Verra contemplates future of crypto instruments and VCUs

Launched on August 3, 2022 and continuing until October 2, 2022, Verra is hosting a public consultation on its proposed approach to third-party crypto instruments and tokens.

The public consultation is open to comments on measures to responsibly link verified carbon units (VCUs) with digital assets, the know-your-customer checks that should be conducted on issuers and holders of digital assets, the amendments to be implemented on the Verra Registry Terms of Use, and the fees that Verra will charge in relation to digital assets.

It is further seeking comment on a potential proposal for creating guidelines and rules to prevent fraud associated with creating crypto instruments and tokens on VCUs. These guidelines and rules which arise from the public consultation would need to ensure a clear and non-ambiguous methodology for mapping virtual assets and their underlying VCUs to prevent double issuance and double use.

Background

In May this year, Verra banned the creation of tokens based on retired VCUs because retirement is supposed to permanently remove the VCU from circulation. As a result of this ban, Verra will scrutinize each account holder’s VCU retirement request for evidence that a user does not plan to tokenize such retired VCU. If there is evidence that the retirement is linked to tokenization, then Verra will block the request.

Verra explained that the tokenization of a retired VCU causes confusion in the market about the actual consumption of such VCU; in other words, by tokenizing the retired VCU, it may appear that the environmental benefit remains unconsumed and therefore is not retired.

Before the May announcement, Verra issued a preliminary opinion on third parties minting VCUs that have been retired. Verra specified that it does not administer crypto market activities, nor does it create or mint tokens based on VCUs. As a result, Verra stated that it will take no responsibility for any harm posed by these activities. It further warned individuals that those who are account holders in the Verra Registry had agreed under the registry terms of use to not create, market, or transact in instruments that are related to VCUs without the written consent of Verra.

Public consultation

As part of the consultation, Verra published its preliminary proposal for addressing digital assets based on VCUs. Verra is considering allowing account holders to “immobilize” their VCUs by transferring them to a dedicated subaccount within the Verra Registry. Under that subaccount, the link between the virtual assets and the underlying VCUs will be recorded and made publicly available by both Verra and the issuer of the digital assets. Verra would then require transaction information from tokenization platforms, including information on creation and use of VCU-backed digital assets and information on fractionalization of digital assets and/or transfer between holders on tokenization platforms.

Although Verra banned the tokenization of retired VCUs, it did state that it would explore the concept of “immobilizing” VCUs in accounts so that the non-retired credits may be tokenized. Verra has further stated that it sees crypto instruments and tokens as an opportunity to channel finance to support emission reduction and removal projects that supply the carbon credit markets.

These actions by one of the largest carbon credit registries should not come as a surprise: in recent months, millions of credits have been virtually tied to cyptocurrency tokens and removed from circulation. In fact, Verra’s ban was a direct response to Toucan, a decentralized finance project, using Web3 to “bridge” carbon credits issued by Verra. This bridging has contributed to over 4 percent of VCUs being tied to the Base Carbon Tonne (BCT), a digital token that is traded in exchange for retiring the credit. The BCT can then be traded on cryptocurrency exchanges.

Verra is seeking to release its final policy in the last quarter of this year.

Conclusion

With Verra taking the initiative to explore possibilities in tokenizing VCUs and by not having anonymous people or organizations be responsible for tokenization and taking the VCUs out of circulation, the market may become more transparent – a development that is necessary to strengthen the carbon markets and allow organizations to take appropriate climate action.

For additional information on this and related subjects, or assistance with the preparation of 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.

Please also join us for a fireside chat hosted by DLA Piper with Rob Schwartz, General Counsel of the CFTC, on October 27, 2022 in our Washington, DC office. For more information, including how to RSVP, please see here.