First Mover Asia: Bitcoin jumps above $31k; Crypto carbon trading races to clean up act

Carbon credit protocols have had a difficult time in recent months but have been working to improve the way they operate; bitcoin on Monday notched its biggest single-day gain in more than two months.

Good morning. Here’s what’s happening:

Prices: Bitcoin jumps more than 7%, and some crypto market analysts are asking if the bottom is in.

Insights: Crypto carbon trading firms are looking to address problems that have plagued them.

Technician's take: BTC remains in a choppy trading range with limited upside.

Prices

Bitcoin (BTC): $31,646 +8.4%

Ether (ETH): $1,990 +11%

Biggest Gainers

Biggest Losers

There are no losers in CoinDesk 20 today.

Bitcoin posts biggest daily price rise in two months, as crypto markets rally broadly

Traditional markets were mostly closed in the U.S. on Monday for a holiday, but bitcoin (BTC) didn't rest.

The largest cryptocurrency jumped more than 7% to about $31,500, in its biggest gain since March 9.

The sudden burst higher came as bitcoin had just completed a record nine-week losing streak that took the price down to around $29,400 from $37,600.

Now crypto analysts are starting to ask if the market is finding a bottom after the latest downdraft.

According to the blockchain analysis firm Glassnode, the recent selling pressure might be easing up. "The price action appeared to have bottomed for the time being," Glassnode wrote Monday in its Uncharted newsletter.

Almost all major cryptocurrencies were in the green, with Cardano's ADA gaining some 17% and leading the CoinDesk 20.

Markets

(Most traditional markets were closed in the U.S. on Monday for an official holiday.)

Insights

Crypto carbon credit protocols look to improve

Like all things crypto, blockchain-based carbon credit protocols have had a tough go of it during the last quarter. They have been subject to the same market pressure as the rest of the industry, which is struggling to regain its footing since the Terra collapse.

But the sector’s challenges are not just to do with market dynamics. It’s also facing an internal reckoning after questions emerged about the quality of the credits being traded inside the base carbon tokens (BCT) issued on the Toucan protocol, which led Verra, a hybrid standards agency and registry responsible for carbon credits, to take a hard look at the practice.

In April, researchers at Carbon Plan, a California-based climate data non-profit, published a paper titled “Zombies on the Blockchain,” which outlined how approximately 28% of the Verified Carbon Units (VCU) traded in BCTs on the Toucan Protocol and via carbon trading KlimaDao were from “zombie projects.”

“Toucan appears to be generating entirely new demand for long-neglected credits that have experienced little or no demand in recent years,” the researchers wrote. “When the crypto market places higher value on BCTs and KLIMA tokens, these products can bring formerly defunct offset projects back to life.”

CarbonPlan highlights in its post that carbon credits under Article 6 of the Paris Agreement prohibit the trading of credits from carbon offset projects registered before Jan. 1, 2013. Yet, these older projects are being actively traded on the Toucan protocol and were still being tokenized as late as November 2021.

“Rather than eliminate supply from the voluntary market, however, zombie projects show that BCTs are bringing new supplies into existence – not in the form of new projects, but of old credits that weren’t previously able to find any buyers,” CarbonPlan’s researchers wrote. “Thanks to demand from blockchain buyers, however, these low-quality credits found new life.”

Aside from the issue of “zombie projects,” the other problem with these projects is structural. The industry has been commodifying what’s called “retired” credits.

When firms want to offset their emissions, they use this process to purchase credits and retire them from the market. In turn, they get a receipt that makes the basis of their published carbon offset and BCT tokens.

In an interview with S&P Global, Robin Vix, Verra’s chief legal, policy and markets officer, called this entire process “mind frying” as the company plans to disconnect the Toucan protocol from buying retired credits.

"Verra will, effective immediately, prohibit the practice of creating instruments or tokens based on retired credits on the basis that the act of retirement is widely understood to refer to the consumption of the credit's environmental benefit," Verra's statement said.

Vix said to S&P Global that Verra will start scrutinizing stakeholders' requests for retired carbon credits and block anything it suspects of being associated with tokenization.

“Carbon credits themselves are abstract intangible things based on counterfactuals of things that you can't actually see – emissions. And then crypto is another layer of abstraction on top of that,” Vix said.

But all this isn’t to say that Verra is entirely opposed to the tokenization and trading of carbon credits or that Toucan is not cognizant of the structural flaws of the arrangement.

Verra said that it is exploring ways to "immobilize" current – not retired – carbon credits so they can be bridged over to Toucan or other exchanges to trade.

"The initial thinking is that the best way of doing this is if these tokens somehow tie back to live, unretired credits so that the environmental benefit hasn't yet been used," Rix said to S&P Global. "In other words, if you're acquiring tokens or coins, you always know that the underlying [offset] is there."

In an interview with CoinDesk, Rob Schmitt, one of Toucan’s core developers, emphasized that this isn’t about Verra blocking tokenization; rather, Verra just wants to make the process better.

Schmitt said that bridging and trading retired carbon credits weren’t ideal but just a first step. Once Verra introduces the ability to immobilize credits it would mean that credits could be sent bi-directionally from Toucan back off-chain, creating price parity.

“This will be very positive for the on-chain markets,” he said. “

Schmitt is also aware of Carbon Plan’s paper on zombies. He points to a post from Toucan called "Raising Standards in the On-Chain Carbon Market" that outlines the protocol’s filtering plan to only offer credits less than 10 years old.

“The obsession over age isn’t necessarily what’s correct here … if you took a climate action one year, it’s the same action the next. It’s not going to be different,” he said. “The issue with these credits is it's questionable whether these projects needed the funding from carbon credits to get going.

“But it’s an issue we inherited from Vera.”