UNLOCKING FINANCE FOR THE ENERGY TRANSITION THROUGH BLOCKCHAIN TECHNOLOGIES
INTRODUCTION
A crypto investor has utilized Bitcoin to purchase 98% of solar cells for Pretoria Boys High School's solar project, through Sun Exchange, a peer-to-peer solar leasing platform. The 198-kilowatt solar system will reduce 5,800 tonnes of carbon over two decades, equivalent to removing 210,000 petrol cars off the road annually[i]. Sun Exchange's online platform enables individuals and businesses to purchase solar cells, which provide power to schools, farms, retirement homes, and other organizations in Southern Africa.
Sun Exchange's Chief Executive Officer, Saul Wainwright, emphasized the importance of mitigating the energy crisis and addressing the solar finance gap in emerging markets. The investor, a former student of the school, said they are excited about the transformative power of blockchain and solar energy. Sun Exchange mentioned that the solar project will assist the school in reducing its reliance on fossil fuels, such as diesel generators, during load shedding or scheduled power cuts. The solar system will be integrated with the existing generators, enabling the school to use solar power during daytime outages and reducing diesel consumption and associated carbon emissions.
UNLOCKING FINANCE FOR THE ENERGY TRANSITION – THE ROLE OF BLOCKCHAIN TECHNOLOGIES
The utilization of cryptocurrency, particularly by leveraging diverse blockchain technologies and tokens, holds the promise of facilitating the release of funds for energy transition initiatives. Renewable energy assets like solar panels, wind turbines, or energy storage facilities can be transformed into tokens with the help of cryptocurrency. These tokens symbolize the ownership or partial ownership of the assets. By investing in and trading these tokens, individuals and institutions can now participate in clean energy projects in a novel way. This innovative approach to investment marks a significant development in the field of renewable energy[ii].
Furthermore, leveraging cryptocurrencies allows individuals to invest directly in renewable energy projects without the need for traditional financial intermediaries through the instrumentality of crowdfunding and Decentralized Finance (DeFi) platforms. This development can significantly reduce the barriers to entry for potential investors and streamline the process for projects to secure the necessary capital. Overall, this approach represents a promising new frontier for renewable energy financing that has the potential to revolutionize the industry[iii].
More so, one of the most significant advantages of cryptocurrencies is their borderless nature. This unique feature enables global investment in energy projects, which can facilitate clean energy initiatives in developing countries. With the ability to attract investment from any part of the world, such projects can potentially accelerate the transition to sustainable energy sources. This remarkable opportunity can help drive the shift towards a more sustainable future.[iv]
Additionally, self-executing contracts, known as smart contracts, can be utilized to automate different components of renewable energy financing. These contracts contain the terms written directly into codes, allowing them to release funds when particular project milestones are reached automatically. This eliminates the need for intermediaries and simplifies the investment process, making it more efficient.[v]
The underlying technology behind cryptocurrencies, known as blockchain, provides a range of advantages, such as transparency and traceability. This means that investors can closely monitor the flow and utilization of funds, ensuring that they are being channelled towards their intended purpose(s). This heightened level of accountability can be especially valuable for renewable energy projects, as it promotes trust and confidence in their success.[vi]
Notwithstanding the potential and significant benefits of cryptocurrencies, in terms of financing energy transition projects, there are several challenges and risks that must be considered. Among these are regulatory uncertainties, price volatility, security concerns, and the possibility of fraudulent projects. It is important to note that regulatory issues can vary significantly from one country to another, which only adds to the complexity of the technology. All of these factors will need to be carefully evaluated before deciding whether to use cryptocurrencies as a means of financing energy transition initiatives.[vii]
LEGAL, POLICY AND REGULATORY CONSIDERATIONS
Nations considering the adoption of cryptocurrencies for energy transition financing, need to address several legal, policy and regulatory considerations:
Security and Fraud Prevention[viii]: To protect investors from fraudulent or unethical schemes, it is imperative for governments to put in place the attendant regulations. As a measure, regulatory bodies can be set up to oversee both token offerings and crowdfunding platforms. This will ensure that investors can confidently participate in these projects without the fear of being scammed or misled. Such measures are crucial to establishing a safe and fair investment environment for all parties involved.
Taxation[ix]: It is important to note that engaging in cryptocurrency transactions may have significant tax implications. As such, it is imperative that governments take proactive measures to establish clear tax frameworks that will ensure appropriate taxation of any cryptocurrency investments and gains. By doing so, they can effectively manage and regulate the cryptocurrency market, while ensuring investors are held accountable for their tax obligations.
Anti-Money Laundering (AML)/Know Your Customer (KYC) Compliance[x]: To deter and prevent any illicit activities involving cryptocurrencies, it is imperative to strictly enforce the Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. These regulations are essential to ensure that the identities and financial transactions of individuals engaging with cryptocurrencies are thoroughly monitored and verified. Doing so helps maintain the integrity of the cryptocurrency market and upholds the standard(s) of lawful conduct within the industry.
Stablecoins[xi]: To address the issue of fluctuating prices in the world of cryptocurrency, stablecoins may prove to be a viable solution for governments to consider. These digital currencies are pegged to traditional fiat currencies, providing stability that can help alleviate concerns about price volatility.
Interoperability[xii]: It is essential for nations to focus on establishing standards and promoting interoperability between various blockchain platforms. This is crucial in facilitating cross-border investments, which require seamless communication and compatibility between different systems. By working on these aspects, nations can enhance their capacity to engage in global economic activities and attract more investment opportunities.
CONCLUSION
Cryptocurrency and blockchain technology have opened new avenues for sourcing capital for energy transition projects. However, governments and regulatory authorities must tread carefully when navigating the legal, policy and regulatory framework(s) to ensure investor protection, security, and the overall success of these ventures. It is important to bear in mind that Regulations will differ from country to country and will evolve over time; as the technology and its applications mature.
[i] https://www.esi-africa.com/renewable-energy/south-africa-schools-solar-energy-project-funded-by-bitcoin-investor/
[ii] Ahmed Meziou, ‘Power Generation Assets on Blockchain: Re-defining The Rules of Investment in the Energy Industry.’ < https://www.linkedin.com/pulse/power-generation-assets-blockchain-re-defining-rules-energy-meziou/ >
[iii] IMF, ‘‘DEFI’ AND ‘TRADFI’ MUST WORK TOGETHER’ <https://www.imf.org/en/Publications/fandd/issues/2022/09/Point-of-View-Defi-Tradfi-must-work-together-Michael-Case >
[iv] World Bank, ‘ Does blockchain have a role in the financing of infrastructure?’ <https://documents1.worldbank.org/curated/en/099200503082329768/pdf/P17425408f3aa00580a2620810813ed0370.pdf >
[v] Ibid.
[vi] Vishal Gaur and Abhinav Gaiha, ‘Building a Transparent Supply Chain’ <https://hbr.org/2020/05/building-a-transparent-supply-chain >
[vii] ‘Assessment of Risks to Financial Stability from Crypto-assets’ < https://www.fsb.org/wp-content/uploads/P160222.pdf >
[viii] Roger Brown, ‘REGULATING CRYPTO’ <https://www.imf.org/en/Publications/fandd/issues/2022/09/Regulating-crypto-Narain-Moretti >
[ix] OECD, ‘Taxing Virtual Currencies’ < https://www.oecd.org/tax/tax-policy/taxing-virtual-currencies-an-overview-of-tax-treatments-and-emerging-tax-policy-issues.pdf >
[x] Katherine Lemire, ‘Cryptocurrency and anti-money laundering enforcement’ < https://www.reuters.com/legal/transactional/cryptocurrency-anti-money-laundering-enforcement-2022-09-26/ >
[xi] Weforum, ‘The Macroeconomic Impact of Cryptocurrency and Stablecoins’ <https://www3.weforum.org/docs/WEF_The_Macroeconomic_Impact_of_Cryptocurrency_and_Stablecoins_2022.pdf >
[xii] UNCTAD, ‘GLOBAL REPORT ON BLOCKCHAIN AND ITS IMPLICATIONS ON TRADE FACILITATION PERFORMANCE’ < https://unctad.org/system/files/official-document/tcsdtlinf2023d1_en.pdf >