In the wake of the crypto collapse of 2022, regulators and governments have soured on the highflying technology as leading lights of the space —, like FTX’s Sam Bankman-Fried, aka SBF — keep ending up in jail. If there’s been one ray of light for crypto, it’s been regenerative finance (or ReFi), a loose term for companies and actors that want to use cryptocurrency approaches to accelerate funding for climate change mitigation efforts. There’s a much clearer narrative as to why ReFi efforts are potentially useful: More financing is needed in the climate space. It’s also easy to present ReFi as the serious, buttoned up cousin to crypto as most of the companies never hawked JPGs of apes. One organization that’s continued to support ReFi is the World Economic Forum (WEF), which recently released the white paper, “Blockchain for Scaling Climate Action.” However, despite claiming to offer a balanced view on the issue, the WEF paper fails to meaningfully engage with real issues of blockchain or carbon credits. It misses the mark in three key ways:
- Blockchain is not a substitute for real-world trust or transparency. Blockchain proponents often call it a “trustless” ecosystem, referring to the systems in place to prevent double spending of tokens and ensure that one actor can’t take over the network. These attributes and open-source nature of the code get expanded into a broad claim of blockchain approaches providing transparency — but this is only true for transactions on the chain.The WEF report states, “Such transparency removes the risk for corporate buyers [of carbon credits] who want to ensure their net-zero budgets are going towards measurable, verifiable climate mitigation efforts.” However, the real risk from carbon credits is not so much from fraudulent financial transactions as from the real-world risk carbon will be re-released into the environment or was never captured in the first place. Ensuring that this failure doesn’t happen — or being aware of it when it does — requires monitoring and assessment in the physical world. The kind of trust that blockchain brings simply doesn’t address the real issue.
- Blockchain doesn’t lower barriers to adoption. Another major claim is that blockchain can increase the amount of money flowing into the climate space by lowering barriers to purchasing carbon credits (or their digital asset equivalents) and “reduce the need for intermediaries.” To be frank, this claim doesn’t make any sense. First, blockchain companies like Toucan don’t produce the credits themselves, they just tokenize credits from existing markets — so their efforts are not going to replace any existing ecosystem. A couple of years ago, you could have at least argued that crypto hype was useful for drawing funding to carbon credits, but that looks much less appealing today. The WEF also ignores the fact that the blockchain often requires more intermediaries to help regular people through the complex process of buying cryptocurrency; these intermediaries have often contributed to crypto’s many scams and frauds — with FTX serving as the most notorious example. In contrast, I can just buy credits directly from the Gold Standard with my credit card.
- Blockchain approaches are not separable from speculative cryptocurrencies. One of the fundamental claims of ReFi purveyors is that we’re not like the other guys, those bad crypto scammers, and as such, we should be treated (and regulated) differently. The WEF paper buys into this and calls for regulation that treats ReFi and cryptocurrencies differently. Ultimately, however, crypto tokens are the mechanism that powers the blockchain — they are the reward for doing the extensive computational work necessary to verify transactions. There is no blockchain system without cryptocurrency; the two things are fundamentally linked. This means that the toxic incentives towards pump-and-dump schemes, “rug pulls,” scams, and more will always be present in the same ecosystem as “respectable” carbon credits.
All told, you really shouldn’t expect crypto or ReFi to be a significant driver for carbon removal or other sustainable innovations. Instead, if you want to understand the real opportunities around carbon credits, check out the The Lux Carbon Credit Portfolio Tool, which shows how to build carbon credits into your company’s net-zero roadmap, accounting for risk as well as cost and scale. Companies can use credits to hedge their risk and accelerate their sustainable transition — all without ever having to get on chain.