Digital assets, sustainability and regulation: the new convergence

Digital technologies will be central to company transformation and increasingly integral to managing sustainability footprints. In this SIBOS spotlight session, Ali and Nick discussed how the realms of digital assets, sustainability and regulation might be converging – and what it means for the future of the digital asset space. 

Why sustainability and regulation matter, and their relationship to digital assets

In the larger picture, three things are becoming increasingly clear: digital assets are getting regulated; sustainability is an integral emerging part of that regulation; and, when you put it all together, you get a relevancy that reaches past digital assets to encompass wider sustainability and ESG themes.

Digital assets enter the regulated, enterprise-driven era

Digital asset regulation is evolving fast worldwide – and, increasingly, in a way that sets it within familiar financial services style frameworks.

In the EU, MiCA has come into effect as the first comprehensive, crypto-bespoke framework; MENA/APAC has Dubai with its recently established Virtual Assets Regulatory Authority, and hubs of Asia activity in Singapore & Hong Kong. And of course the UK – Zumo’s home jurisdiction – has stated crypto hub ambitions, with legislation now in place to implement a comprehensive, financial services style regulatory roadmap.

At Zumo, we observe the first shoots of these developments already live in action, with FATF-derived travel rule requirements governing cryptoasset transfers live since September and stringent rules relating to financial promotions around the corner in October.

Speaking to sustainable business, it seems increasingly clear that compliance is an area in which companies may easily be caught out if they don’t prepare and move with the times. As a compliance-first business, we continue to engage closely, and are speaking with regulators and other businesses on the ways companies can continue to operate compliantly in the UK. 

Ultimately, these frameworks will be global, with according reach, with the topic making its way to G20 level.

The role of sustainability in the regulatory agenda

Within this wider context, it appears evident that sustainability of cryptoassets will form an important component part of this regulatory agenda.

In Europe, the already mentioned MiCA includes a mandate for providers to identify, disclose and report on climate impacts of crypto-assets in line with guidance to be provided by ESMA.

In the UK, HM Treasury’s consultation on the future regulatory regime for cryptoassets included a call for evidence on aligning sustainability disclosure requirements, and understanding environmental, social and governance risks associated with cryptoassets reappears under firms’ due diligence in the FCA’s most recent financial promotions guidance consultation.

In the US, the SEC has of course been conspicuously absent in terms of proactive cryptoasset rules, but we note with interest, as it ponders a raft of spot Bitcoin ETF filings, its high-profile broader climate-related disclosures agenda.

Overall, given the scrutiny the topic has received, it seems reasonable to assume that more requirements of this type will emerge as early-stage frameworks are iterated and developed. Cryptoassets therefore need to come with built-in environmental solutions to guarantee a sustainable future.

The convergence

Most broad of all is the convergence of such compliance and sustainability themes beyond the area of cryptoassets themselves in the wider potential application of blockchain and digital assets.

Currently, corporates find themselves under scrutiny for climate-related disclosures and reporting through the likes of the Corporate Sustainability Reporting Directive (CSRD); International Sustainability Standards Board (ISSB); or Taskforce on Climate-related Financial Disclosures (TCFD).

This represents a global finance challenge that calls for transparent and audited data, and ways for corporates to measure and report on carbon footprints at scale.

It is also an area in which blockchain technology and tokenisation – both in the tracking and showcasing of data and proofs, and in broadening the accessibility and tradability of tokenised instruments such as energy attribute certificates or carbon credits – has a very strong use case.

This is where convergence is found – not only in accounting for cryptoassets, but in using related technology to tackle wider climate challenges. The opportunity is to embrace blockchain and digital assets both for sustainable cryptoasset solutions and also (corporate) sustainability in general: blockchain-enabled ‘regenerative finance’.

Offering practical solutions

In line with this view of the converging landscape, Zumo offers practically focused solutions in both the cryptoasset and wider blockchain sense.

Solutions for cryptoassets

Earlier this year, Zumo launched its new Oxygen solution. A world-first, Oxygen is a provable and scalable cryptoasset climate mitigation solution for financial institutions and fintechs.

Oxygen builds on research work, testing and grant funding from Innovate UK, and has won multiple awards for its innovation and positive action. It works by combining the forecasting and calculation of crypto electricity consumption with standard industry data, and uses renewable energy procurement in the form of Renewable Energy Certificates (RECs) to ensure cryptoasset activities are transparently and verifiably matched with renewables. 

The goal is therefore to empower banks, banks, asset managers, and other financial institutions to align their digital asset offerings with their wider net zero strategy and make verifiable claims as to the actions they have taken.

The Oxygen product is currently live with Jacobi Asset Management, which in August 2023 launched Europe’s first spot Bitcoin ETF powered by a solution from Zumo to purchase Renewable Electricity Certificates to match the electricity consumption attributable to bitcoin held by the fund.

Solutions beyond cryptoassets

Beyond cryptoassets, Zumo views blockchain as a ‘digital enabler’ in tackling climate change and supporting the energy transition to a more sustainable infrastructure with an ambition to be the one-stop shop for tokenised ESG assets such as carbon credits or RECs.

Most recently, Zumo announced a collaboration with GMEX/Zero13 that aims to enable Zumo to leverage GMEX ZERO13’s hub connectivity to digital carbon registries, trade execution venue capability and its decentralised asset settlement network to source validated, high-quality, tokenised carbon credits.

The aim is therefore to provide corporate customers with a flexible and transparent way to account for their carbon footprint through the procurement and custody of tokenised carbon credits, with ease of trading, clearing and settlement. 

Zumo is also a founding member of the ETST, the Emerging Technologies Sustainability Taskforce, with the goal of providing robust input into standard-setters’ organisations so that emerging technologies companies have what they need to ensure they adhere to sustainability practices.

As the technology develops, we are committed to harnessing technology productively so that companies have what they need to take effective action and tell their ESG story. 

The digital asset platform of the future

Putting the puzzle pieces together, then, there is an emerging view in the industry of what the digital asset platform of the future looks like – compliant, sustainable, integrated.

As regulatory frameworks evolve, so too does the need for compliance, security and trust. As sustainability mandates grow, so too the need to incorporate sustainability into all aspects of operations. And as cryptoasset and mainstream finance worlds converge, so too the need to integrate and evolve solutions.

Zumo as a provider works across this gap, helping businesses and financial services providers to leverage the emerging opportunities across the ecosystem.

We look forward to seeing solutions continue to evolve and a sustainable digital asset future.