Welcome back to the Agri Fintech Newsletter!
🧐 Thoughts [#Refi - Verify, Value and Vault]
🗞 Relevant News [Tarfin, Earthbanc, DeHaat, AgroStar and Jiye Technologies, Agro.Club, FBN IPO]
ReFi - Verify, Value and Vault
Crypto.. seriously 😒. Sometimes wading the jungle of jargon is exhausting, especially when there are so many dud projects out there.
On Refi, a hybrid of 'regenerative' and 'finance', I almost gave up trying to untangle something I thought I would understand naturally. It was only a peppering of Sustainable Agriculture, Crypto, Data with a dash of Finance.🤷♂️
◉ When I previously wrote about Blockchain in Ag, I was convinced that there were two facets to the crypto thesis - the technology and the community.
◉ Similarly, in my previous write up on the "Digital Crop", I put forward the idea that data was already widely monetised in Agriculture, notably for carbon products.
◉ I even hold an NFT for the Tree DAO, a regenerative woodland project in the UK. Now I'm just signalling my showboat.
But it didn't click. As I hacked my way through the jungle, one protocol would pop to replace another. Crosschain wobble boop interlinked with a staked token cornflakes for breakfast.
But then it happened. 🌤
If any piece of land could have an ecological rating based on practices on that land, then an ecological value could be attached to it based on the merit of those practices - now or in the future.
So ... an ecological credit score 🧐 is what I settled on.
Below I explain this more using the following👇
📈 A Credit Score;
🌍 An Ecological Credit Score;
and then introduce some players ⤵️
♻️ The Regen Network;
Oh and the blockchain happens to facilitate some of the scaling and interoperability of these projects, which makes sense to think about but as this sector is in early stages, I don't think is actually critical.
Anyway, the first rule of crypto should be, "You do not talk about crypto" as getting to the basics of this involved me filtering out a lot of the blockchain babble.
📈 A credit score
Let's start by looking at a very simple credit score.
I love this framework and I love the traffic light system even more and tried to replicate my own below.
Let's say, your bank wants to sell a $10,000 loan you hold with them and your Credit Score is 850, or Excellent. The value of that loan to another Buyer is probably quite close to $10,000 as they expect you to repay over time.
However, if your bank also sells a loan for a customer with a score of 320 according to this chart, the loan will be worth less, as the expectation of getting repaid in full is less.
So there we have it. Different products have different values depending on how likely they are to do their job, or repay their loan. (If you like this amazing insight - please subscribe now 😀).
Finally, in relation to credit scores, alternative data is more widely used to glean further insights from those scores. Maybe someone with a 560 score above can provide alternative data which suggests they may actually be a 650. 💡 This alternative data can allow some arbitrage between scores and allow buyers or sellers to speculate on underpriced loans 💡
🌍 An ecological credit score
"If any piece of land could have an ecological rating based on practices on that land, then an ecological value could be attached to it based on the merit of those practices - now or in the future."
The underlying assumption here is that practices and their current scientific rigour will determine the underlying market value of specific carbon credits.
In ecological credit score terms the Measuring, Reporting and Verification (MRV) inputs look great and are from reputable projects. Institutions will happily buy them - like the $10,000 loan from the high credit score borrower above.
But this is where things get interesting in the ReFi world. Just like credit scores, there may be some value arbitrage available for regenerative practices not fully priced in the market... yet.
The ReFi market can then allow:
1️⃣ Valuation of known outcomes based on current market prices;
2️⃣ Provision and monetisation of data to scientific or buyer communities to validate new practices over time; and
3️⃣ Some arbitrage between credit classes if a project sequesters carbon better than expected over time and can prove it.
In this case Marketers (Land owners, Developers and MRV), or speculators, may hold some of the lower tier credits which they expect to increase in value
Blockchain protocols facilitate these data structures globally including valuation and verification data. If they can verify and value, then they can also issue payments (which I will refer to as vaults).
ReFi = Verify, Value and Vault of ecological assets.
That trilogy for me is the real reason for using blockchain, especially the vaulting piece.
There are lots of players in this sector but I want to introduce just two for brevity: The Regen Network and Earthbanc.
♻️ The Regen Network
If you haven't here is what you should know:
◉ Peer to Peer
The aim of the Network is to facilitate the financing of regenerative practices via a peer to peer marketplace.
On one side of the marketplace are the Marketers - The Land Stewards and/ or Project Developers (and possibly MRV). On the other side of the market are the Buyers, such as Microsoft above.
The marketplace model aims to shorten the loop between the buyers and sellers and ultimately reward those doing and verifying the work.
◉ Standards - The Regen Registry accepts methodology from numerous providers:
Methodologies covered include:
- Gold Standard
- American Carbon Registry
- Climate Action Reserve
- Australian Emission Reduction Fund - Carbon Farming Initiative
- Social Carbon Registry
- Plan Vivo Registry
- Verified Carbon Standard (VCS) Registry
- Climate, Carbon, & Biodiversity Standards (CCBS) Registry
This way, the protocol can start to develop consistency and standards over time and allow anyone to access it.
◉ It's not all about outcome credits. Regen Network wants to facilitate and monetise practice change and other ecosystem benefits and be the default home for these.
10,000 Foot view: Currently, it claims to have over 40 various projects working on its platform to develop ReFi solutions for blue carbon, agroforestry, soil carbon, and reforestation.
Selling data to the scientific or carbon buyer community on alternative practices to refine verification models is one way to monetise these 'fringe' projects.
In addition, these practice changes can incentivise other ecosystem benefits, such as reducing flood risk (relevant to insurance for example) or reducing nitrogen run off.
Earthbanc are a fascinating example of a climate fintech who have stepped into the gap to finance regenerative practices, using the Regen Network.
They claim to have developed satellite based AI models by auditing over 13m hectares of forestry globally and currently finance up to 100m hectares based on these models. The satellite data can automatically generate credits based on their perceived quality and can be staked by users in order to qualify for an audit system and transferred to a formal outcome based credit later.
This is equivalent to AI models being used in the Credit Score examples above, with the added benefit of monetisation for those that generate the ecological data.
I feel this is just getting started as they are also currently testing a Green Bond structure on the Regen Network which may go live this year. This would help formalise the financial structures, although I expect these flows to be minimal at first.
And if that is not enough, Earthbanc are also taking an API first approach.
I can't do Earthbanc all the justice it needs, but you can read more here in Marianne's Green Techpreneur Newsletter and also a link below in the News section.
⏱ Timing - I think these projects will scale very quickly, but it might be 5 years before they become more mainstream - what do you think?
On the one hand I can see lots of implementation issues, especially for peripheral projects in far flung geographies. AI models will need to be tested. On the other hand, there is already momentum in this space around green financial products in the mainstream financial world e.g. Oxbury Forest Saver which I covered previously.
🧐 I am beginning to form a view that although blockchain maybe over engineering for some projects, it does make a lot of sense where regulation doesn't exist or is at least expected to evolve.
Should the Regen Network become a Self Regulatory Organisation for example? Should other crypto projects? 🤷♂️
📑 Standardisation - the lack of standardisation in Carbon just creates confusion for everyone. This will also hinder the early network effect of any marketplace including Regen. I hope the class structure which is proposed by the Regen Network and others can address this and hopefully also drive tier arbitrage. (Whether you like speculation or not, it drives activity on these types of marketplaces).
Let me know your thoughts. Does this stack up? If you are in the ReFi space, does it make sense?
Anyway, lets pause for breath at that point and jump to some ews around the Agri Fintech universe.
It has been an active period for European Agri Fintech companies. This is encouraging as, frankly, despite some exceptions, Europe lags in innovation across the Agri Fintech sector.
⦿ Tarfin have entered the Romanian market
⦿ Earthbanc - referred to above, have raised a pre-seed round of $1.5m, with participation from Regen Network, also above.
and one US based company launches a lending product in Spain 🇪🇸
⦿ Agro.Club launch embedded finance solutions in Spain alongside financing platform Crealsa.
▶️ Shane Thomas covered this recently in his newsletter also and gave a great summary of the Buy Now Pay Later products Agro.Club wish to launch.
A theme of Vertical integration continues in India among some of the platform players.
⦿ Agro Star buying downstream here, and
⦿ DeHaat acquire 75% stake in Y Cook
🧐 These are two similar downstream acquisitions in a matter of weeks which I found very interesting. Naturally, market linkage is a key theme in India but securing it via acquisition is a new strategy to me for agritech platforms. Will others follow? It does make sense when you think of the reliable demand data that can be gleaned and, of course, the embedded offtake.
⦿ Will FBN IPO? 🧐 This is like a stopped clock ⏰ - if it is published every now and again, it will be right eventually.
And in other news
⦿ Jiye Technologies (Pakistan) issued an update (via email) that they have increased annualised Gross Merchant Value to $16m in March 2022, which is up 20% month on month - and increased the average order value by 12% in the same period.
🧐 This is starting from a low base, but in a country of 227m people, it is not difficult to see the potential for their business. 🚀
*** If you operate in the sector and want to share updates, please do as I am more than happy to receive these.
I hope you have enjoyed this edition as I feel I have bombarded you with lots here.
Reach out and say hi 👋 and please do share the content with people in your network by sharing on Twitter or giving the post a Like on LinkedIn