Blockchain in the financial sector
In finance, Blockchain is a tool where transactions are decentralized and all transactions are available on a public ledger that is updated by the computer. There is a distributed ledger where financial institutions can connect to and transactions are updated regularly for all to see. Transactions are done in real time. It has the same concept as peer-to-peer trading that was done in the agrarian times but on a larger, computerized stage. All of the transactions over a certain period of time is kept as a block of data, a list of transactions and updated regularly (Warburg, 2016).
The following image illustrates how peer-to-peer transactions are done in a Blockchain as the distributed network:
Blockchain and climate change
There are many benefits of using Blockchain in climate change implementation. It gives the possibility of a platform where states, companies, and individuals participate and whose interactions are facilitated by so-called smart-contracts. These contracts are pieces of computer code running on top of the blockchain, which makes them virtually unstoppable. A common token or currency which allows climate commitments by states to be linked with the flourishing ecosystem of transnational climate initiatives and individual climate action (Reinsberg, 2020).
Coordinated action against climate change requires better information. One important task is to ensure that different stakeholders do not claim carbon credits for the same carbon-offsetting activity, such as two companies paying for the same forest to be planted. To avoid such double-counting, a publicly shared distributed ledger of carbon credits, as currently piloted by the Pacific Alliance nations, would offer a more cost-effective solution. Another task would be to verify that carbon-offsetting activities have actually occurred. Blockchain technology, combined with digital information feeds, could tap new information sources. Meanwhile, smart contracts offer an efficient way to reward critical tasks like verifying emission reductions and adaptation measures on a national level (Reinsberg, 2020).
Blockchain technology can be used to trade energy as well. It could be used to improve the system of carbon asset transactions. For example, IBM and Energy Blockchain Lab are currently working together to develop a Blockchain platform for trading carbon assets in China. Recording carbon assets on a public Blockchain would also guarantee transparency and ensure that transactions are valid and settled automatically. Blockchain could also allow for the development of platforms for peer-to-peer renewable energy trade. Consumers would be able to buy, sell or exchange renewable energy with each other, using tokens or tradable digital assets representing a certain quantity of energy production. Blockchain technology could help develop crowdfunding and peer-to-peer financial transactions in support of climate action, while ensuring that financing is allocated to projects in a transparent way (Asenjo, 2020).
Blockchain and financial transparency
In general, Blockchain has the capacity to prevent monopolistic control over financial systems. The technology can also record transactions openly and permanently, thus creating transparency and traceability. Moreover, Blockchain has transparency, cost-effectiveness and efficiency advantages, which may lead to greater stakeholder involvement and enhanced creation of global public goods (Giambelluca, 2020).
With Blockchain’s capacity to record anything of value and digital ledger technologies being incorruptible any financial system, businesses or institutions (including government departments and third party regulators) involved to get a open, transparent, neutral, reliable and secure transaction data (Giambelluca, 2020).
As transactions in the digital ledger are open for all in the network to see its easier to track transactions history and ownership of financial assets. Its easy to see the destination of transactions and governments ledgers for land and cities financial budget records is a step towards technological advancement where it will be impossible to manipulate these records, permanently keeping them from being altered or faulted. Transparency in blockchain defines the ability to view public addresses where you will be able to access transaction history, assets etc. without limitations or boundaries. This degree of transparency has never existed within the financial system or businesses from before (Giambelluca, 2020).
This technology will help central banks in to make better decisions, and manage monetary policy based on the transparency provided through establishing a consortium with other banks, allowing for more effective decision making based on dispersed control and consensus protocol, for example, monitoring how lowering interest rate can affect the economy. The impact can be monitored on the platform observing the effects this decision had on both spending and the economy, instead of relying on third parties to collect information. Regulators can also have access and monitor the performance of banks to see whether banks are taking on excessive risk. Furthermore, it solves the doubles sending problem (Giambelluca, 2020).
Blockchain and climate finance transparency
Corruption certainly plays a role in climate finance or in development aid, but its the bureaucracy that hinders development and leads to a decrease in efficiency. Blockchain eliminates the need for trusted third parties and, these parties are the cause for slowing down development and efficiency. Investors or grand recipients will enjoy a much higher degree of credibility from their stakeholders just by using blockchain-based processes. Blockchain can be designed to be permission-less, they provide for a great transparency. Blockchain technology can increase transparency, accessibility and accountability along every line of climate finance flows, hoping that it leads to an automatic adoption over time (Marke, 2018)
Asenjo, M. (2020, November 29). The Relevance of Blockchain for a Global Climate Governance System? Retrieved from https://blockchainclimate.org/the-relevance-of-blockchain-for-a-global-climate-governance-system/
Giambelluca, G. (2020). Blockchain: The regulatory challenges for central banks and financial sector. Blockchain, Law and Governance, 99-102. https://doi.org/10.1007/978-3-030-52722-8_7
Marke, A., Sylvester, B., Macinante, J., & Klauser, S. (2018). Transforming climate finance and green investment with blockchains. London: Academic Press, an imprint of Elsevier.
Reinsberg, B. “Three Ways Blockchain Could Get the World to Act against the Climate Crisis.” The Conversation, 11 June 2020, theconversation.com/three-ways-blockchain-could-get-the-world-to-act-against-the-climate-crisis-139503.
Warburg, B., 2016. [online] Youtube.com. Available at: <https://www.youtube.com/watch?v=RplnSVTzvnU> [Accessed 30 December 2020].