Genesis 2.0: Smart Contract-Based Carbon Credits Attached To Green Bonds

Categories : Climate finance, Customer and Users of Digital Payments


Author: Bank of International Settlements

The BIS Innovation Hub Hong Kong Centre and the Hong Kong Monetary Authority collaborated with private consortia in 2021 under Project Genesis 1.0 to address the inefficiency in issuance, the uncertainty of green impact committed to at issuance and the lack of liquid and transparent secondary markets of government green bonds for retail investors

As an extension to Project Genesis 1.0’s successful proof-of-concept on the tokenisation of retail green bonds using both a public blockchain and a permissioned blockchain, Project Genesis 2.0 sought to address issues of greenwashing and additionality of green bonds, thereby enhancing the transparency, objectivity, and environmental integrity of the green bond market. In this project, a new structure of green bond is explored to ensure that green bonds serve the 1.5°C climate goal. In this new structure, a green bond is appended with MOIs, which are de facto verified carbon credits recognised by either international, national, or other recognised verification mechanisms in line with the Paris Agreement. In addition, the integration of the green bond market and carbon market transforms the carbon market from an ex post reward to an ex ante enabler for green projects.

Under Project Genesis 2.0, the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority, the UN Climate Change Global Innovation Hub, in conjunction with two private consortia: one composed of Goldman Sachs, Allinfra, and Digital Asset; and the other composed of InterOpera, Krungthai Bank, Samwoo and Sungshin Cement, achieved two prototypes with the use of blockchain, smart contracts, and internet-of-things (IoT) to digitally track, deliver and transfer MOIs appended to the green bond.

The prototypes demonstrated the ability to allow investors real-time transparency on the environmental impact of the use of proceeds from the green bond, efficient trading and settlement of MOIs, as well as potential solutions to concerns of double counting in carbon credits.

The first prototype developed in conjunction with the Goldman Sachs, Allinfra and Digital Asset consortium showcases a simulated solution for an end-to-end digital flow for institutional green finance. The straight-through process via a blockchain-based platform is able to digitally track, deliver and transfer MOIs in addition to tokenising the issuance of the green bond itself. It is able to achieve smart contract-based delivery of bonds and MOIs, and provides source data transparency enabled by IoT technology.

The second prototype, developed in conjunction with the InterOpera, Krungthai Bank, Samwoo and Sungshin Cement consortium is built on an interoperable host chain designed as part of a wider ecosystem. With a combination of blockchain, smart contract and API technologies, it digitally tracks, delivers and transfers MOIs throughout the full green bond lifecycle.