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- No partnership has raised even close to $2 billion for a series of market-making products that feature both asset classes
- Tokenized carbon credits feature aspects of structured products, commodities and related derivatives
Carbon offset credits, meet crypto.
Digital assets-focused exchange and carbon credit liquidity provider 1GCX and T3 Trading, a proprietary trading firm that invests in the space, have struck a deal, raising a whopping $2 billion and setting up a $100 million liquidity pool to ease carbon credit transactions.
The move, made possible by the unprecedented fundraise for tokenized carbon credits, has been propelled by the growing interest of institutional investors in the securities, executives from the firms exclusively told Blockworks. Such securities — proponents say — ease the ability of institutional investors, including pension plans and endowments, to put their money where their mouth is in terms of deriving measurable alpha from ESG investment products.
As an asset class, however, fractionalized carbon credits carry plenty of risk: The financial instruments are quite volatile, and the verdict is still out, according to detractors, on how much good they do in terms of stopping the rampant spread of global warming. And that’s not to mention a glaring absence of liquidity, considering the offsets trade more like illiquid structured products than anything else in digital assets, despite coming with far steeper ups and downs in terms of price.
Enter 1GCX, which is providing the infrastructure for the ambitious new trading platform.
T3 moves millions of dollars of capital around between a number of major crypto exchanges and also puts money to work in commodities markets. Both firms additionally specialize in equity derivatives and have rolled out a number of related synthetic trading pairs coupling commodities with cryptocurrencies. The exact terms of the deal were not disclosed.
The idea is to set up a series of liquidity pools and associated over-the-counter (OTC) market-making activities that reduce the spreads of such transactions in a bid to attract institutions into the markets, including entities from traditional finance accustomed to carbon assets but still learning when it comes to digital assets.
RA Wilson, 1GCX’s chief technology officer, told Blockworks the company has been doing due diligence on the feasibility — and the cost of quantitative-driven execution — on the initiative for several years. It was especially driven after finding there were virtually no other market makers that catered to retail and accredited investors alike in terms of pairing digital assets with real-world commodities, plus derivatives.
Even now, according to Wilson, liquidity is mostly made up of bulge-bracket banks snapping up large quantities of the carbon securities at discounted prices, then acting as an unofficial marker maker for counterparty trading firms. The banks likely capture a handsome spread for doing so, considering such trades are essentially de facto OTC in nature.
The case for tokenization
Wilson, who has personally invested in crypto since 2011, said he noticed about five years ago that, while carbon credits — promoted by governments, including the US, and featuring tax incentives, in select cases — were gaining momentum, companies see the products as more of a do-good effort, not the “currency” the instruments were designed to become.
“Business development starts with building the right marketplace, making sure there’s liquidity, of higher-quality offsets and nature-based solutions,” Wilson said. “Diverting financial assets from land-based projects can actually benefit us globally.”
1GCX is also in the relatively early stages of developing its own blockchain, featuring a token that draws a parallel between “proof-of-authority” and algorithmic “computational proof-of-authority.”
Proof-of-authority is a method of signing off on transactions that features elements of proof-of-stake consensus mechanisms but relies on validators staking their identity or reputation. It typically features in private, centralized blockchains, rather than public permissionless systems.
The end goal: building a digital assets-based market driven by the burgeoning “green web mixed with the internet of energy.”
The first-of-its-kind setup would, ideally, increase the transparency of price discovery and real-world utility — in terms of combating climate change — two common thorns of institutional investors that until now have had to rely on Wall Street and the commodities hub of Chicago to transact in illiquid carbon credits denominated via the murky pricing of market makers.
Traders using 1GCX already have access to a range of digital assets, such as bitcoin, ether, AVAX and SOL.
There’s already a “huge demand” from institutions hungry for carbon offset credits, one that’s growing every year, according to Wilson. The launch of the trading platform ought to boost liquidity, transparency and fair pricing — while clamping down on fraud — by adding crypto to the mix, he said.
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