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February 2, 2023

Will 2023 really be the year of ReFi?

Regenerative finance shows promise for solving big sustainability challenges—but questions remain as to whether these initiatives will work.

In the news

We’re hearing a lot from blockchain, climate activism and crypto circles about 2023 being a “breakout year” for regenerative finance, or ReFi.

ReFi combines the concepts of regenerative economics and decentralized finance to propose a new way of using money to solve systemic problems. As this article explains, it takes a more holistic approach to funding environmental and social initiatives based on a shared-value system, using profits to further progress.

As defined here, ReFi “seeks to change the extractive and exploitative strategy of traditional finance, creating a financial ecosystem capable of better responding to the needs of all stakeholders.”

That loaded definition reflects ReFi’s essential idea to incentivize individuals and communities to solve systemic issues, particularly climate change. As this World Economic Forum report notes, Web3 “has positioned itself at the heart of the regenerative finance movement … a new economic paradigm that operates at the intersection of climate action and Web3 communities.”

ReFi investing could take many forms, including “green bonds” and carbon offsets. In practice, the first step would be to assign monetary value to a given initiative, such as habitat restoration. Next, the value of that initiative would be transformed into a tradable asset on blockchain. If the value of that tradable asset was high enough, a landowner would be incented to put money into reforesting a plot of land vs. cutting it down for timber or commercial development.

The ideal result, as this piece says, is to use the capitalism carrot, rather than the regulatory stick, to bring about positive change.

The Cognizant take

There are a couple of important things to note about ReFi at this early stage of its development. Building markets and tradability around blockchain makes a great deal of sense. Blockchain is good at enabling parties that don’t trust each other to verify data; this makes it particularly useful for activities such as cross-border transactions that are not monitored by a central authority.

The bigger question, perhaps, is whether ReFi is the panacea its proponents say it is for climate-related innovation. There’s no guarantee, for example, that blockchain would deliver greater benefits than those offered through traditional exchange mechanisms.

Take buying and selling carbon credits. There have been numerous instances of bad carbon credit trading practices on blockchain exchanges, from “zombie credits” to overpriced assets. As more ReFI mechanisms emerge, it will be important to look beyond the idealist concept and ensure the humans behind it are aiming for the right outcomes.

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