Gold Standard consultation on the future of digital assets in the carbon market: Top points for stakeholders

Gold Standard, a best practice standard for climate and sustainable development, has recently finished a consultation on the conditions under which it could consent to the tokenization of Gold Standard-issued credits.[1]

While Gold Standard stated that the use of blockchain could bring innovation, transparency, and more financing to the carbon market– including providing a record of data and ownership – it also stated that tokenization without any controls or standardization could create risks for environmental integrity, IT security, regulatory uncertainty, and reputational harm.

Based on these risks and comments received from stakeholders, the results of the Consultation will be used to establish a formal framework and conditions to permit and manage the creation of digital tokens representing Gold Standard credits.

Background

In May 2022, Gold Standard updated its Registry Terms of Use to clarify that the creation of tokens, cryptocurrencies, and other digital instruments or assets is not permitted without Gold Standard’s express written consent.

The crediting organization stated that the process of consent allows Gold Standard to understand and manage the tokenization of its credits in a responsible and cooperative way. Gold Standard further acknowledges that there are potential risks if tokenization is permitted to occur in an uncontrolled market and without formal coordination or terms of reference between Gold Standard and third parties. These risks include integrity, IT security, regulatory uncertainty, and reputational harm.

In order to assess the conditions and criteria to be applied to the tokenization of carbon credits, in August of this year Gold Standard announced it was developing governance frameworks for monitoring digital transactions, digital carbon assets, and the infrastructure of the digital carbon market. This work began under three working groups: the Digital Monitoring, Reporting and Verification (DMRV) Working Group, the Digital Assets for Climate Impact Working Group, and the Digital Infrastructure and Open APIs Working Group.

The DMRV Working Group explored how to upgrade and digitize methodologies along with the verification processes and systems. The Digital Assets for Climate Impact Working Group researched best practice principles to leverage advantages of distributed blockchain technologies while implementing safeguards to avoid perverse incentives, double counting and claiming, and other risks associated with trade of digital assets. Lastly, the Digital Infrastructure and Open APIs Working Group defined core principles for the digital market infrastructure to connect a quickly growing ecosystem of market participants “while promoting trust, transparency, interoperability, and access to carbon credits and broader climate solutions.”

To prepare for this consultation, Gold Standard used the feedback from the Digital Assets for Climate Impact Working Group and the initial findings of the International Emissions Trading Association’s Task Group on Digital Climate Markets, formed in January 2022 to examine the new trends in digital carbon markets and recommend steps to ensure integrity.

The Consultation

On September 14, 2022, Gold Standard invited views from stakeholders on the framework that they plan to implement to provide consent to organizations seeking to create digital assets representing Gold Standard carbon credits. Gold Standard has outlined eight categories in which they intend to apply conditions to creating such credits.

These eight categories are:

1. the model used to create and manage digital tokens
2. the requirements related to information associated with digital tokens of carbon credits, the retirement of credits on the Gold Standard Registry, and reporting by the organization responsible for creating digital token
3. pooling limitations on the credits that the carbon credits can be pooled with
4. the due diligence information requirements as part of the Know Your Customer and Anti-Money Laundering checks
5. sustainability requirements to ensure digital assets representing carbon credits are only created using blockchain technologies with a low carbon intensity
6. data security requirements to ensure that organizations take appropriate steps against data breaches that could put the digital tokens representing carbon credits at risk
7. permitted units with initial restrictions on the type of credits that may be tokenized and
8. provisions to protect Gold Standard and its projects from reputational harm.

The consultation called for suggestions from stakeholders, and either provides immediate restrictions, requirements for each category, or an acknowledgement of the complex realities surrounding the categories.[2]

Going forward

 Earlier this year, Verra held a similar consultation on the digitization of carbon credits.[3] The industry feedback given to Gold Standard on this consultation, along with the feedback given to Verra during that consultation, will shape the digital asset market for carbon credits for years to come.

For additional information on this and related subjects, or assistance in preparing comments for the consultation, internal policies, procedures, or controls, or assistance with any submission to the Commodities Futures Trading Commission, please contact DLA Piper’s Commodities team at DLAPiperCommodities@us.dlapiper.com.