DIGITAL POWER – HOW TO TOKENISE YOUR NEW ENERGY PROJECT – ENERGY CRYPTO PART II
Published on Mar 24, 2022 by Jaime Lumsden, Michele Levine and Nicholas Pavouris
This is part of our Digital Power Series focusing on the deep connection between power and the digital economy. Throughout the series, we explore: the opportunities that cryptocurrency (or “crypto”) miners and data centres bring to the National Electricity Market; digital security considerations in energy; the ‘tokenisation’ of energy related projects; and relevant ESG considerations when acquiring a digital assets business.
In Part I, we explored the intersection between cryptocurrency and New Energy. In this Part II, we examine the key factors that you should consider before launching a crypto project in the New Energy sector.
WHAT FACTORS SHOULD YOU CONSIDER?
Before you launch your New Energy project on the blockchain, you need to first work out your objective - why do you want to tokenise your project or use the blockchain.
This may seem like a simple question. But, in our experience, businesses often do not spend enough time on this upfront. It can be difficult to pinpoint why you want to use a token or the blockchain for your project. However, the following questions can help you narrow this:
- Will you need a token as an essential component of the project?
- What token standard will you use (e.g. ERC-20, ERC 721 or ERC 777)?
- What blockchain will you use (e.g. Ethereum)?
- Will the token provide any rights?
- If so, what are these rights? Will the token provide any ownership, licensing, voting, distribution or other rights?
- Do you want the token to be tradeable on any cryptocurrency exchange?
- Will the token be used to reward customers?
- Will the token be used to make donations?
- Will the token be used to fund business activities?
- Will the token be used to invest in green projects?
- Will the token be used as a form of payment for your services or other services?
- Can the token be used as collateral for lending protocols?
- Can the token be staked on decentralised protocols?
In answering these questions, you should identify what are your “must haves” and “nice to haves” as this will drive the design of any token solution and what is possible from a legal and regulatory point of view. Also, it is possible that there may be other features or functionality that you will need to consider for your project. The above list is not exhaustive but is a great starting point.
Once you have answered these questions, you will have a better understanding of your commercial objectives and key drivers. It will also help you determine whether the token and blockchain will meaningfully achieve your objectives or simply add unnecessary complexity.
PARTNERING WITH ADVISERS
One you have settled on your objectives, the next step is to make sure you get sound legal advice. Given the complexity and uncertainty surrounding cryptocurrency, it is important that you have a clear understanding of whether your token will be regulated and, if so, how. This will help inform the design of your token and your legal arrangements. In addition, there may be alternate structures available to you to combat regulatory challenges. Make sure you work with lawyers that have a sound understanding of cryptocurrency and its regulation. It may require expertise across technology, intellectual property, financial services and tax.
The final step is then implementing your solution from a legal perspective. This may require a tokenholder agreement, whitepaper, regulatory and licensing arrangements and other marketing collateral. It is important to remember that a token is not typically a quick-to-market solution and requires significant time investment to get right.
THE ESG COST OF CRYPTOCURRENCY
Given the computer power and significant energy consumption required to operate a blockchain, there has been much talk about the ESG impacts of blockchain.
If you are proposing to use tokens or the blockchain for your green project, you should consider the energy and environmental impacts of using this technology. This is because you do not want to undermine your green project simply because you have utilised the blockchain. There a number of solutions that you can deploy to reduce or offset any environmental impact and the technology powering the different blockchain solutions can lead to better sustainability outcomes. Make sure you consider this as part of your due diligence process. If you are unsure, make sure you tap into the relevant experts.
The cryptocurrency industry is rapidly growing and expanding into new markets like New Energy. With that, there is a lot of hype and opportunity. However, it is important that you follow a robust legal due diligence process before you launch any token or blockchain technology.