A major voluntary carbon standard invites comments on linking carbon credits with crypto instruments and tokens, reinforcing the growing importance of blockchain transactions in voluntary carbon markets.
On August 3, 2022, Verra, a voluntary carbon standard, announced it was opening a public consultation process on its proposed approach to third-party crypto instruments and tokens.[1] The 60-day consultation began on August 3 and will close on Sunday, October 2, 2022.
Verra is seeking public input on a proposal to permit tokenization of “live,” unretired carbon offsets via a new “immobilization” process. This “immobilization” would essentially lock a Verra account holder’s carbon credit within that account’s registry unless the credit is retired or the crypto instrument or token is “burned” (i.e., destroyed).[2] In recent years, a number of entities have sought to develop crypto instruments or tokens that represent Verra-generated carbon offsets. Verra’s announcement of the public consultation process is the latest in a series of steps it has taken to address these efforts and to provide validity and transparency in the market for tokenized carbon offsets.
Verra’s stated objective in conducting its consultation is keyed to identifying and implementing anti-fraud measures related to the association of Verified Carbon Units (VCUs) with crypto instruments and tokens. While crypto instruments and tokens are not inherently fraudulent, in Verra’s words, their “exotic and technical nature… can create an elevated risk of unscrupulous entities taking advantage of unsuspecting people.” Verra began its public consideration of crypto instruments and tokens in late 2021, when it issued a “Statement on Crypto Market Activities.” In that statement, Verra noted its awareness of crypto market activities that aimed “to represent canceled or retired VCUs” issued by Verra.[3] At the time, Verra did not express a position on the legal nature or environmental integrity of crypto activities.
However, Verra issued several cautionary notices including that Verra does not administer crypto activities, does not take any responsibility for the tokens, and does not verify, endorse, or recognize any token not licensed or otherwise authorized by Verra. In its November 2021 statement, Verra referred to provisions of its Terms of Use, which govern how VCUs may be transacted to state that Verra’s express written consent is required to create, market, or transact in instruments linked to VCUs. Lastly, Verra stated that it intended “to work with new product developers and other market participants to establish transparent, robust and credible pathways for responsibly associating VCUs with such instruments.”
Verra’s proposed approach to crypto instruments and tokens relies on an important distinction between “retired” and “immobilized” credits. Whereas “retiring” a carbon credit is widely understood to constitute consumption of that credit, “immobilization” would essentially freeze within a Verra account holder’s registry account any VCU associated with a corresponding crypto instrument or token. The VCU would remain “immobilized” until either (1) it is retired, and both the VCU and corresponding crypto instrument or token are burned; or (2) the VCU is “reactivated” by burning the crypto instrument or token without the use of any environment benefit. Consistent with this approach, on May 25, 2022, Verra prohibited the practice of creating instruments or tokens based on retired credits.[4]
In the public consultation process announcement, Verra cited perceived risks of a poorly-designed crypto framework that the “immobilization” framework is intended to address. In particular, Verra cited environmental integrity concerns, risks in connection with know-your-client (KYC) processes, and regulatory and legal “uncertainty” stemming from varying laws concerning crypto instruments and tokens, as well as its concerns about fraud discussed above.
To address each perceived risk, Verra is proposing amendments to the Terms of Use, preparing a template agreement that would govern the tokenization of VCUs, and soliciting feedback from the public.
As one of the largest carbon offset standards, Verra’s decisions on tokenization of carbon offsets will impact the nascent carbon offset cryptocurrency market. In its public consultation guidance, Verra has outlined a number of potential risks on which it is requesting input. Interested parties may submit comments to Verra through the end of the public consultation process at 11:59 pm ET on October 2, 2022.
Endnotes
[1] Verra, Public Consultation: Verra’s Approach to Third-Party Crypto Instruments and Tokens (Aug. 3, 2022), https://verra.org/public-consultation-verras-approach-to-third-party-crypto-instruments-and-tokens/
[2] Verra, Public Consultation on Third-Party Crypto Instruments and Tokens (Aug. 3, 2022), https://verra.org/wp-content/uploads/2022/08/Verra-Public-Consultation-on-Crypto-Instruments-and-Tokens.pdf (all quotes in this post not otherwise cited are cited to this source). Note, Verra considers crypto instruments and tokens as essentially identical, noting that “these types of instruments [both] exist as entries recorded on a blockchain and represent underlying Verra-issued units.” Thus, for Verra’s purposes, there is no difference between a “crypto instrument” and a “token.”
[3] Verra, Verra Statement on Crypto Activities (Nov. 3, 2021), https://verra.org/statement-on-crypto/
[4] Verra, Verra Addresses Crypto Instruments and Tokens (May 25, 2022), https://verra.org/verra-addresses-crypto-instruments-and-tokens/
