Among all of the interesting developments this year in green digital finance, the one that excites me the most is the BBVA issuance of a blockchain-based green bond. I don’t blame you if this makes you lift your eyebrows in surprise and disappointment—what about the Swedish credit card with a built-in CO2 calculator that blocks further purchases once you have reached a CO2 spending limit? I must admit that one is really exciting, too.
But there is a reason I am so particularly excited about what the BBVA offering potentially represents, and that reason has to do with the trade-offs that have historically been part of the pursuit of scale. Under traditional operational and delivery models, financial products can either be “mile wide, inch deep” or they can be “inch wide, mile deep.” That is to say: products can be custom-tailored to certain needs or context, and really be effective in those contexts—but they can’t scale up. Alternatively, they can achieve massive scale, but will necessarily become more “one size fits all” in that process. It has just been assumed that “mile wide, mile deep” is an impossible dream.
With the BBVA offering, it is not the high-tech green bond in and of itself that I find so compelling. It is the prospect it suggests for how we design green digital finance instruments going forward. A green bond issued on the blockchain offers all participants equal access to data on the transaction in real time, reduces transaction time, lowers transaction costs, and potentially offers automated data harvesting. In short: blockchain delivers the radical efficiency gains which are a prerequisite to scaling green debt finance—to going mile-wide.
Secondly, it is the opportunity blockchain offers to target bonds to each community, each green building, or each network of smart energy grids for local renewable energy trading—to go mile deep—that makes it so exciting.
Essentially, blockchain-powered bond markets can potentially invite orders of magnitude more people to become owners of localized, bespoke green assets and to invest in the green transition. We can learn from the lessons harvested by the World Bank, BBVA, and others that have deployed distributed ledger and adjacent technologies in bond issuance since 2018 to bring those lessons to structure green community bonds all over the world, especially in developing economies where both the needs and the opportunities are greatest.
Connecting to climate finance by investing your savings into green assets in your own community is both a way to create ownership to mitigation and adaptation. It creates a sense of local empowerment to act on a green agenda that is, by necessity, universal in its nature.
Microfinance has proven that savings capacity is everywhere as long as the correct financial products are designed to meet the needs of different citizens. In addition, the number of high net worth Individuals has never been higher in both Asia and Africa. Starting to experiment with micro green or community bonds is a way to offer people a chance to invest in the local communities in their countries—and can mobilize entirely new sources of green finance.
As it is essentially a type of crowd funding of bonds, these developments do call for regulation to help shape and unlock this opportunity, with policymakers and regulators working hand-in-hand with technology, communities, and service providers. Such coordinated collaborations can point to a potential future of do-it-yourself green micro bonds as a self-service approach to connecting community assets to investors.
Can blockchain-based investing really enable custom-tailored green finance—at massive scale? Or will “mile wide, mile deep” remain the impossible dream? For me, at least, the prospect of finding the answer to that question, probably faster than any of us currently believe possible, is what makes it so exciting.