Response to Verra’s May 25th Announcement

Earlier today Verra made a public announcement addressing crypto instruments and tokens. In this announcement, three key pieces of news relate closely to the Toucan Protocol:

1. Verra prohibits further bridging of retired carbon credits on-chain.
2. Verra is exploring a path to tokenization by introducing an “immobilized” state into their registry.
3. Verra intends to launch a public consultation to openly discuss the subject.

Toucan welcomes this announcement from Verra, which comes after a lengthy dialogue and close contact between Verra, multiple other carbon market stakeholders and us.

We look forward to continuing to work with industry leaders to help scale the world’s carbon markets with high integrity and unlock climate action at scale. In this post we share what this means, why it’s exciting, and what to expect next.

Building better bridges

Since its inception, Toucan has viewed the current bridging process as a first version. The Carbon Bridge v1 requires that credits are retired in their source registry in order to be tokenized.  While this tokenization process was not optimal, the approach was selected because it was deemed the safest way to build a transparent, deterministic, blockchain-based carbon registry that avoided the double use of credits and maintained Verra’s high integrity standards.

We’ve long believed that the best option was for established registries to work together on a better bridging process. Since soon after our launch last October, we have been advocating for a clear procedure for bi-directional tokenization. We’re excited that Verra has chosen to explore this path — they refer to it as an “immobilized” credit state. (We have previously referred to it as a “tokenized” state.)

Introducing this designation for credits held on the Verra registry would allow for these credits to be safely transferred to another registry (like Toucan’s) without risks of double counting. Even better, connecting our registries in this way opens the door to a process where tokenized credits could be transferred back from a blockchain onto their source registry.

This approach would enable all voluntary carbon credits to gain the benefits of tokenization on a public blockchain, including immediate global settlement, double spend protection, transparent traceability, enhanced market access and connections to decentralized finance (DeFi) applications.

Beyond these benefits, connecting on-chain and off-chain registries would allow credit prices on each market to maintain parity. This would dramatically reduce the price risk of one-way tokenization. It would also help traditional carbon market participants benefit from on-chain carbon markets, where the vast majority of VCM trading volume now exists and a wealth of new applications for carbon credits are being developed.

Importantly, these benefits open the door towards avoiding needless compromises, such as relying on custody by intermediaries. A carbon market built on these trust assumptions introduces needless counter-party risk and creates systemic dangers to the on-chain carbon market.

We are glad to see Verra take this approach and make pro-innovation progress towards fully integrating on-chain market activity with the broader market. We are excited to participate in Verra’s public consultation on the topic.

In the meantime

One immediate impact of this decision is that there will be a period of reduced bridging of carbon credits on-chain. In cooperation with Verra’s announcement, we are encouraging bridgers to comply with Verra’s rules and hold back on bridging until further notice.

We believe this pause in on-chain supply growth will be temporary and will not necessarily have any material impact on existing tokenized carbon. We’re exploring options together on how we can serve Toucan’s users while the public consultation takes place.

To the holders of carbon tokens on the Toucan Meta-Registry — TCO2, BCT and NCT — no action is required right now. These tokens continue to work as usual and today’s statement should not impact the integrity of these credits. We will be working to find the best way to bring the supply that has already been tokenized into harmony with the new system.

We will share any updates in our blog, on Discord and on Twitter.

Improving together

At Toucan we want to emphasize our commitment to continue working with all carbon market stakeholders, including Verra and IETA. Close collaboration is key to ensuring on-chain carbon brings value to the voluntary carbon market by improving integrity and transparency — we are excited for the next chapter in our efforts to build the healthy and mature financial infrastructure we need to scale the world’s climate response.