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Project Genesis 2.0—How DLT Can Optimize Green Bonds Market, Reduce Greenwashing

Ruholamin Haqshanas

Published: October 25, 2022 8:22 pm

The Bank for International Settlements (BIS), along with two other high-profile monetary institutions, has explored the use of blockchain, smart contracts, and the internet of things (IoT) for a global environmental cause as part of a new initiative. Dubbed “Genesis 2.0,” the project aims to use tokenized carbon credits to monitor green bond issuers’ emission-reducing commitments.

Climate Disaster and Growing Market for Green Bonds

This summer started out exceptionally hot, leading to record-breaking temperatures across different parts of the world, ranging from the US to Europe and Australia. It is no secret that climate risks are higher than ever before, and more effort and partnerships are required to reach the goal of limiting temperature rise to 1.5°C above pre-industrial levels, as set out in the Paris Agreement.

While finance has historically helped countries and organizations achieve this goal through various vehicles including green bonds, the current green finance market needs to be transformed in order to reach the depth of the green transition required, the BIS said in a recent research report.

Green bonds are instruments that finance green projects and provide investors with regular or fixed-income payments. Over recent years, green bonds have become an important tool to address the impacts of climate change and related challenges.

However, the BIS aims to make the green bonds market more efficient and effective with the use of innovative technologies like blockchains and distributed ledger technology or DLT. Called Project Genesis 2.0, the initiative came as an extension of Project Genesis 1.0, which was conducted by the BIS and Hong Kong Monetary Authority in 2021.

The project resulted in two prototypes of tokenized green bonds, each of which is created by two separate international teams. Both prototypes are developed using blockchain and smart contracts, which ensure the tracking of MOIs.

Advantages of Using Blockchain for Green Bonds

The BIS said that Project Genesis 2.0 will use blockchain and smart contracts to enhance real-time transparency of the environmental outcome of the asset funded by the bond’s proceeds. This will be done by digitally tracking and recording real-time mitigation outcome data associated with a digital mitigation outcome interest (MOI).

“Unlike the current lengthy and manual process of measurements, reporting, and verification (MRV) processes for carbon credits, the two prototypes developed in this project demonstrate the ability for investors to monitor, and trace back the environmental impact of the funded asset or activity on a granular level, in a timely and cost-efficient manner.”

Another major advantage of the project is the efficient redemption of mitigation outcome units (MOUs), which are units of GHG emissions reduction. Through the use of blockchain technology, Project Genesis 2.0 can deliver MOUs at maturity automatically using smart contracts.

“The automation reduces the need for reconciliation of data between different parties. This includes the issuer, registrar, custodian, carbon credit validator, the investor, etc, and ensures that the redemption conditions of MOIs have been met before the transfer of the MOUs.”

Finally, the project can eliminate the double-counting problem using blockchain technology. A single carbon credit must not be issued more than once for the same GHG emission abatement to ensure carbon credit integrity. Therefore, it is very important to avoid double-counting carbon credits on an international level.

The blockchain and DLT can allow investors and other stakeholders in the carbon credit ecosystem to trace the origin of the GHG data associated with the carbon credit and access the same “golden source of truth.” This way, they can address the double counting problem with carbon credits, the BIS said.

Meanwhile, the global green bond market was valued at $433.30 Billion in 2021, according to an estimate by Research and Markets. And since it is critical as always to connect environmental projects with capital markets and investors, the green bond market stays of great importance.

This article originally appeared on The Tokenist