The Banking Executive Magazine - November 2022 Issue

Cryptocurrency has exploded in growth, onboarding around 300 million new users. This exponential growth has been accom- panied by serious environmental side effects stemming from energy inten- sive activities such as Bitcoin mining, which consumes as much electricity as a small country each year, and transacting on proof-of-work net- works, including Ethereum. CARBON CREDIT MARKETS Cryptocurrency traders are moving into the carbon credit market. Car- bon credit markets are trading sys- tems in which carbon credits are sold and bought. One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided. There are broadly two types of car- bon markets: • Compliance markets: are created as a result of any national, regional and/or international policy or reg- ulatory requirement. • Voluntary carbon markets: for issu- ing, buying and selling of carbon credits, on a voluntary basis. The current supply of voluntary car- bon credits comes mostly from pri- vate entities that develop carbon projects, or governments that de- velop programs certified by carbon standards that generate emission re- ductions and removals. Demand comes from private individ- uals who want to compensate for their carbon footprints, corporations with corporate sustainability targets, and other actors aiming to trade credits at a higher price to make a profit. One type of compliance market is emissions trading systems (ETS) which is operating on a cap-and- trade principle. The European Union launched the world's first interna- tional ETS in 2005. China launched the world’s largest ETS, estimated to cover around one-seventh of global carbon emissions from the burning of fossil-fuels. Many more national and subnational ETS are now operating or under development. The Clean Development Mechanism (CDM), adopted under the Kyoto Protocol in 1997, is another well- known example of an international compliance market. Under the CDM, emission-reduction projects in developing countries have generated carbon credits used by industrialized countries to meet part of their emis- sion reduction targets. According to Asia Nikkei, crypto- linked trading of carbon credits has spread to the extent that it now ac- counts for 9% of all transactions. Nikkei investigation shows it is a trend that will change the market- based solution for environmental ac- countability. Cryptocurrencies originally did not come with underlying assets that guarantee their values. New crypto- assets pegged to fiat currency or gold are being floated extensively. Carbon credits have intrinsic value. The carbon credit market, in which companies voluntarily participate, is expanding as more businesses seek to offset their emissions to achieve carbon neutrality. CRYPTOCURRENCY THAT OFFSETS CARBON KlimaDAO, a decentralized au- tonomous organization, takes carbon credits that have been converted into digital tokens by cooperating crypto groups, then converts the tokens into Klima, another cryptocurrency. Each Klima is intended to represent at least one metric ton of carbon credits. KlimaDAO, is aligning economic in- centives for a green regenerative economy, making on-chain carbon retirement accessible to all. Kli- maDAO’s native token “KLIMA” can only be minted when tokenized car- bon credits are locked away in its treasury. This is achieved by offering incentives to users to exchange tok- enized carbon in return for KLIMA at a discounted price. The KLIMA token is itself backed by carbon. As the Kli- maDAO treasury acquires more car- bon over time through its incentives, any newly minted KLIMA tokens are distributed to those who hold KLIMA themselves. Anyone can acquire KLIMA or through the open, transparent, and fairly priced markets that are hosted on Decentralized Finance (DeFi) ex- changes such as SushiSwap. This means for the first time, anyone can participate in the carbon economy without needing to use a third-party broker to source, or offset, carbon. By using KLIMA as the dominant trading pair for transacting carbon, and with KlimaDAO responsible for providing the liquidity in these mar- kets, an efficient, liquid and transpar- ent market for carbon is emerging. As users transact, trade, and offset car- bon assets at market prices, the utility of KLIMA scales. Through the growth of diversified carbon assets, Kli- maDAO intends to create the best experience to source and retire car- bon assets. Nikkei Asia has determined that 23 million metric tons of carbon credit were apparently transacted for the purpose of getting Klima between October and May 2022. The traders are mainly speculators on the hunt for short-term profit. Sellers are able to pocket the difference between the carbon credit's actual value and the Klima's market value if the crypto gains in price. REGULATING THE CRYPTO INDUSTRY According to World Economic Forum, regulation has long been a hot topic in the area of cryptocur- rency. However, United States Presi- dent Joe Biden’s recent Executive Order calling for the responsible de- velopment and regulation of digital assets, specifically refers to ex- ploratory efforts to investigate the en- vironmental benefits of distributed the BANKING EXECUTIVE 34 ISSUE 167 NOVEMBER 2022