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The environmental impact of blockchain’s energy consumption has raised concerns globally. However, the use of renewable energy sources within the Bitcoin space demonstrates a commitment to addressing these concerns. Although the blockchain industry is not nascent, we have seen an increasing number of ESG initiatives emerging that leverage the numerous benefits of blockchain technology, showcasing the industry’s commitment to mitigating its environmental footprint.

To ensure an environmentally and economically sustainable future, we should explore and dispel the myths surrounding blockchain’s energy use, so we can aptly recognise the potential to drive positive change in both environmental and social dimensions while emphasising the importance of interconnection and data sharing in the industry.

Debunking blockchain myths

Myth 1: Blockchain’s energy intensity and market participants

There is a common assumption that only environmentally nonconscious individuals and specific industries engage in cryptocurrencies due to their energy-intensive nature. However, the reality is that cryptocurrencies attract participants from diverse backgrounds and industries. The accessibility and potential for financial growth in the industry appeal to a wide range of individuals, contributing to its adoption in environmentally conscious circles and beyond.

Myth 2: Blockchain’s sole focus is crypto

Blockchain technology is often solely associated with cryptocurrencies, neglecting its broader social impact and positive ESG goals. Beyond crypto, blockchain has the potential to revolutionise supply chains, enhance transparency, and promote sustainability. Recognising the multifaceted benefits of blockchain technology is pivotal to realise its full potential in driving positive social change and achieving ESG goals.

Balancing the direct and indirect environmental impacts of blockchain

We should also emphasise the importance of addressing both the direct and indirect impacts, particularly in the Bitcoin mining sector. While controlling the infrastructure and mechanisms may be challenging, taking responsibility for the environmental impact is essential. There are multiple ESG initiatives—such as Zumo’s Oxygen and GMEX Group’s ZERO13—whose methodology offers organisations, including banks, a valuable tool to address the carbon impact of their assets, promoting transparency and accountability within the financial sector.

Reducing energy consumption is a critical aspect of ESG efforts. In the public blockchain community, where there is no central authority to drive progress, the value of both proof of stake and proof of work mechanisms should be recognised to verify that algorithms and processes are indeed related to environmental impact. We are beginning to see some blockchains better assess their energy usage and carbon footprint. This balance validates the integrity of carbon credits and fosters sustainable practices in the industry. In this regard, the Guidelines for Improving Blockchain’s Environmental, Social and Economic Impact INSIGHT REPORT APRIL 2023 by the World Economic Forum are very insightful.

The table above from this World Economic Forum report outlines the estimated annual carbon footprint for various proof of stake blockchains. It is interesting that Cosmos as a layer 0 blockchain, which we at ZERO13 utilise for our ZERO13 Chain (underpinned by Pyctor) to connect multiple private and public blockchains as a trading and settlement ‘network of networks’ for digital carbon credits and real-world climate-related assets, has the lowest carbon footprint amongst the list.

Interconnection, data sharing and geopolitical understanding

Interconnection and data sharing play vital roles in tracking and verifying carbon credit projects, especially when it comes to assessing the credibility of the industry. Engaging and collaborating with various stakeholders becomes essential, considering the diverse interests and the need for end-to-end provenance. Understanding the geopolitical dynamics of carbon credit markets, where developing countries primarily produce credits while developed countries consume them, helps foster collaboration and innovation. For example, carbon-negative Costa Rica generates credits, while the UAE and Saudi Arabia buy credits to offset the oil produced by Adnoc and Aramco respectively. The oil companies are increasingly moving into green energy production too in the drive to achieve net zero. For example Adnoc, who are on both the buy and the sell side, recently set up a carbon trading desk. The emergence of digital registries that promote transparency and accountability whilst connecting into multiple digital measurement, reporting and verification standards (dMRV) upstream, and multiple markets downstream, holds significant promise for the future of the industry.

Mining Bitcoin for social and economic benefits

The impact of blockchain technology extends beyond cryptocurrencies. Bitcoin mining, despite its energy-intensive nature, can be harnessed to generate economic drive and commercial benefits. Moreover, it can contribute to social initiatives, which leads to positive change. In Mexico for instance, a mangrove project focuses on ecosystem preservation, carbon credits, and community involvement. Tracking and transparently distributing profits from the primary and secondary sales of carbon credits back to the community using cryptocurrencies essentially ‘banks the unbanked’, and contributes to the concept of “social carbon” and equitable distribution. Blockchain technology allows for transparency and accountability in such practices where legally binding contracts are (sometimes) not enough to track the distribution.

Seaweed farms are also an interesting system to explore. Seaweed absorbs carbon and offers environmental benefits. Whilst Seaweed farming is a nascent industry globally, a report published in Nature Sustainability earlier this year cites that if seaweed could expand to form 10% of human diets by 2050 it could result in a reduction in the amount of land needed for food production by 110m hectares (272m acres), equivalent to an area twice the size of France. Blockchain can ensure fair profit distribution to labourers, enhance transparency in supply chains, and enable producers to verify the origin and ethical standards of seaweed. It becomes a win-win situation: more seaweed farms mean more carbon absorption, with the added benefit of improving the treatment of farmers. Funds from social carbon systems can be redistributed back to individuals by allocating a portion of the proceeds to improve the quality of life. This can be done by investing in infrastructure and facilities that benefit the local communities, including the development of industry-related facilities which can generate stable income and support the growth of sustainable products. By prioritising economic sustainability and community development we can create a more inclusive and prosperous future. Additionally, by examining chemical components, such as conducting lifecycle assessments, the environmental impact of products and assets can be measured more effectively. For example, studies on how effective different varieties of seaweed are at absorbing carbon would directly alter their price and any possible profit.

Another interesting point to consider is water, not as a finite and scarce resource, but rather in trying to avoid its treatment as a commodity like oil, which is an impending concern. Big corporations such as clothing manufacturers and drinks companies are under pressure to address their water usage, especially in product manufacturing. To address the water scarcity issue, they are willing to finance the upstream replenishment of water, including distributed community-based water projects. To support this, blockchain technology can facilitate decentralisation, harness finance, and support upstream developments. We can validate sustainable water management practices by tracking and tracing financial projects related to water usage to ensure transparency, avoid greenwashing, and promote responsible corporate practices.

Looking Ahead: bridging traditional carbon markets and Blockchain

As the worlds of traditional carbon markets and blockchain converge, challenges and opportunities arise. Whilst some assume that carbon emitters solely purchase and use credits, initiatives like Adnoc’s carbon credits trading desk in Abu Dhabi challenge this notion. We simply cannot switch off oil production overnight as it would lead to economic ruin. We have seen the adverse impact of the restricted supply of fossil fuels due to gas pipeline interruptions from Russia supplying fuel to Western Europe. As such it is very much a process, rather than a single event, to move to greener energy. By allowing the sale and purchase of oil and the generation of credits, it demonstrates the potential for synergy between industries. We are transitioning towards greener production methods, meaning that the generation of carbon credits will inevitably increase, promoting a more sustainable future.

Addressing the energy-intensive nature of the blockchain industry and technology services as part of a broader strategy, alongside recognising the wider social impact and positive ESG goals, are crucial steps towards building a more sustainable future. Through the use of renewable energy sources, initiatives like Oxygen and ZERO13, and a focus on economic and social benefits, we can ensure the responsible growth of carbon and wider climate-related markets by leveraging blockchain technology. We can drive transformative change and create a more sustainable and equitable world through more efficient water management, mangroves and seaweed farms – just to name a few initiatives.

At the start of January 2021 I made my top 5 predictions for the digital asset and blockchain space. The results were very accurate. I briefly recap those and try to repeat that feat with my key predictions for 2022:

2021 Predictions recap

Capital markets accelerate the move from analogue to digital – Regulated digital exchanges and custodians continued to be launched, not just from newer players but also from traditional ones.

Product innovation in terms of assets tokenized begins to succeed – Security tokens, whilst still nascent, started to come into their own during 2021 as better products were developed with listing and trading on digital exchanges in regulated environments.

Demand for smart and digital hub solutions increases – digital hub-based models, which can connect many participants from upstream to downstream launched and started to gain traction, with the aim of bridging the gap between existing traditional infrastructure and fragmented multiple blockchain-enabled digital infrastructure.

Convergence of B2C and B2B with digital exchanges and payments intersecting – Emerging markets opportunities began to propagate, harnessing users and aggregating and matching these with institutional activity, including a well-designed compliance construct to ensure proper KYC/ AML.

Growth of CBDC and payments use cases going live – We saw successful pilots in some developed markets and some emerging markets starting pilots to embrace a CBDC and payments-enabled ecosystem.

Looking ahead to 2022

Regulated DeFi is applied in practice

Currently many ventures embracing blockchain technology are doing so by utilising a traditional centralized model. In contrast, the decentralized exchanges and broader DeFi plays, whilst increasing their liquidity flow, currently have perceived KYC/ AML concerns.

Financial Action Task Force (FATF) guidelines suggest that Decentralized Applications (DApps) will need to comply with country specific laws enforcing FATF, AML, and Counter-Terrorism Financing requirements.

These guidelines call for countries to identify individuals with “control or sufficient influence” over DeFi initiatives, which could potentially result in founders of such initiatives becoming subject to rules requiring them to provide beneficiary information relating to transactions.

This will lead to ‘Regulated DeFi’ in practice, which is seen as essential for DeFi to become more usable for institutions.

On a related note, Central Bank Digital Currency (CBDC) adoption will continue to rise, coupled with some form of regulation for stablecoin usage, likely – starting with the United States. This will aid in the reduction of Fiat payments friction and inefficiency, which is a good thing as traceability and credibility will protect consumers and make it cheaper and faster to transact. It will also create an environment whereby more participants transfer from being off-chain to on-chain, creating more democratisation and financial inclusion despite decentralized purists say about central authorities.

CeFi and DeFi convergence leads to HyFi

Centralized Finance (CeFi) and Decentralized Finance (DeFi) will intersect within a regulated environment to support the convergence of traditional and digital asset activity.

Centralized and decentralized technology-enabled businesses will coexist via hybrid solutions (traditional and digital) as buy side institutions, banks, brokers, exchanges and other capital players increasingly adopt digital assets as part of a digital transformation agenda.

To support this, financial market and digital asset infrastructure will become interoperable. One such example will be centralized  and decentralized exchanges combining to create a type of Hybrid Exchange (HEX). For example one which supports trading models that are Centralized Exchange (CEX) like and Decentralized Exchange like (DEX) in a cohesive fashion.

These will be part of the evolution of hybrid digital market infrastructure delivering Hybrid Finance – HyFi!

Digital Market infrastructure interoperability solutions gain increased traction

Digital asset interoperability and time to market remain a challenge, with traditional and multiple types of blockchain-enabled digital asset infrastructure being severely fragmented.

We will increasingly see the evolution of solutions and services that bridge the gap between traditional and digital capital markets, whilst effectively mapping to evolving regulatory frameworks to enable mass adoption by institutional players.

Institutional players largely want exposure to digital assets in the same way as they do other asset classes. Ease of integration into what they already do is essential.

In order to surmount these obstacles and achieve greater efficiency in digital asset facilitation, financial players need to optimise digital asset infrastructure.

To address this need in a secure and scalable fashion, platforms offering cloud enabled microservices, by way of a distributed hub model that integrates private ledgers and public blockchains into traditional market infrastructure, will expand and prosper. This will facilitate better portability of digital assets as well as enable seamless trading, clearing and settlement.

Traditional exchanges and post trade operators will harness such solutions to digitally transform themselves, as they seek both technology and knowledge enhancing partnerships. They will no longer be able to ignore the keen interest in digital asset trading from both retail and institutional investors or the need to service the market with trusted digital asset infrastructure.

NFTs, legal and finance intersect

The growth of Non Fungible Tokens (NFTs) will continue in multiple spheres including sport, film, music, gaming, art, other collectibles, and virtual assets in relation to the Metaverse.

There will be innovation in legal and smart contract frameworks addressing some of the NFT ambiguities pertaining to intellectual property (IP), ownership and licensing rights. This will be a welcome development to legitimise the sector and instil trust, which in turn will propel the sector to more accelerated growth.

Such growth will also be aided by the intersection of NFTs and finance. We are going to see portfolios of NFTs created to offer structured products and portfolio diversity to Family Offices for example, in addition to the fractional ownership opportunities afforded to retail investors. On the other hand, the ability to tokenize such structured products and NFT funds, and the creation of digital bonds to finance NFT projects which list and trade on digital asset exchanges open to both digital assets and fiat investors, will serve to inject further capital into the sector.

Data, Analytics and AI combine with blockchain

The convergence of data, analytics and AI with blockchain will begin to drive smarter solutions in 2022. For example, Netflix knows exactly what content you are watching and can therefore purchase more content and finance the creation of new content by predicting anticipated demand with a high degree of accuracy. They can also accurately assess content supply and demand dynamics on platforms elsewhere and utilise this to address any gaps and opportunities in terms of their own content offering. Amazon works on similar principles.

Imagine if such technology was transferred from B2C use and applied to B2B finance for product development and ongoing management. Well, this is not a utopian world in a Science Fiction movie, it will soon be coming to a financial centre near you via the cloud. When combined with AI driven smart contracts and blockchain immutability, we are going to see an explosion of digital asset and traditional asset product innovation suited to the needs of both retail and wholesale user segments.

The question also arises whether the Big Tech central construct gives way to a more democratised decentralized version. As I have stated in earlier predictions, both will continue to coexist for the foreseeable future and certainly for all of 2022.

We are certainly in store for an exciting digital ride this year. Buckle up and have a great 2022 and make the reality virtual and the virtual reality!

The move to Exchange 4.0 is well underway, with profound implications for financial markets.

Forward-thinking firms are already positioning themselves for a DLT-fuelled future. But behind the buzzwords, there are lingering questions. What benefits will digitalisation bring, both to trading venues and the market participants they serve? What are the main obstacles to Exchange 4.0, whether they stem from outdated thinking or misaligned stakeholder incentives? And what sort of step-changes can we expect as digitalisation takes off?

In a recent report, Hirander Misra, Chairman and CEO of GMEX Group, and the Realization Group interviewed experts at firms pioneering the new world of crypto asset trading

• Alokik Advani, Managing Partner, Fidelity International Strategic Ventures
• Charles Kerrigan, Partner, CMS London
• Jessica Naga, Director Responsible for Legal and Compliance, SECDEX
• Anoop Nannra, Global Blockchain Segment Leader, Amazon Web Services
• Nicholas Philpott, Director, Zodia
• Duncan Trenholme, Head of Digital Assets, TP ICAP.

We summarise the key highlights and perspectives from virtually every stakeholder group involved in the trend towards digitalisation.

Introducing Exchange 4.0

Just as the world is experiencing a fourth industrial revolution, sometimes called 4IR, financial exchanges are beginning their own technological revolution. The 4IR concept is the driving force behind the Internet of Things, where AI and web technology combine to create smart products. A similar idea is taking hold in the world of financial market infrastructure enabled exchange trading, as DLT, smart contracts and tokenisation make it possible to facilitate true asset portability while linking far-flung liquidity centres.

But there is a great deal of confusion as to how distributed technology will change financial market infrastructure so that it can make the transition, be fit for purpose and what benefits it will bring. There are also significant roadblocks, either in terms of old-fashioned thinking or stakeholders defending their turf. Experts say it is only a matter of time before these obstacles are overcome. The first step, they say, will involve trading venues and participants developing a new mindset, one that embraces open-source practices. As Exchange 4.0 becomes better understood, and as firms move from proof of concept to bottom-line benefits, we can expect a rash of major changes. New trading centres, new products, new ways of doing business and new ways of enabling post trade are all on the way.

Creating the network effect

A growing number of exchanges and trading firms are embracing distributed ledger technology (DLT) and tokenisation, recognising a surge of interest in crypto asset trading from both retail and institutional investors. But many of the venues are replicating silo-based models and missing out on the most important lessons from the digital revolution. DLT, tokenisation and crypto asset trading offer a chance to create much larger market ecosystems by enabling participants to transact across borders more easily and by facilitating asset portability. Rather than divvying up the pie, it’s all about making the pie much larger.

“The key thing about this is asset portability,” says Hirander Misra. “If you look at marketplaces in this space, there are lots of exchanges across the world and there’s tumbleweed growing through most of them. How do you create that network effect? But then also, how do you focus on what you’re really good at?”

Misra says the problem starts with exchanges adopting a silo mentality, where they seek to service clients exclusively rather than building a more collaborative model. Trading, clearing and settlement end up being offered in a closed-in environment. “Essentially these exchanges are just pockets of their own liquidity.”

But the future could soon look very different. “You’re going to see exchanges, custodians and other services interconnect more seamlessly, with the ability to swap services and assets across jurisdictions and across different types of users to get that network effect. This is a construct that I have labelled Exchange 4.0,” Misra says.

What the Experts Expect

Provided that network effect can be created, what sort of benefits can firms look forward to? The list is long and varied.

Alokik Advani:“You have to try this in pockets of smaller assets, where it can be really efficient – private markets, alternative assets, private equity, venture capital, real estate, private debt. All of these things are obscenely inefficient. They trade like bulletin boards today. If you wanted to bring that to some level of an exchange-like infrastructure with a DLT backing and speed of clearing and settlement, it’s a revolution.”

Charles Kerrigan: “You are seeing the move towards digitalisation as a prime example of capitalism forcing change. You are talking about another wave of creative destruction. We have digitalised the front office of financial institutions – what you see as a customer – but the real benefits will come from digitalising the market infrastructure.  Crypto shows how this can be done.  Payments have learnt from that.  Securities issuance is following.  We are simply following the logic of the information economy.  This is a big one.”

Hirander Misra: “With Exchange 4.0, say you’re an existing exchange and you have existing infrastructure. You may want to set up a digital exchange, but you may not want to replicate everything you have. You may not need another matching engine, you may need digital custody or you may need issuance. The thing about Exchange 4.0 is that you can combine the services you have with services others have or augment what you already have. So, you’re not beholden to creating yet another siloed infrastructure.”

Jessica Naga: “There is something to be said for the countries that take the jump and do this now fast. They will have first movers’ advantage, if they build the necessary legal framework and infrastructural ecosystem in a sustainable way. The clear advantage of technology and FinTech companies is that their business is cross border and therefore from one centre, they can service the world.”

Anoop Nannra: “We look at Exchange 4.0 and the opportunities in terms of creating digital assets on virtually any aspect of our business. I think it’s really exciting, being able to create a futures index based on real-time solar energy production. Right down to the second. You create new patterns and opportunities for liquidity to occur. Capital historically will move to the environments where liquidity is most easily had.”

Nicholas Philpott,: “The locations and the cities that succeed in the future may no longer be the same as the ones at present. It’s a much more even competition now. If you can spin up a virtual exchange with none of that physical infrastructure, that opens up the possibility of some very interesting developments as far as the new trading centres of the future are concerned. You’re broadening the market across a bigger spectrum of participants. More people can have access.”

Duncan Trenholme: “It’s possible that some of the private permissioned blockchains get traction in certain areas and solve certain use cases, but over time we believe the open permission-less blockchains will eat market share. The idea of running your own distributed ledger, in a centralised manner, just misses the point of what this technology can do. It’s repeating the limitations of vertical silo’s all over again. As people do connect, they’ll increasingly experience the benefits of transacting on an open, interoperable, and programmable financial system.”

A way forward

All of this leaves traditional venues and market participants having to prepare for a wholesale change in the way they operate while still conducting business in the here and now. At the same time, scores of new exchanges have sprouted up with DLT technology and digital assets that can only be traded on one platform.

By forging the DLT-based world of the future while still servicing traditional assets in traditional ways, we will see a hybrid model which bridges the gap between digital and traditional financial market infrastructure. This will serve to eradicate the current silos and fragmentation to facilitate better portability of assets by interconnecting the whole capital markets value chain of participants, across international nodes (jurisdictions), to more easily trade, clear and settle.

Click here for more of his insights & initiatives in this article featured on Asset Servicing Times.

Hirander Misra, CEO of GMEX Group, says: “The old world and the new world will have to coexist in the foreseeable future, with the gap needing to be bridged between blockchains and legacy networks.” Read more on pg 58-59 after downloading your copy here: https://bit.ly/31vMtGy

“The GMEX Group and the Realization Group held a webinar on Thursday, 11 March 2021, to delve deep into the cutting-edge report ‘Out on a Ledger: How the advent of Exchange 4.0 will transform trading ecosystems?’.

Hirander Misra, Chairman & CEO of GMEX Group & SECDEX Group, skilfully moderated the discussion and asked probing questions from experts at some of the firms pioneering the new world of crypto asset trading such as Anoop Nannra, Global Blockchain Segment Leader at Amazon Web Services; Charles Kerrigan, Partner at CMS London; Duncan Trenholme, Co-Head of Digital Assets at TP ICAP; Jessica Naga, Director Responsible for Legal and Compliance at SECDEX; and Nicholas Philpott, Director at Zodia (a joint venture between Standard Chartered Bank – SCB – and Northern Trust).

Read full article here.

In this report, The Realization Group speaks to experts at some of the firms pioneering the new world of crypto asset trading to get answers.

Please click here for the report