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BwB Talk Series – Nicolas Steiner



Exchange summary

The BwB Talk Series is where we bring innovative leaders in impact, finance, and the environment to speak with our network around the world. The BwB Talk Series helps generate new ideas for our network by bringing experts to share their deep knowledge of sustainability topics.


The August edition of the Talk Series introduced us to Nicolas Steiner - an experienced entrepreneur, investor and advisor with an extensive background in emerging technologies such as #blockchain and asset #tokenization. He is currently focused on Scrypt, a company pioneering the institutional adoption of digital assets. He was also serving as Invesco's representative for the Cambridge Centre for Alternative Finance (CCAF) and is still active at the Centre today.


Nicolas is from Switzerland and moved to London 17 years ago. His first exposure to digital disruption happened in the early 2000s when he was involved in a voiceover IP concept which was sold to a telecom company. At the time, he saw how Internet protocol decentralised the creative voice business of the telecom.


“Therefore when, a few years later, the tech community mentioned Bitcoin and running on blockchain, it did not take me very long to see history repeating itself for the financial industry”, commented Nicolas.


Bitcoin and Crypto

In 2017 Invesco offered Nicolas the position of Director of Technology Strategy for EMEA and APAC to deliver strategic guidance, and Tokenisation was a significant element of it.

Mapping the subject is key to start with as people generally equate blockchain with crypto and for good reason, as it was the first widely communicated use case. But looking at crypto only like another financial index is missing the point considering the underlying ecosystem.


Bitcoin representing the first crypto wave and there is no shortage of opinions on it. However, the thing we know for sure is that bitcoin is not a government construct.


Ethereum led the second wave of crypto in 2015 and introduced a programmable smart contract automating processes for Data secured on the Blockchain. As data underpin everything we do in financial services, we saw the emergence of an ecosystem automating financial value chains. As of today, Ethereum is the Blockchain supporting most of tokens deployed.


Crypto run on a distributed market infrastructure, which is the blockchain networks of computer enabling smooth and secured token transaction. This means that the relationship between Ethereum and Bitcoin is that both are running on an open-source network secured by thousands of powerful computers around the world with no single person controlling the network, and that both Bitcoin and Ethereum let the user control their funds if they want to.


The Rise of programmable money, or what is called also “Stablecoin”, was led by the high volatility of crypto asset when valued in fiat currency. These new forms of tokens, mainly pegged to the US dollar to maintain their value. To date, stablecoin have been hugely popular in decentralised finance application and are massively used by crypto exchanges. We also see big technology firms getting into money creation through this mechanism as we have seen lately PayPal launching their own stablecoin.


“Let's make it clear that financial assets have been already digitised and that has been key in supporting the growth of the current financial asset.”


When we talk about asset tokenisation on blockchain, we refer to a new IT mechanism forming a decentralised web architecture called Web 3.0.


“This is the first time in a digital world where we have an automated and secure mechanism avoiding a set of data to be duplicated. Think about the value of this in a world of asset transfer and trading, considering all the IT legacy system you need to have just to avoid double spending on a smart contract enabling tokenisation.”, highlighted Nicholas.


“Think about blockchain networks running decentralised ecosystems, as a sum of different existing technologies mixed together providing a level of security never seen before.”


Some of the protocol on DeFi (decentralised finance) became quickly a key component of a new ecosystem of autonomous financial services application, where traditional and intermediary functions are replaced by a combination of self-executing code, and all of this is paving the way to asset tokenisation on blockchain as a kind of future digital avatar representing a financial asset.


The Invesco use case

Nicolas then presented a core use case of what he explored at Invesco. The target was to make decision makers understand that the financial world is moving into a future where technology will be driving the business and asset tokenisation is one of the most disruptive elements for the asset management industry.


“We created a digital twin of an existing fund on the blockchain and that was good success. We saw improvements in the management of the Asset Lifecycle, but we did not capture all financial aspects of the assets as we did not include the cash flows element associated with those assets on the chain. The learning we got with legal compliance projects, among others, were great at the time. It was very innovative. But thinking back, we did not really leverage the full potential of the blockchain technology in relation of asset tokenization.”, shared Nicholas.


“We worked as well on the changing role of custodian as in the blockchain space. Digital securities are stored on the blockchain directly, therefore the custodian function is evolving to the management of keys, providing the access and the control of the asset on the blockchain.


We became active in the FCA Sandbox to develop a proof of concept alongside UBS, BNP, Citibank, Society, General, Fidelity and so on. This proof-of-concept performed under the FCA focused on testing an approved transaction of a token between Invesco and Fidelity.”


Ian Choo, a colleague of Nicolas, then explored the concept of regenerative finance with a specific focus on blue carbon projects aimed at mitigating climate change while generating real wealth for investors.


“We call it “blue carbon gold”, which is really a token that is backed up by the carbon assets of mangrove swamps and other things between the land and the sea. We consider this to be the first of a whole emerging field of finance. We call it regenerative finance.”


“In regenerative finance profit, planet and people, in that order, are inextricably linked with each other” said Ian. “Our core mission is to be able to incentivise, through clever design of real assets, the mitigation of climate change through carbon sequestration. Besides, we also want to incentivise a whole lot of other things that mangroves or blue carbon in this case does for the ecosystem, including providing natural habitats to keystone species like fish and preventing receding of shorelines. Also, one of our objectives in structuring this product is, essentially, to allow investors to access high-quality carbon, particularly blue carbon projects.”


Tokenisation of Carbon Assets from Mangrove


Ian Choo introduced a tangible use case related to blue carbon, which involved creating tokens backed by carbon assets from mangrove swamps. “It is part of our mission to incentivise climate change mitigation and regeneration through regenerative finance.”, commented Ian. He elaborated on how they channelled capital into early and mid-stage blue carbon projects using web Three as infrastructure for settlement and distribution.

“What we are trying to pioneer with the blue carbon gold is the monetisation of these ecosystems across the entire 20-to-25-year period. We believe that we can achieve somewhere between a 12% and 15% internal rate of return over a 30-year period, which is optimistic and aggressive. However, we think this is realistic if we assume that blue carbon, which is the highest quality carbon now, is selling for about $25 a ton. And we believe that over a 25-to-30-year period, it should at least somewhere near $100 a ton. With this structure, we forecast for the cash flow to breakeven around year six or year seven. And all of this will not be complete without an investment in the community and ensuring that all the other wonderful ecosystem benefits and communities that the mangroves are actually in, are benefiting financially. We got a significant allocation of between 20% to 30% of the carbon credits that are going to be shared with the local community and custodians.”


Question Time

One of the most engaging segments of our Talk Series is the Q&A session between our speaker and BwB. This talk’s Q&A segment was filled with insightful moments, a few of which we have captured below.


Emre Eren, BwB Senior Analyst, commented:


“BwB did a white paper for a company, called Terraformation, about financing a mass scale forestation. We found there are limited instruments that we could use to finance such projects. One of the barriers that we identified was the lack of commercially viable models. given the trajectory of growth in the first five to seven years is very limited, which means very limited carbon credits, and, therefore, very little revenue streams for investors. But there's a lot of money needed in the beginning of the project to finance these projects. Is this an issue that you see with mangroves? And if not, what other barriers are there? Is fluctuating carbon credit prices another barrier potentially to these models? And if so, how do you mitigate that and prevent that from causing an issue for investors?


Ian answered: “One of the main reasons for the breakdown along the way, in my view, is the way we allocate capital for nature. Finance is a short-term animal. In my native country of Singapore, we consider an investment for a period of 5 years a long-term structure. In the US and Europe long-term structures are those of 10 to 15 years. The main problem comes from the inability of people to think long-term. The problem can be solved by a combination of financial innovation, good analytics, and creating liquid secondary markets for these sorts of instruments.”


Steve Smith, BwB Managing Director, Global Head Carbon & Forestry Finance, wanted to find out if the company sells the carbon credits on behalf of the local community.


Ian answered: “Yes, because most of these carbon credits, if they are not sold forward, they tend to be sold in bulk to corporations and you'd sell them over time rather than sell them all upfront.”


Christine Zhou, BwB Vice President wanted to find out more about the reception of blue carbon tokens.


Ian replied: “We are managing a portfolio. The carbon credits are the collateral, and they are traded wholesale. This is part of our operational model.”


Christine also asked what trends Ian and Nicholas have noticed in the buyers and if they have registered a necessity for significant capacity building and awareness raising campaigns amongst the corporate buyer group.


Ian responded: “According to a recent article by The Guardian, published in January or February, 90% of carbon credits in a Vera's portfolio are useless. There has been bifurcation of high-quality carbon assets. On the other side, there's been a significant proportion of people and companies who have almost retreated from buying carbon. I think we are kind of finding the middle now where we realise that both are important.


Nicolas further commented: “Some of the corporate get excited about the potential of technology, which I, myself as a technologist, support. But there is a long way to go until things become tangible.”


Rupesh Madlani, BwB CEO, commented: “I totally agree, Ian, with your comment on the size of the carbon markets. I think it was at Davos, at a biodiversity dinner, that we co-hosted, where we discussed how biodiversity markets ought to be designed. Certainly, something that I referenced was I'm willing to accept an imperfect biodiversity market, but if it happens to be 100 times the size of carbon markets, which is no more than US$ 2bn, it will be a good problem for us then to go and fix.

What institutional investor feedback do you have to date?”


Ian responded: “On institutional feedback, given my years of experience in the field, we have noticed a lot of interest, but whether it is really moved from the innovation end of the portfolio to the mainstream portion of the asset allocation is still a question. In my view, we are not quite there yet.”


Rupesh also asked: “My second question refers back to the 15% estimated rate of return you mentioned, is that really the right number over 30 years, given that liquidity to your point, is not going to be terrific initially at least”


Ian responded: “I’d say the questions is rather about “What kind of capital structures and which kind of markets do I see with potential on this?” Given the disclaimer that I'm not a biologist or a scientist, whom I respect immensely, this is somewhat of a biological question. The reason is that, if you look at the key drivers for the returns on mangroves and carbon credits, most of it has to do with biological growth.


I personally believe that natural capital markets, as an emerging asset class, will benefit a lot from blended capital structures. By that I mean having this three-layer structure that we know from mortgage-backed securities where you have some catalytic.”


Matteo Scalabrino, BwB Senior Analyst, wanted to find out more about the communication side of this type of products. “We already know that this is not easy material. And on top of that we had the blockchain, the DeFi component, etc., which is not easy to digest for those who are not particularly familiar with that. So how do you tackle that complexity and that difficulty when you need to go through this product in talks with investors, etc?


Nicolas replied: “It is challenging to explain to people who believe in dogmatic finance that technology is going to change the world. It took me some time to really make sure that top executives were interested to listen that technology is not going to serve their business anymore, and that they are going to be disrupted by it, which was, at the time, very scary for them. There is a study that the average person needs to spend 50 hours minimum just to understand the basics of bitcoin.”


Matteo further continued: “What we have been trying to understand at BwB in the last few months were the different applications of the blockchain technology and the crypto technologies in the sustainable finance space. And indeed, one was the carbon finance area. On the base of your experience, do you see also other applications of this technology in the sustainable finance space more promising than others happening in the market that you think this is going to be the next big thing in the market?


Ian replied: “I think from a settlement and distribution mechanism I would dare say that there is no cheaper way of distributing instruments or quasi financial instruments than the blockchain. I think tokenisation and blockchain fit disruption in that classic sense.


I don't really deal with ESG and sustainable finance. What I think the next wave I would like to go is nature-based securities and regenerative finance. It's much smaller subset. And the case for me I think is impeccable. We are coming off a big credit bubble right now that's deflating. We have high interest rates and almost every other asset class that has been Available on public capital markets in the last 10 or 20 years has been innovated and packaged. The only place you can really create new alpha is in assets that do not exist yet, either because they have not been innovated or because of whatever difficulties. For example, in the case of nature - too many externalities, too illiquid, too long term. But these are real assets, something between real estate and commodities. And these are, ironically, assets that, because they are real assets, they are resistant to inflation.”


I remember a quote on Facebook saying: “We might be the first species that will not save itself from extinction simply because it wasn't economical.” I think that's a little bit unfortunate. But this is, in my view, an asset class screaming for innovation because we need to, if we want to survive as species.


Jennifer Faust, BwB Managing Director and Talk Series host, asked:


“Are you thinking that you could then take this model beyond mangrove trees and apply to other assets?”


Ian Choo answered: “The answer to climate change is planting trees. But after some research, I found out that for ecosystems to work, there are those certain keystone species that are disproportionately important to the ecosystem, and mangroves are an example. They prevent the receding of shorelines, provide natural habitats, sequester carbon for the long term, etc. On their own, they don't look very useful, but by their existence, they tend to make everything better and possible. I guess the question next is what other keystone species are there. The one thing that is coming up forward now in biodiversity discussions is the role of pollinators and insects. I haven't yet figured out how to structure a financial product that encourages the pollination and insects, but I would certainly think it is an important piece that We should look at as a civilisation.


The third piece I would suggest would be soil health, and particularly soil carbon, because industrial farming is depleting topsoil in agriculture. I see some initial work in thinking about how we can restore the micro-bacteria in soil health through some processes that are deliberate and planned. It is extremely interesting to see how this can be replicated into other keystone species.”


Yasir Shah, BwB IT Associate, then asked:

“We are talking about the blockchain technology for these green bonds and all the underlying elements to develop those products. Are you using those currently available on the market or you are building your own blockchain?”


Nicolas replied: “I’m not saying Ethereum is the best, but currently it is the most widely used for this kind of concept so far. There is a couple of other emerging blockchains coming, but I don't want to duplicate centralised financing on a blockchain which is centrally controlled.”


Jennifer Faust concluded the conversation with a last question on what the next steps for Nicholas and Ian are. “What are the key priorities that the two of you are focusing on here for the next six to twelve months? And how can BwB support you?”


Ian replied: “Blue Carbon goal is pre-launched now. We think it is important work because we want to be the first end-to-end proof of concept. This is not usual for financial services. But in doing this sort of work inventing a whole new or regenerative finance, we have found that you need to deal with the whole value chain. From asset investment thesis and asset managers, through the legal structure, compliance, the technology and the reporting technologies, down to the whole end. This is quite heavy lifting.”


“We are always in search of kindred spirits who like our pioneering effort that could go not only towards saving the planet, but to owning a whole new emerging space. We are looking to talk to anybody who’d be interested in this sort of work, in what I believe is the next cutting edge of finance.”


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