Upstart Crypto Carbon Credits Platform Raises $2 Billion to Harness the 'Internet of Energy'

Upstart Crypto Carbon Credits Platform Raises $2 Billion to Harness the ‘Internet of Energy’

  • No partnership has raised even close to $2 billion for a suite 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 the crypto.

1GCX and T3 Trading, a proprietary trading firm that invests in space, have reached an agreement, raising $2 billion and creating a $100 million liquidity pool to facilitate carbon credit transactions.

The move, made possible by the unprecedented fundraising for the tokenized carbon credits, was propelled by growing institutional investor interest in the securities, the companies’ executives exclusively told Blockworks. Such securities – say proponents – facilitate the ability of institutional investors, including pension plans and endowments, to put their money where they say it will in terms of deriving measurable alpha from equity products. ESG investing.

As an asset class, however, split carbon credits carry a lot of risk: the financial instruments are quite volatile and the verdict has not yet been given, according to critics, on their effectiveness in terms of stopping the rampant spread of global warming. And that’s not to mention a glaring lack of liquidity, considering offsets trade more like illiquid structured products than anything else in digital assets, despite much steeper ups and downs in price.

Enter 1GCX, which provides the infrastructure for the ambitious new trading platform.

T3 moves millions of dollars of capital between a number of major crypto exchanges and also puts money to work in the commodity markets. Both companies also specialize in equity derivatives and have deployed a number of associated synthetic trading pairs coupling commodities to cryptocurrencies. The exact terms of the agreement 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 these transactions with the aim of attracting institutions to the markets, including including traditional finance entities used to carbon assets, but still learning about digital assets.

RA Wilson, Chief Technology Officer of 1GCX

RA Wilson, chief technology officer of 1GCX, told Blockworks that the company has been doing due diligence on the feasibility — and the cost of quantitative execution — of the initiative for several years. This was particularly motivated after discovering that there were hardly any other market makers that catered to retail and credentialed investors in terms of pairing digital assets with real-world commodities, as well than by-products.

Even now, according to Wilson, the liquidity is mostly made up of big banks grabbing large amounts of carbon securities at discounted prices and then acting as an unofficial marker for counterparty trading firms. Banks are likely capturing a nice margin for this, given that these transactions are essentially de facto OTC in nature.

The case of 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 some cases – were gaining momentum, companies viewed the products as more of a benevolent effort, not the “currency” the instruments were meant to become.

“Business development starts with creating the right market, ensuring there is liquidity, higher quality offsets and nature-based solutions,” Wilson said. “The diversion of financial assets from terrestrial projects can actually benefit us globally.”

1GCX is also in the relatively early stages of developing its own blockchain, with a token that draws a parallel between “proof of authority” and algorithmic “computational proof of authority.”

Proof-of-Authority is a method of signing transactions that has elements of Proof-of-Stake consensus mechanisms, but relies on validators staking their identity or reputation. It is usually found in private, centralized blockchains, rather than public systems without permission.

The end goal: to create a market based on digital assets, driven by the booming “green web mixed with the internet of energy”.

The setup, the first of its kind, would ideally increase the transparency of price discovery and real-world utility – in terms of fighting climate change – two common thorns in institutional investors who until now had to rely on Wall Street and the commodities hub of Chicago to trade in illiquid carbon credits denominated via murky pricing from market makers.

Traders using 1GCX already have access to a range of digital assets, such as bitcoin, ether, AVAX and SOL.

There is already a “huge demand” from institutions hungry for carbon offset credits, a demand that is growing every year, according to Wilson. The launch of the trading platform is expected to boost liquidity, transparency and fair pricing – while cracking down on fraud – by adding crypto to the mix, he said.

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  • Michael Bodley

    Chief Editor

    Michael Bodley is a New York-based editor for Blockworks, where he focuses on the intersection of Wall Street and digital assets. He previously worked for the institutional investor newsletter Hedge Fund Alert. His work has appeared in The Boston Globe, NBC News, The San Francisco Chronicle and The Washington Post. Contact Michael by email at [email protected]

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