Over the last year, we have seen the emergence of a new carbon market based on the tokenisation of voluntary carbon credits. It represents a new, decentralised approach towards scaling up the carbon market, and it has seen very rapid growth since its inception.

The reasons for that growth are clear: it allows anyone with access to cryptocurrency software to instantly buy and sell tokenised carbon credits, without needing to hold an account in the underlying carbon credit program registry or undergo the usual KYC checks that come along with that. In that sense, it has the potential to unlock a huge segment of the carbon credit consumer market.

Like any new technology, it can be both a force for good and bad; the other side of the (digital) coin is that the proliferation of carbon credit-backed cryptocurrencies represents a threat to the integrity of the whole carbon market; it reality, a tokenised carbon credit is completely disconnected from the underlying carbon credit: it gives no right to the underlying credit, only a contractual right (as against the token issuer) to the environmental claims attached to it; and it is not controlled or backed by the carbon credit program provider. There is obvious scope for greenwashing and fraudulent schemes, which we have already seen happening.

It is clear that if the crypto carbon market is to have a future as a credible part of the wider carbon market, rather than as a marginal, high-risk product, it must be subject to controls to ensure that tokenised carbon credits possess the same fundamental attributes/qualities as the underlying carbon credits themselves, i.e. that the claimed carbon offsets must be real, additional, permanent, robustly quantified, independently verified, and uniquely claimed.

The fact that the volume of tokenised offsets being issued has declined over recent months is an early sign that the initial ‘gold rush’ has tailed off, as consumers and market spectators begin to call into question the integrity and quality of carbon crypto currencies.

What comes next in this market will depend in large part on how the carbon credit program providers react, i.e. whether they embrace this new instrument and lend their credibility to it through tie-ups/collaboration with token issuers.

The Gold Standard position could perhaps be described as ‘cautious optimism’: whilst being alive to the potential pitfalls of tokenisation, it welcomes the transformative possibilities of tokenisation and the potential for carbon crypto currencies to increase access to the carbon markets and for the underlying blockchain technology to create a better record of transactions.

Conversely, in May of this year, Verra took a much more conservative stance by announcing an immediate prohibition on the tokenisation of retired VCS scheme carbon credits (VCUs). Their reasoning was primarily that the act of retirement is generally understood to refer to the consumption of the credit’s environmental benefit and, therefore, the crystallisation of the carbon offsetting claim. However, it is clear that Verra has broader underlying concerns as to the integrity of the market and the existential threat it potentially creates for the program providers.

The American Carbon Registry (ACR) followed the lead of Verra by announcing later in May that it too was updating its program rules to prohibit the tokenisation of ACR carbon credits unless explicitly authorised by ACR. Its stated reasoning was that the process of tokenisation must be subject to a more rigorous assessment process to ensure that it did not undermine the integrity of the carbon market.

The reaction of the crypto carbon companies to these moves by Verra and ACR was predictable and swift. As reported by Carbon Pulse, a US congressman even penned an open letter to Verra and ACR, urging them to climb down from their positions and allow tokenisation to restart. In response, Verra announced this month that it would launch a public consultation process on tokenisation in August (exact date to be confirmed). One of the options it is likely to explore is the ‘immobilisation’ of credits in Verra registry accounts so that they can be tokenised with transparency and traceability. Whilst the crypto carbon market is somewhat in limbo in the meantime, this overdue engagement between the carbon credit program providers and the crypto companies may ultimately result in the emergence of carbon crypto market 2.0: one that is subject to greater controls, but which better protects the integrity of the carbon market and, therefore, removes barriers to its further growth.