it’s not always the first-order consequences that matter. It is still too early to judge whether digital assets can change the world or make it greener.