The United States’ formal withdrawal from the Paris Agreement on climate change last week has renewed a sense of urgency in efforts to mitigate global warming. What role could blockchain play in helping prevent climate change?
One of the most promising solutions that blockchain technology could offer, experts say, is improving the way that carbon trading systems are currently funded.
The Paris Agreement grew out of the United Nations Framework Convention on Climate Change five years ago to coordinate and strengthen the international response to global warming. Its long term goal is to maintain the global temperature below a 2-degree Celsius threshold above pre-industrial levels. According to a recent report by the U.N. Intergovernmental Panel on Climate Change, a 1.5-degree Celsius rise in global temperatures could result in water stress, food scarcity and climate-related poverty.
The U.S. withdrawal from the Paris Agreement may yet be reversed as President-Elect Joe Biden has vowed in a tweet that his administration would rejoin it. But regardless of U.S. actions, there is a lot the rest of the world can do about carbon emissions, climate advocates say.
The Asia-Pacific region is the largest emitter of carbon dioxide (CO2) in the world, according to a report from Statista. China alone produced an estimated 28.8% of global greenhouse gas emissions in 2019.
In Asia and elsewhere, blockchain technology could help small and medium enterprises (SMEs) engaged in carbon emissions trading by providing investors easier access to tokenized funds, improving the liquidity of assets through the use of those tokens and increasing the transparency in investment processes.
Sonic Capital is a venture capital and investment fund doing just that — using blockchain and token economics to invest in startups that provide commercial solutions to environmental problems, with a focus on businesses that support the carbon credit market.
Stefan Rust, founder and CEO of Sonic Capital, told Forkast.News that the carbon trade industry in the spot market has the potential of growing to US$50 billion. He also explained how blockchain technology can help spur greater investment in companies in the environmental sector.
The following Forkast.News interview with Rust has been edited and condensed.
Sonic Capital’s investment funds are tokenized on blockchain. How does this work?
Individual participation in any fund is subject to the requirements of applicable laws, including the local laws of the jurisdiction where a potential investor is based. Venture capital (VC) is generally available to “qualified,” “professional” or “accredited” investors.
From Sonic Capital’s perspective, our aim is to lower the barrier to entry for VC as an asset class. Most funds have relatively high minimum investment requirements, but by tokenizing our fund and leveraging the benefits of blockchain technology, we can lower our administrative costs and increase automation around shareholder management. As a result, we can open the fund up to a larger pool of qualified investors with much lower investment sizes.
How much control will token buyers have on the deal nomination and approval process?
Ultimately, we want our investors to feel the same passion that we do around ensuring our future generations can enjoy a thriving planet and bringing those currently left out of the financial ecosystem into the fold. We feel that we can best align ourselves with our investors by empowering them to contribute their ideas, propose investments and to make investment decisions alongside us as the management team. Our view is that VC funds should harness the massive knowledge pool they have access to in their limited partner base in a more systematic way, and this is the way we aim to accomplish that.
How is this different from a normal initial coin offerings (ICOs) or security token offerings (STOs)?
The ICO hype was driven predominantly by “companies” that had produced white papers or thesis papers outlining their intended business plans and product offerings. These companies managed to raise significant funding off the back of that, and in most cases, we’ve yet to see real results.
The STO market, while very attractive, has been suffering in recent years due to confusing regulations across different jurisdictions and fragmented technology standards and protocols. As a result, institutions have experimented with STOs but on a limited basis.This is likely to change drastically in the next 3 years as we are already seeing interesting innovations such as fractional share ownership, venture ownership, etc.
In contrast, the returns associated with investing in a tokenized venture fund are directly tied to the underlying investments in the fund. Put simply, a tokenized venture fund essentially mimics a traditional venture fund, it’s just digitized so that an investor’s shares in the fund are represented by tokens. This comes with a number of benefits, such as lower cost, access to liquidity, greater transparency and rapid distribution of returns.
What is this process like for token investors?
The market has matured, technologies, smart contracts and developer tools have evolved substantially (see governance tokens and the evolution of decentralized autonomous organizations), people are more educated and the transparency of the blockchain along with the evolution of governance models allow for a new way to move this forward. There are a few investors we’re working with that made tokenizing our fund a prerequisite for investment. Times have changed and three years from now, it’s likely that the liquidity and exchanges supporting STOs are going to be far greater than they are today
How would Sonic incorporate the appropriate know your customer (KYC) /anti-money laundering (AML) requirements, particularly since this initiative is aimed at Asia in general, which has different policies toward cryptocurrency?
Sonic is partnering with a technology platform to help us manage the token issuance and build out the smart contracts that will manage the governance of the fund. As part of that process, KYC/AML requirements for each jurisdiction in which Sonic has shareholders will be implemented according to their respective geographies to ensure compliance with the relevant regulations.
What are some examples of companies/projects Sonic is supporting through funding?
Regen.network is a company we’re really excited about and have already invested in. The company works with farmers to ensure they can compete with large food manufacturers by bringing down the cost to capture the benefit to the environment gained.
Allinfra is another company we’re currently supporting through the consultancy side of our business and has been on our radar for investment. They use blockchain to track the production, ownership, transfer and retirement of climate-relevant data for internal tracking, external rating and environmental financial products. This enhances the quality and scale of climate action across major compliance and voluntary environmental markets.
We are actively working with a number of other really cool companies across the value chain that are led by strong entrepreneurs.
Why the focus on social impact and the environment, and what role would blockchain technology play?
We’re looking to monetize and convert what historically has been viewed as “charity,” a “good cause,” I “have to do this” and “donations” into a “how can we convert saving our planet into actually making money.” With blockchain we can put the governance into the most secure truth machine and slash US$5 trillion in global corporate annual fraud. By bringing tokens to the mobile, we can include 2.7 billion people worth $350 billion in our global economy, and this doesn’t include the innovative financial products that will create value beyond that initial estimate.
For simplicity, we lump everything into carbon credits, but what we’re referring to is as a bucket that represents a variety of planetary assets. With blockchain and tokenization of those assets, we can truly accelerate value and monetization opportunities while creating many new different types of jobs.
An example of a good actor is Tesla. In the last five quarters, Tesla announced profits thanks to cleaning up manufacturing, sourcing energy for their robots from the natural resources and then trading the credits they earned as a result in the market.
Today we were just talking to one company who has a number of real estate customers working with consumers, who 1) cannot buy carbon credits that their customers want to offset and then 2) when they actually do find carbon credits, they are from 2007.
This industry is struggling with huge fragmentation and looking for a homogenous product, struggling with quality control and certification and lacking liquidity and transparency. Trust is a big problem. Isn’t this perfect for blockchain?
Today, the Trump Administration officially left the Paris Climate Agreement. And in exactly 77 days, a Biden Administration will rejoin it. https://t.co/L8UJimS6v2
— Joe Biden (@JoeBiden) November 5, 2020
With the demands to go carbon neutral by 2030 from [23% of] Fortune 500 companies and countries like Japan, China and E.U. by 2050, the only way to get there is with blockchain technologies. This industry in the spot market will grow to US$50 billion. If we wait for the regulators and the United Nations, we won’t be able to hit these targets in time. We want to help accelerate this momentum.
Sonic’s focus is on businesses using carbon credits. Critics of carbon credit systems say that such schemes may not lead to any meaningful reduction of carbon emissions since businesses would still be allowed to buy the right to keep polluting if they offset their emissions with investments elsewhere. How does Sonic view these critiques to carbon credit systems?
In an ideal world, we wouldn’t need a carbon-credit system, and businesses would overhaul their entire supply chains and operations to be environmentally friendly overnight. In reality, this won’t come to fruition on a global scale for decades to come, especially when considering industries that are the biggest offenders and less developed economies. There needs to be an interim solution to enable companies to offset their carbon emissions while they work toward a more permanent solution to achieve carbon neutrality.
Beyond this, carbon credits or “planetary credits” allow small and medium enterprises (SMEs) to compete in this space. There are far more SMEs than large enterprises, employing a large proportion of the population. By being “good actors,” these businesses can leverage carbon credits to compete against the big multinationals that benefit from economies of scale.
Sonic touts the decentralized and transparent nature of blockchain, but investments are by nature often from centralized sources and private. Why is blockchain needed for this funding activity, and where is the demand for decentralization and transparency in similar investment projects?
The benefits of tokenizing an investment fund are threefold.
1) Cost and access: Venture capital investment opportunities are traditionally reserved for a very small segment of the population due to the high initial cost of participation. As discussed above, the automation associated with building the fund on the blockchain and the implementation of smart contracts results in lower operating costs for the fund. Those cost savings can be passed along to investors in the form of lower fees, while enabling the fund to manage a much larger investor base in a cost efficient manner.
2) Liquidity: Venture capital funds traditionally have an 8-to-12-year life span. This means that investors will receive distributions from successful portfolio company exits during the life of the fund, but their initial investment is locked up for that full duration. Tokenizing Sonic’s fund means that we can offer early liquidity. After an initial lockup period, investors have the ability to trade their Sonic tokens on pre-authorized and approved exchanges. Secondarily, while Sonic is a venture capital fund at the core, it will also invest in tokens issued by its portfolio companies (where appropriate) to supplement equity driven returns, in addition to utilizing other techniques to optimize the return on called but undeployed capital. As a result, Sonic will be able to provide early distributions from these more liquid holdings ahead of exiting its equity holdings.
3) Venture capital funds are notoriously opaque when it comes to the investment process. As alluded to above, Sonic’s intention is to empower its investors by providing a similar level of transparency as a traditional VC fund would to its investment committee and enable them to participate in the decision-making process. We also aim to provide real-time transparency with regards to fund investments (both liquid and illiquid) through Sonic’s investor portal.
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