Power Generation Assets on Blockchain: Re-defining The Rules of Investment in the Energy Industry.
Blockchain is a key application of a distributed ledger technology, where submitted transactions are connected to forming interlinked and encrypted blocks. These transactions are time stamped, immutable and proposed for processing by consents which reflect the commitment of the parties to the transaction.
Blockchain has the potential to redefine the rules of investment in the energy industry through the process of tokenization. The tokenization of a power generation asset is the process of representing a fractionalized ownership stake in such asset through a blockchain-based token.
Tokenization will have a game changing impact on the power sector. It will allow investors with small tickets to invest in a power generation asset and trade that investment using smart user-friendly applications. This is the new shape of investment in generation assets which would become more accessible to a wider class of investors with better efficiency and liquidity through blockchain-based smart contracts. Anyone will be able to own a piece of a floating solar PV plant in Africa or an onshore wind power plant in Central Asia that is offered on a selected secondary market.
Bringing massive liquidity leverage to the power market is a key feature. Other benefits of tokenization include accessibility, cost efficiency, automation and transparency.
Liquidity is an essential element brought by blockchain to benefit the energy investment space. Some assets such as stocks or bonds are very liquid as they can be quickly exchanged for cash as compared to power infrastructure assets which are illiquid due to the time it takes to disinvest from such asset.
The tokenization of a power generation assets would unlock cash in these assets and make investments accessible to all classes of investors in a secondary market where tokens are freely and easily traded. Hence, liquidity will flow and increase the value of the underlying asset.
Equity fractionalization will make access to investment in power generation assets a concrete option for all.
Equity fractionalization is the division of the equity of a power plant into a small-sized pieces (tokens) to be traded on a particular market. While project sponsors remain the majority owner, investors purchasing equity tokens are vested with owners’ rights (dividends, voting rights, etc).
By way of an example, renewable energy asset class has long had a high barrier of entry because there is usually a large capital expenditure required. With a fractionalized property, the asset becomes democratized, and access is opened to smaller investors.
In a classic independent power production project, there are many high intermediary costs and processes involved such as lender costs, technical assessments, financial closing costs, inspections and legal fees.
Blockchain-based smart contract (self-executed contracts) executes transactions in real time reducing any risks of uncertainties or conflicts. The legal ownership to tokenized assets are exchanged between a buyer and seller without the need for a third party middleman (trader, broker, etc.) and hence, cutting down significant external costs and bringing higher efficiency to the investment process.
In a closed blockchain network, all authorized parties could review the details of the transaction (date and time stamps, payments and all other contractual obligations) at each step of the deal.
Blockchain-based smart contracts will ensure transparency of all transactions involving power generation assets for all parties involved and adequate recording of data through unalterable record keeping.
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One of the key benefits of tokenisation is liquidity, especially for power infrastructure investments that have historically been illiquid and associated with long lock-up periods of many years. This has limited the investment in these types of assets to investors who are able to maintain capital locked in these investments for a long time. Tokenised assets enable investors to trade positions in real time as the risk profile of a the project changes. In addition, it provides increased transparency, so that investors can actually confirm how many tokens have been issued, as well as validate the ownership of those tokens.
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Deputy General Counsel - G42
4 年Very interesting article Ahmed. It’s a tricky subject that many people are still trying to understand so well done for shedding light on this.
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4 年What you have described is exactly what we do. Check out our https://youtu.be/Vgq8HIEQLe0
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4 年Thanks Ahmed, few questions if can respond to: 1. How it is different from trading a stock of a listed renewable energy developer? I understand in this case, we can buy a token of specific project rather than a company. 2. How can a smart contract be created that is acceptable to buyer and seller without involving lawyers everytime. 3. How is this different from online crowd funding, only difference can be a liquidity which is a big plus. 4. How can we overcome country specific FDI regulations - eg an Indian buying a token for Australian project.
Ahmed Meziou Thanks for taking questions. I worry that what is promising to be a simple arrangement can get quite complicated. Specifically 1. Token holders must link bank accounts to their tokens to receive dividends. How do you foresee this practically being done? How will the project company know which bank accounts are entitled to what cash? 2. Bank accounts means banks, i.e. KYC and cash traceability requirements. Documentation requirements for KYC differ between jurisdictions, but it's already not uncomplicated to transfer cash to and from a crypto exchange. How will you tackle this? 3. Tokens become de facto public equity certificates, thus subject to security regulations and local company law. That means requirements for shareholders meetings, insider trading rules, minimum national ownership requirements (in some jurisdictions), flagging requirements, dividend withholding tax, information disclosures etc. For equity certificates, the infrastructure supporting compliance with a complex set of rules has evolved for more than 100 years (main components are security exchanges that regulate market players with the help of brokers, enabled by national shareholder registrys). How will tokens be regulated as securities?
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4 年Ahmed Meziou , "transparency of all transactions"? Really? I thought anonymization has been lauded as one of the grest festures of any blockchain construct (that's exactly why the bulk of transactions in cryptos is estimated to be for illegal means). So, this would be the exact OPPOSITE of transparency. You are bemoaning the "middlemen" - well, they are there for a reason: as much pain in the butt as they are, #legal reviews ensure that the future #cashflows of the project are protected and it's compliant (therefore, #risk reduced), #technical reviews ensure that the plant will work the way it's intended (therefore, risk reduced), #environmental reviews ensure the plant will not be put on hold because of some infractions of the #EHS code (therefore, risk reduced). What you are proposing is the jolly utopian dream of blockchain enthusiasts disconnected with reality. All what this is, is #circumvention of proper risk-MITIGATING processes and the rules protecting the "small folk" from the exposures of unqualified investing. Not to mention #moneylaundering.