Blockchain is now on the front line against climate change

Full Transcript

Angie Lau: Can you save the planet and make money? How can blockchain mitigate bad actors in the carbon market? And how can we help future generations save their future?

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and the emerging technologies that shape our world at the intersection of business, politics and economy. It is what we cover right here on Forkast.News. I”m Forkast Editor-in-Chief Angie Lau.

Well, the IIF, this is the Institute of International Finance, predicts that the carbon market is set to grow by up to 16,000%. So you could say that demand is on the rise, but the development of the global carbon market has been slowed down by Article 6 of the Paris Agreement. Now, this article would enable nations around the world to transfer emission reductions, but it”s yet to be finalized because of Covid-19.

So what is the blockchain industry to do? Well, a $50 million tokenized fund by former Bitcoin.com CEO Stefan Rust has announced the launch of Sonic Capital. The eight-year fund is looking for startups that leverage blockchain to tackle ESG issues.

So let”s talk to the man himself. He is the CEO of Sonic Capital. He”s former CEO of Bitcoin.com, founder of Exicon and a veteran in the field of blockchain, Stefan Rust, and a friend to the show. Hello, Stefan, it”s great to see you. I love every time you break your news, you break it on Forkast.News and we love having you on.

Stefan Rust: Thank you for having me and love being on the show with you. Yes — second time around within the twenty-four month period, right? Eighteen months.

Lau: Well, you know what? The last time we talked, we were in the pre-Covid world. We were in the old world. We met face to face. The world was so different then. Fast forward, everything unexpected and unanticipated has come true. ESG, which of course everybody knows is environmental, social and corporate governance has been one of those things that has its roots in the old world, but in the new world, in the post-Covid-19 world. What role, in your view, does ESG have and why do you think blockchain can play a role?

Rust: ESG is super important. We have an environment, we”re living on this planet and we”re struggling to live on this planet and we”re moving towards the days of Blade Runner. All those pictures that we”ve seen in these movies, every time you go into cities, everybody”s wearing masks. I saw this other thing the other day, people wearing astronaut helmets that have belt buckles on the side and then, you have gloves to go into and touch your face. So the environment is obviously impacting how we”re living, and our capability on surviving on the planet. It”s not the planet that”s going to survive, it”s whether we as a species can sustain and retain that biodiversity on the planet, number one. 

I just felt that with the pandemic — it”s much bigger than just the pandemic — it”s touching on to the environment. As we go down this path, how do we actually do something about it versus just saying, every time you talk to somebody about ESG, it”s donation, it”s give me money, it”s support, it”s grants, it”s a constant giveaway of money. Then I came across these great companies that are building and innovating, using the blockchain technologies to enable the lower cost of aggregating of information and data, the verification of that data, the conversion of that data into credits of some form or fashion, and then ultimately, with DeFi and all the services that we have in blockchain the capability to trade those credits and exchange them amongst peers.

From that perspective, I felt blockchain is the perfect answer to a large portion of the problems. Governance in smart contracts, you”ve got it on the blockchain, immutable, there”s no better truth machine than the blockchain itself. And then you can address all of the inclusion elements around social, which is addressing social inclusion so everybody can participate in it. The mobile phone that we have — 60% of the world population have a smartphone which enables apps where you can have your wallet, you can trade, you can interact, you can pay, you can do all those services with these smartphones. And that will then bring an additional two billion people into the economy with some $350 billion dollars worth of savings multiplied by the fractional capabilities of funding. And using that $350 billion, we have a whole new growth engine that”s driving a broader audience base across borders because blockchain and mobile know no borders and nor does carbon dioxide, nor does the ocean. They don”t know what we draw a line on a piece of paper.

Lau: What I”m hearing is that, let”s stop waiting for the big firms, the legacy firms, and let”s go directly to the everyday person around the globe who actually cares about it and for those who can care about it, they might not be the bigwig investor. But in a way that they could contribute in their own way. Sonic Capital, from what I understand, is a $50 million tokenized, venture capital and investment fund. First of all, your investment thesis, that”s clear. Tell me about this tokenized perspective that you”re bringing to venture capital.

Rust: Everybody”s been talking about security tokens for quite a while, and we felt that when we were going out and talking to investors, validating the interest in our fund and focused on the area that we are, they were all talking about: “What about tokenizing it, tokenizing it?”

And we felt that given the demand that you”re seeing at a consumer level, there is a strong interest, 80% of all consumers have an interest in purchasing products that are either aligned with their own values or that are doing good on the planet. So combining that sort of desire at a consumer level with that of an institutional level to invest via security tokens or via tokens into our fund, we can by combining the two together, focusing on maybe institutional sort of grade investors or qualified investors, we could actually make the availability to buy into early-stage venture companies to lower grade investment appetite. So people with a lower appetite, they don”t want to put in 10 million dollars, they can put in five thousand dollars — that”s the minimum investment. We can now facilitate that, thanks to the blockchain and it being tokenized, our cost of maintaining a fund, providing all the transparency, the disclosures, the onboarding, all of that is far more cost-effective. And as a result, we”re providing very competitive terms for our fund and being able to manage a larger investor base. And so that”s the brilliance around it.

We have the ability for it not to necessarily be eight years, so you may not want to hang on for eight years, you might want to exit after three years. We have a three-year lock up so people do stay in for the first three years.

And then after that, you can then trade them on exchanges where we”re certified that are registered to support security tokens and then any investor can get out of that. The other thing that we kept coming across was private companies generally tend to stay private for longer. So they go the funds last longer than eight years, and so how do you handle that? And so that was one other addition that we could address. So not only can we support more investors and a broader base of investors, but we can also provide earlier liquidity.

Lau: How much capital commitment do you have so far for Sonic?

Rust: So we”ve got about, interested parties, about 10 million already in the house, I”d say, but not yet in the bank. We”re going through the final legal setups and documentation and regulatory hurdles that we”re going through. We are working with great law firms, highly, globally, reputable law firms, and setting up on a Cayman SPC structure. So it”s a segregated portfolio company.

Lau: Got it. It”s very timely, but I”m curious what your thoughts are of Ashley Alder”s announcement in Hong Kong. This is the SFC chief talking about the digital assets regulatory requirement for exchanges. How does that affect you, your plans, if it at all? What do you think it does for the space?

Rust: There”s a whole slew of answers that I could throw there. Definitely, the governments are beginning to feel the pressure, separation of state money — how do they play? Regulatory environment — all of a sudden, do I need as many lawyers as I have as we put a lot of the contracts into smart contracts and the governance moves onto the blockchain? How does that impact these exchanges? You”ve got decentralized exchanges — nobody”s governing them. They”re managed on the blockchain. I hold the custody of my funds on a decentralized exchange. So where does that leave all these centralized institutions that have been established over the course of the years? And it”s a huge, ginormous industry. They”re trying to figure out what the role is and how do we manage this new Wild West, for lack of a better name.

Over time, it”s inevitable that more regulation will come into this market. I don”t think we can try and out-innovate as the Internet has done. It”s created these technology behemoths. I think what these governments are trying to do is create technology behemoths with money so that they can do quantitative easing, highly targeted, like Facebook does A/B testing, they will do interest rate testing with a select set of wallet holders. You”ll see these interesting innovations that on the one hand, is super great because you can then really support specific groups. But then it will also be a bit scary because it”s in the hands of a set few that govern a nation. We”ll see how that goes.

Lau: Well, absolutely right. You just left Bitcoin.com in its CEO role back in April of this year. You”re seen as obviously a leader in the space. What did you learn and what are you applying now to Sonic? As you”ve been in this industry for a while. What are you going to apply to Sonic?

Rust: Open-source — at the speed of innovation that happens in the open-source world is phenomenal. And the passion that a lot of the developers had in the software development space is huge and particularly around the blockchain environment. So how do you harness that innovation in an area where it comes down to the environment and saving ourselves on the planet? And for that, I wanted to really harness that and bring that to the world.

We talked about it earlier. One market that we”ve looked at was really the carbon credits market. And you break that down into two sorts of a set of areas. There”s the voluntary market and then there”s the governed market. I think the governed market is really going to struggle with keeping up the pace of this industry.

And so how do we structure and bring the innovation and the velocity that we saw in bitcoin and crypto overall into this carbon world and accelerate the voluntary market, create homogenous products? How do we then create liquidity, transparency? How do I know that the money that I”m buying in that carbon credit, that token, is actually still keeping that mangrove tree alive, and that mangrove tree is sequestering X amount of carbon? How do we professionalize that and incentivize and attract the right talent into that market, yet enabling the farmers to make money that is actually being biodiverse in their farming, the companies that have solar panels on the roof to additional rent subsidies for being good actors, as well as the investors that want to trade it, that want to do futures? These contracts, sometimes are 20-year future contracts, and there is no derivative market for any of this. It”s still very immature and can use a lot of the existing DeFi products that we have developed in blockchain. How do we now bring that into something that”s going to save our planet?

Lau: And a lot of major corporations, to your point, like Microsoft and Apple, are starting also to commit to the voluntary carbon market. We”re seeing a lot more industry leading enterprises continue to expand contributions towards ESG strategies. How do you envision the supply-demand for carbon credits to play out?

Rust: I”m sort of echoing the twofold — we believe there”s an enterprise element where I echo exactly what you just said. You”re seeing huge demand not only from the tech companies but also from Unilever, Nike, Ralph Lauren. All these companies are beginning to manage their whole supply chain to be carbon neutral. That means that this shirt from Ralph Lauren has cotton, it has shims, it has buttons, it has threads. Each one of those is from a different supplier. Each one of those suppliers needs to be carbon neutral. The whole supply chain will work through. You see that in examples like Apple, TSMC, you have Taiwan — TSMC just signed a deal with Ørsted to fund the whole offshore wind farms that are going to supply the electricity from natural resources to their semiconductor factories. You”re seeing that chain happening in the enterprise space and that demand is going to result in the adoption of these voluntary carbon credits, we believe. The second element is the consumer. So the consumer is coming in. 

Ant Financial — unfortunately, they can”t go IPO, which is another regulatory hurdle. Why the regulators sort of identified that two minutes before midnight is an interesting question. But besides that, they”ve developed this Ant Forest, I don”t know if you”ve heard of that app in China. There”s an app, they have 500 million of their customers are actually using Ant Forest. So if you walk to work, take the bicycle to work, you earn green credits versus taking a car. Those green credits get used to fund trees. I think they planted now about a million trees, over one hundred thousand hectares in sort of the mid-west of China. So it”s like super interesting that the consumers are actually beginning to then use those green points to earn it off chopsticks. So when I take the home takeaway delivery, I don”t want the chopsticks, I”m going to use my own home chopsticks because I earn green points. Again, having a bigger impact — if you have 500 million people not taking chopsticks, how many trees do we save?

Lau: That”s incredible, you”re totally right. On one hand, there”s that. The things that we do in our every day that is amplified transactionally and recorded on the blockchain, that transparency, no doubt is there. But then, on the other hand, the criticism that we know is the crypto carbon footprint. Recently, on Forkast, the Ripple head of social impact pointed that out — crypto”s carbon footprint is larger than some nations and not sustainable. So how can we solve ESG issues with blockchain when one of its main criticisms is its carbon footprint?

Rust: I think two things: in crypto, we have proof of work and we have proof of stake. And the proof of work is really where electricity is the currency. The more electricity and the better conversion rate of electricity into mining success, the more you earn. The proof-of-work side is definitely consuming a lot of electricity. However, if you look at the demand and there have been a number of reports on Google that have identified the sources of that electricity for the proof-of-work mining is generally from underutilized electricity, e.g. electricity that”s being generated and not pumped into the grid. So it”s dead electricity, basically, that all these power plants have already created. They just can”t get it into the grid or it”s not being stored or consumed. The second element is the proof of work. Miners are generally heavily reliant, I think up to 80% on renewable energy. So they”re all using water where it”s cold and where nobody else goes. From that perspective, there is another angle, or they”re close to solar power plants where there”s, again, can”t get it into the grid in time, it”s not being consumed appropriately. But there”s room for improvement. How do we improve that? You”re seeing and Ethereum is shifting away from the proof of work into proof of stake, mainly for, I suppose one of the reasons is, they want to be more carbon-friendly.

Lau: With Sonic, you”re also the millennial generation and Gen Z generation-friendly as well, providing low minimum investment. We took a look at your presentation deck. Five thousand dollars is the minimum investment. That”s quite low for a fund. Why do you think engaging with the Gen Zs and the millennials is going to be important to your fund?

Rust: So Gen Zs care about this area, and I”ve seen a lot of ICOs, and IEOs, and token offerings, token generation events, and I”ve just looked at the generation and been working alongside a lot of the Gen Z, Gen Y, sort of millennial generations, and their investment appetite is: “Oh, I just want to put ten thousand dollars in. I want to have skin in the game and I want to put ten thousand dollars in, but I can”t.” When I was a kid, I wanted to invest in — I met Tesla in my work, I wanted to invest in them, but I didn”t have access to them. And so I had to wait till they went to an IPO to get access to them. So how do I get a bit earlier access to some of the companies that I”m interacting with? I just felt, how can we get it as low as possible as long as you pass the qualified investor hurdles that we need to do from a regulatory standpoint to enable anybody to participate? So anybody that cares can do that. And we”ve also changed the whole governance model. So if we have enough people that care about a specific company, we have committed to doing due diligence on that company and we have a whole governance model that”s framed out. We have a timeline and so we”re really sort of sticking to that.

Within 60 days, every deal gets reviewed and analyzed and then we will invest or not invest based on the decisions that the investment committee makes. And the token holders, by the way, are also a part of the investment committee. 

Lau: That is the new future. That is absolutely the new model, that transparency. No more activist investors because it”s baked into the agreement that you put in your fund. That”s incredible to hear. When are you going to launch your fund?

Rust: We”re hoping to launch by the end of this year, get live and start our first investments. We”ve already done two investments. Really excited about those. One is in a company Regen.Network. What they”re doing is capturing the biodiversity of farmers so that your organic tomato can be subsidized and be equally priced as the mass-produced tomato. And at the same time, the farmer makes his margin on the carbon credits that they earn from using organic materials and no pesticides, etc. Super interesting in that area. We”re looking to get it up and running by the end of the year and really start making an impact this decade because we need to make a change this decade in order for the rest of the century to really be fruitful.

Lau: If we don”t do it this year — this has been not a great year. So if you can help us end it on a high note, we truly appreciate it.

Rust: Well, that”s what we”re trying to do. There is so much opportunity and we got to break away from this doom and gloom. Let”s find these entrepreneurs that are building great products that are driven, passionate and focused on trying to get their product to market to really change the world. How do we empower them? How do we attract the right talent to them and enable them and get them funding for any source to be successful so that we can survive on this and so that the consumers can also realize the benefits of this,

Lau: Stefan, the fund sounds very promising. I know you have a lot of hoops still to jump through. Regulatory, the tokenization, you”ve got to make sure all your legal ducks are in a row. And I know you know that. So we will be watching very closely and cheering you on because environment, sustainability, governance are three critical issues to the true sustainability of the planet and us, quite frankly. Stefan, it was a pleasure. Thank you for sharing a preview of the fund. And we”ll have you on again when you launch it.

Rust: Thank you very much. Thank you. Awesome. Look forward to it.

Angie Lau: And thank you, everyone, for joining us on this latest episode of Word on the Block. I”m Angie Lau. Forkast.News Editor-in-Chief until the next time. Bye, guys.