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

• Neither partnership has raised anywhere near $2 billion across a range of market-making products spanning both asset classes
• Tokenized carbon credits exhibit aspects of structured products, commodities and related derivatives

Carbon offset credits, meet crypto.

Digital asset-focused exchange and carbon credit liquidity provider 1GCX and T3 Trading, a proprietary trading firm investing in the space, have reached an agreement, raising a whopping $2 billion and establishing a $100 million liquidity pool to Facilitate carbon credit transactions.

The move, made possible by unprecedented fundraising for tokenized certificates, was fueled by growing interest in the securities from institutional investors, executives at the firms exclusively told Blockworks. Such securities, proponents say, make it easier for institutional investors, including pension plans and endowments, to put their money where their mouths are to derive measurable alpha from ESG investment products.

As an asset class, however, fractional carbon credits pose many risks: the financial instruments are quite volatile, and critics say the amount of good they are doing to halt the rampant spread of global warming has yet to be decided. Not to mention a glaring lack of liquidity considering the offsets trade more like illiquid structured products than anything else in digital assets, despite having far steeper ups and downs when priced.

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

T3 moves millions of dollars in capital between a number of major crypto exchanges and also puts money to work in the commodity markets. Both firms also specialize in equity derivatives and have launched a number of related synthetic trading pairs that pair commodities with cryptocurrencies. The exact terms of the deal were not disclosed.

The idea is to set up a series of liquidity pools and related over-the-counter (OTC) market-making activities that reduce the spreads of such transactions in order to attract institutions into the markets, including companies from the traditional finance industry, which are used to carbon assets , but still learning when it comes to digital assets.

RA Wilson, Chief Technology Officer of 1GCX

RA Wilson, 1GCX’s chief technology officer, told Blockworks that the company has been carefully evaluating the feasibility — and cost — of quantitatively-driven execution — as part of the initiative for several years. It was particularly pushed after realizing that there were virtually no other market makers, catering to both retail and accredited investors, to combine digital assets with real-world commodities plus derivatives.

Even now, Wilson says, liquidity consists mostly of bulge bracket banks snapping up large amounts of the carbon securities at discounted prices and then acting as an unofficial marker maker for counterparty trading firms. Banks are likely to fetch a handsome spread for this, given that such deals are essentially de facto OTC.

The case for tokenization

Wilson, who has personally invested in crypto since 2011, said he noticed about five years ago that carbon credits — sponsored by governments, including the US, and in select cases with tax incentives — were gaining momentum, with companies ignoring the products themselves look more like a boon than the “currency” the instruments were designed to be.

“Business development starts with building the right marketplace to ensure there is liquidity for higher quality offsets and nature-based solutions,” said Wilson. “Diversion of financial assets from land-based 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 incorporates elements of proof-of-stake consensus mechanisms, but relies on validators staking their identity or reputation. It typically occurs on private, centralized blockchains rather than public systems without permission.

The end goal: building a digital asset-based market powered by the burgeoning “green grid mixed with the internet of energy.”

The unique setup would ideally increase transparency of pricing and real-world benefits – in terms of combating climate change – two common thorns of institutional investors who have traditionally had to rely on Wall Street and the commodity hub of Chicago to deal with illiquid assets Trading carbon credits denominated by market makers at dismal prices.

Traders using 1GCX already have access to a number of digital assets such as Bitcoin, Ether, AVAX and SOL.

According to Wilson, there is already a “huge demand” from institutions starved for carbon offset credits, one that is growing every year. The launch of the trading platform should encourage liquidity, transparency and fair pricing — while fighting fraud — by adding crypto into the mix, he said.

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• Michael Bodle

  editor-in-chief

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

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