Carbon credit registry Verra has opened a public consultation on its proposed approach to third-party crypto instruments and tokens.
Verra is concerned about the reputational risk of associating current crypto approaches with carbon credits.
It wants to address fraud and environmental integrity.
The development of standards around the use of crypto should accelerate market growth.
The consultation is intended to seek information and views on how to identify and
implement anti-fraud measures relating to the potential association of VCUs with crypto instruments and tokens.
Market concern has been increasing with regard to carbon credits and how they were being promoted and sold on the blockchain, especially in conjunction with crypto.
This was partly driven by the growth in crypto linked to carbon credits in 2021, which seemed to drive the revitalisation of old credit generating projects and accusations of poor quality credits. Research from Carbon Plan identified some significant problems with the demand being generated by the Toucan platform.
At the time, Verra issued a statement making clear that it administered neither the crypto transaction or tokens. Verra said that it was prepared to work with new product developers on ensuring ‘transparent, robust and credible pathways’ for working with such instruments, and the consultation is the result of this work.
What will the consultation cover?
Crypto instruments and tokens are considered together on the basis that
these types of instruments exist as entries recorded on a blockchain and represent underlying Verra-issued units.
While the consultation refers to Verified Carbon Units (VCUs) as the underlying Verra-issued units, the principle also applies to other Verra-issued units such as credits issued by the Plastic Waste Reduction Program or assets issued by the Sustainable Development Verified Impact Standard (SD VISta).
The key issues that have been addressed are approaches to fraud and the question of environmental integrity. The latter can take many forms, from problems with double issuance, double use, abstraction from the underlying project and, of course, the potential energy consumption associated with some forms of crypto. Regulatory and legal uncertainty, as well as concerns about transparency of ownership, also need to be considered.
What are Verra’s concerns about the existing approach?
One method previously used to tokenize VCUs was the use of the retirement function in the Verra Registry, whereby VCUs were retired, an alphanumeric code was assigned,
and crypto instruments were issued based on these codes.
It is Verra’s view that this resulted in market confusion: the concept of retirement is intended to represent the consumption of a VCU’s environmental benefit and, in so doing, permanently withdraw that VCU from the market.
Retiring VCUs to create crypto instruments or tokens, while not maliciously motivated, redefines the concept of retirement away from the consumption of an environmental benefit and toward what is effectively a conversion of a VCU into another instrument whose environmental benefit remains unconsumed.
Verra felt that the reputational risk was significant, in that VCUs – once retired – are no longer eligible for transaction yet remain seen as backed by Verra. Accordingly, Verra banned any model of crypto instruments or tokens backed by retired VCUs.
Verra also considers it important for underlying VCUs to be immobilized in the Verra Registry while their associated crypto instruments or tokens remain on the market, in order to prevent these VCUs from being the subject of other transactions in the Verra Registry.
If not immobilized, these VCUs could be transferred to other accounts or retired for other purposes, thereby undermining, if not negating, the integrity of their associated
crypto instruments or tokens.
What the consultation is about
This public consultation seeks information and views on the topics identified in this document, including the following topics:
a) Measures to associate Verra instruments with crypto instruments and tokens;
b) KYC checks;
The 60-day consultation will run until Sunday, 2 October 2022.