Genesis 2.0: Prototyping use of Smart Contracts for Carbon Credits attached to Green Bonds

Use of innovative technology for Green Finance and related themes is one of the major focus areas of the BIS Innovation Hub's Hong Kong Centre. Following on from the successful PoC in 2021 on tokenization of retail green bonds as part of project Genesis using both a public blockchain and a permissioned blockchain, the Hong Kong Centre has initiated a project, partnering with the UN Climate Change Global Innovation Hub and other public and private parties to explore the use of blockchain, smart contracts and other related technologies to develop a prototype for tracking, delivery and transfer of a digitized Mitigation Outcome Interests (MOI).

To meet the conditions required for the climate bond to be a financial instrument that serves the 1.5 ┬░C climate goal, a new structure for a green bond, appended with MOI is proposed. The MOI is an instrument of carbon unit indebtedness of the bond issuer to the holders of the MOI. Future repayment of the MOI is made using mitigation outcome units (MOUs) that are at least partly generated by activities financed by the proceeds of the bond. Conceptually, the advantage of pledging carbon credit units as part of the green bond coupon results in bond issuers potentially obtaining cheaper funding for green investments, while in tandem reducing the risk of green washing.

In this technology PoC to be completed by COP 27 in November 2022, we will have two leading consortium developing solutions that are expected to digitally track real-time mitigation outcome data linked to a bond lifecycle, and thereby provide transparency and reduce the risk of green-washing. The first consortium is composed of Goldman Sachs, Allinfra and Digital Asset, and the second consortium is composed of InterOpera, Krungthai Bank, Samwoo Corporation and Sungshin Cement. 

The PoCs will seek to achieve smart contract-based delivery of MOUs, and enable automated transfer and trading of the same, thereby linking up with Nationally Determined Contributions (NDCs) and the concept of Internationally Transferred Mitigation Outcomes (ITMOs). By doing so, it will serve to enhance the efficiency and effectiveness of climate and carbon finance.

In sum, if successfully implemented, this new financial product would transform the current carbon finance, which is an ex-post reward in the current carbon market, into an ex-ante enabler in the form of additional benefit for the green bond issuer in an integrated green bond and carbon market. It will directly contribute to the climate goals under the Paris agreement by shifting mainstream finance towards effective climate solutions, while also enhancing the transparency, objectivity, and environmental integrity of the green bond market.