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‘FutureFi’: Crypto is transforming the green finance universe

What’s your Green Finance IQ? Are you up on cryptocurrencies or down on green bonds? What’s the difference between sustainable finance, ESG investing and impact investing? What about AI knowledge?

Does the above test pass? So what about DeFi, NFTs, DAOs, khaki bonds, double materiality, green shorts, impact insurance, stablecoins and smart contracts?

You can find definitions for these and other terms that make up the green finance jargon. As we heard many times at GreenBiz’s recent GreenFin 22 conference, this lexicon addresses current practices, products, and strategies.

The main driving force is cryptocurrencies, digital currencies that use cryptography such as blockchain to manage transactions. At the “Future of Finance” panel I attended, “Cryptocurrency is money built for the Internet” was the speaker’s mantra. “This is the new baseline for value transformation,” asserts moderator David Bennell, Chief Sustainability Officer at Hyphen Global AG. This is the next generation of value for managing assets, whether they are stored or transferred – the digital token economy.

The premise is that digitalization will make investments more efficient and accessible to more people, and blockchain accounting will increase transparency. Just as the rewiring of the Internet, a transformation called Web3, is aimed at decentralizing monopoly control by Big Tech, so is digital finance. This gives rise to decentralized finance (DeFi). It is an umbrella term for financial instruments and practices developed for use with blockchain, including many of the green finance investments. They include items such as tokenized carbon credits, non-fungible tokens (NFTs), and stablecoins.

DeFi also creates decentralized autonomous organizations (DAOs) that guide allocations through smart contracts run by artificial intelligence algorithms. His one example given by Jamie Chapman, his Principal of ESG at Superlunar, was that of Big Green. Originally a school garden project, Big Green turned under COVID restrictions into a DAO that democratized grant delivery, thereby disrupting traditional philanthropy. Big Green claims to be the first non-profit led charitable DAO.

The main argument underlying DeFi’s logic is resilience through widely distributed systems. In other words, it draws on the wisdom of crowds rather than guidance from a small concentrated group of traditional financial experts (such as those who brought about the global financial crisis in 2008-2009). increase. The enhanced transparency and data-driven nature of digitalization should particularly enhance the ability of green investors to manage risk and volatility while maximizing potential returns.

This paradigm-shifting investment disruption is well underway.

Sounds great, but there are issues that cast a shadow over the bright prospects of this futuristic financial environment. For example, digitization relies on data. Given current concerns about discrepancies, incompleteness and incomparability of ESG data, this is a significant challenge.

The biggest problem may be the cipher itself. It was created as a way to handle money outside the traditional banking system and has its own transparency and accuracy issues. Recent headlines on crypto are full of bankruptcies, fines, hacks, scams, insider trading and opaque practices in the crypto world. The crypto crash has seen $2 trillion in valuations drop across the sector since January. Crypto companies are using bullish buys with insufficient collateral to lend to other cryptocurrency platforms. Some appear to have paid early investors with income from new inflows, a model similar to the classic Ponzi scheme. This is an industry ripe for regulation, and with the US Securities and Exchange Commission imposing criminal charges for illicit cryptocurrency practices, regulation looks imminent.

DeFi — decentralized finance — is largely responsible for the current meltdown. The culprit is the forced sale of cryptocurrencies by individual depositors who invested for yield, Martin Green, CEO of quantitative trading firm Cambrian Asset Management, told CNBC. “Since 2020, we have seen a huge build out of yield-based DeFi and crypto ‘shadow banks’. Unsecured or under-collateralized loans were common because credit and counterparty risks were not carefully evaluated. was forced to sell.

There are also external issues. Inflation, weak market conditions and a looming recession are macroeconomic dampers to innovative products and practices.

Then there are the high energy prices and the fact that cryptocurrency mining consumes huge amounts of energy. Tens of thousands of dedicated computing machines that create cryptocurrencies and manage transactions run his 24/7. The world’s largest bitcoin consumes an estimated 150 terawatts of electricity per year. That’s more than Argentina, a country with a population of 45 million. Its energy production is also emissions-intensive, producing 65 megatons of carbon dioxide, comparable to Greece’s emissions. In Texas alone, cryptocurrency miners could add 6 gigawatts of energy demand by the middle of next year. This is equivalent to adding Houston to the grid with one of his.

It’s important to remember that this Brave New World is still in development and is still in its early stages. Many of the above issues – transparency, volatility, data accuracy, and regulation (or lack thereof) – also adversely affect traditional finance in doing investment business. And efforts to solve the above problems are well underway. For example, his ongoing integration and harmonization of ESG data by the Values ​​Reporting Foundation aims to answer questions about the data needed for digital investments to function properly.

The company represented on the panel, DevvESG, was defined by Belem Tamayo, director of international partnerships at parent company Devvio, as a “verifiable source of truth for ESG data and tokens.” Its approach, called the AIR Methodology, offers his ESG “better” in baseline analysis, guidance, tools and data through an open platform, according to the company’s marketing materials.

Trusted data, open platforms, democratization — these are qualities that particularly lend themselves to the value of green finance across a range of products and goals. If crypto serves as the base currency of FutureFi, we will address the issue so that these aspects can effectively drive innovation and enable various green investment products and services based on crypto to reach their full potential. must be

Here’s the problem. This paradigm-shifting investment disruption is well underway. The enthusiasm, smarts and willingness to drive it by the younger generation of financial professionals I saw at GreenFin 22 gave me great clues as to what drives their ultimate success. There is no doubt that speed bumps in the development stage will flatten out. Be prepared for the learning curve as you catch up on FutureFi now in progress.


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