Fears of 'subprime' carbon assets stall crypto rainforest mission

For logger Roberson de Quadros Lima, May 17, 2021, was a day like any other, spent deep in the jungle near Colniza, a town in Brazil's Amazon rainforest, cutting down a large tree in a sustainable timber operation.

But as it fell, entangled vines pulled down a huge branch from another tree nearby, catapulting it in his direction and crushing his chest. He was declared dead at 3pm.

De Quadros Lima was no ordinary logger - he was a tiny cog in a complex supply chain linking corporations seeking to offset their climate-change footprint with financial firms trading digital tokens derived from the conservation work he died doing.

Florestal Santa Maria (FSM), the forest protection project where the Brazilian worked in Mato Grosso state, covers about 71,000 hectares (175,449 acres) of land, which generated hundreds of thousands of carbon credits in 2021.

Carbon projects like FSM are created in areas at risk of deforestation - and in exchange for protecting the trees, which absorb planet-heating carbon dioxide (CO2) as they grow, carbon credits are awarded in proportion to the tonnage of CO2 stored.

Companies like airlines or tech firms and individuals can buy and then "retire" these credits, using them to offset greenhouse gas emissions from their own activities.

Demand for carbon credits has risen in line with corporate targets to cut emissions to net zero, to curb climate change.

Last year, for example, the ITF Beach Tennis World Cup canceled out 16 tonnes of CO2 emissions linked to its tournament in Rio de Janeiro by buying credits issued from the FSM project.

But in recent years, a growing share of FSM's credits have been snapped up not to allay the carbon pollution of concrete operations like sports competitions but to back assets created by a new player in the carbon market: cryptocurrency firms.

These outfits have been buying and transforming credits into "digital tokens" that can be traded on the nearly trillion-dollar crypto market.

EXPLAINER-What happened when crypto companies entered the carbon market?

WATCH: Can you fight the climate crisis with crypto?

This has created significant tensions between crypto entrepreneurs looking to upend existing carbon markets and some veteran players who worry the entire system may fall apart under the weight of speculation and poorly designed financial schemes.

The Thomson Reuters Foundation found that one major pioneer in this new market, Brazilian "green" crypto firm Moss, bought carbon credits it said privately were of "low quality" - a judgment it later reversed in response to the investigation - and mixed them with others to back its digital token, selling them on for far more than it paid.

It also failed to do rigorous project checks as promised.

In a white paper issued in November 2020 and published on its website, Moss asserted that the credits underlying its MCO2 token, launched in March of that year, were "among the highest quality possible in the global voluntary market".

But internally, executives questioned project claims and some of the organizations responsible for developing them.

The Thomson Reuters Foundation investigation draws on internal company records and interviews with former employees, market players and experts, as well as a visit to FSM, where de Quadros Lima was subcontracted to work for one of Moss's main carbon-credit suppliers.

In 2012, when FSM applied to get its carbon credits certified, the project description said it would provide "formal employment" and related benefits, as well as social programs for the local community in Colniza.

But critics say it yielded none of those for people like de Quadros Lima. After nearly a decade, it relied on subcontracted workers like him, paid them a near minimum wage, and did not provide insurance against accidents.

Members of de Quadros Lima's family told the Thomson Reuters Foundation that FSM management handled his death callously, as if he were little more than a lost cell phone.

To receive compensation for his death, his mother had to sue Caraguá - the local company now running FSM - its previous owner and the subcontractor that hired de Quadros Lima.

In a statement, Caraguá said it regretted the fatal accident, adding that it no longer subcontracts labor, and now pays life insurance premiums for employees.

In the past year and a half, more than 90% of credits sold and retired from the FSM project were bought by crypto investors - with a full 40% purchased by Moss.

The climate tech company says it has channeled more than $30 million to conservation projects in the Amazon and preserved about 152 million trees. 

Internal company documents show that Moss bought millions of dollars' worth of carbon credits between July and December 2020.

It packaged up more than 2 million credits and turned them into crypto tokens, at times selling the credits for up to nearly eight times what it had originally paid to developers.

In an interview with the Thomson Reuters Foundation, Moss founder and CEO Luis Felipe Adaime said his aim was to disrupt carbon markets alongside other cryptocurrency players, and help usher in a more efficient, transparent green financial system.

"Moss revolutionized the market... The idea is to replace the whole thing," he said, referring to the global carbon emissions trading system that has evolved since the late 1990s.

But long-time actors in the carbon markets say crypto firms like Moss are chasing quick returns, and are under pressure to pay back investors, threatening the credibility of the market.

The opaque nature of the tokens Moss and other firms are selling has pushed Verra, a body that sets standards and certifies about three-quarters of carbon offsets globally, to suspend since May the use of retired credits for creating crypto tokens.

Verra spokesman Steve Zwick said buying credits at a low price and finding ways to multiply and profit from the return on investment was "not really in the spirit of what climate finance is supposed to be about".

"(The money) should be going to the people doing the work on the ground," he told the Thomson Reuters Foundation. 

Crypto firms, including Moss, have without authorization created digital tokens using credits listed on Verra's registry, Zwick said, adding that Verra cannot vouch for those tokens.

After being contacted by the Thomson Reuters Foundation, Verra sent a "cease and desist" letter to Moss, asking the crypto firm to stop using the Verra logo when marketing tokens.

In August, Verra launched a two-month public consultation on a proposal for how carbon credits could be "tokenized with the transparency and traceability that market participants demand, provided that this can be done in a way that prevents fraud and upholds environmental integrity".   

The American Carbon Registry also in May prohibited the tokenization of its carbon offset credits unless explicitly authorized by the registry, to ensure they are not double sold or used by more than one entity to make environmental claims. 

In the 13 years since an anonymous computer programmer calling himself Satoshi Nakamoto invented bitcoin, tens of thousands of cryptocurrencies have been created.

Few are linked to real-world activity, leading some critics to label the technology a "solution in search of a problem".

A number of prominent crypto projects, however, see a constructive role for themselves in helping more finance for climate and nature protection flow through the carbon markets.

A 2021 McKinsey report pointed to a gap of about $4 trillion in funding over the next 30 years to expand green energy and preserve nature on the scale needed to curb climate change.

It said voluntary carbon markets are "critical to raising and channeling this flow of funding" and could grow in value to between $5 billion and $180 billion by 2030, depending on the types of projects preferred - up from just over $1 billion in 2021.

Crypto firms say they can boost the effectiveness of those markets by adding liquidity and expanding the pool of investors.

A press release announcing the launch of Moss tokens in 2020 was titled "Saving the planet by tokenizing carbon credits".

Moss buys up and bundles together credits from a range of projects, against which it issues an equal amount of its "MCO2" digital tokens, each representing one tonne of carbon.

Unlike traditional carbon credits, which are marketed directly to companies to offset their emissions, the tokens are traded on the open market via internet-based exchanges.

The "crypto carbon" movement - also known as "Regenerative Finance" (ReFi) - considers blockchain a game-changer in plugging the green finance gap.

Even the International Finance Corp, a World Bank affiliate, is partnering on a new fund that will tokenize carbon offsets and trade them on a blockchain-enabled platform.

Blockchain technology allows new marketplaces to be set up quickly, with transactions and data instantly stored on an online public ledger, said Rez, co-founder of Solid World DAO, a project whose tokens back forward contracts for carbon credits.

"It's a perfect fit," he said.

But incentivizing the preservation of remote rainforests via the global financial system is a tricky task - and the spigot of money does not always result in the best outcomes for trees or people, experts say.

Voluntary carbon markets - used to meet self-set climate goals outside government-regulated systems for trading emissions - are, in themselves, controversial.

Some critics say they allow companies to "greenwash" their climate change policies by continuing to emit planet-heating gases while buying credits for carbon reductions elsewhere.

Even some environmentalists who back carbon offsetting point out that ensuring projects actually help lower the overall level of CO2 in the atmosphere and fulfill social promises is a persistent challenge.

Pedro Martins Barata, co-chair of an expert panel crafting a new set of principles to boost the integrity of voluntary carbon markets, said they "invite all types of shady characters". 

"You still have loads of projects making very questionable claims," he told the Thomson Reuters Foundation.

To prove their quality, many carbon projects go through a process to certify and list their credits on the "registries" of standards-setting bodies like Verra and Gold Standard.

But tracking whether projects cut emissions over the long term is hard, as conditions on the ground can change, while claims may be misleading or lack evidence, said Martins Barata.

In the crypto carbon market, where firms like Moss buy credits in bulk and resell them as tokens, sometimes mixing them, guaranteeing quality is particularly tough, he added.

"When you are (doing that), and you don't have an eye for the underlying assets ... it's a bit like a subprime mortgage market," he said.

A team led by Danny Cullenward, policy director at CarbonPlan, a nonprofit that researches climate solutions, studied a tranche of credits that were turned into digital tokens using technology from German crypto company Toucan.

They found that nearly a third came from so-called "zombie projects", such as decades-old green energy projects in China, which did not make meaningful emissions reductions.

After the CarbonPlan report came out, Toucan introduced a rule preventing the tokenization of carbon credits issued more than 10 years after a project made the emissions reductions claimed, said its head of marketing Anna Morrogh.

In Brazil, Moss CEO Adaime said he is passionate about using his financial acumen - gained in what he called "the dark side of finance", working at hedge funds and investment banks - to save his country's endangered rainforest.   

Set up in 2020, Moss has established partnerships with some of Brazil's largest companies, selling them carbon credits and MCO2 tokens, including airline GOL, app-based food delivery company iFood and clothing retailer Hering.

But as Moss established itself as a major player in the crypto carbon market, employees chafed against a growth-at-all-costs culture that appeared to prioritize fast profits.

"There would be this phase of enchantment at the beginning, like, 'Wow, I'm working to save the Amazon'," one former Moss employee told the Thomson Reuters Foundation.

"Then you start to notice the environment you are in, which is (one) with a clear financial focus."

Behind the scenes, in the messaging service Slack, Adaime presented himself to staff as the "Wolf of Amazon".

His profile picture was Leonardo di Caprio in the movie "The Wolf of Wall Street", in which the actor plays Jordan Belfort, a real-life ex-stockbroker jailed for fraud and market manipulation.

Adaime told the Thomson Reuters Foundation he was given the nickname - described by one former employee as "spot-on" - by carbon market insiders, but said he did not approve of Belfort's business practices.

Internal Moss documents show the crypto firm purchased carbon credits wholesale at $2.50-$3.54 in the last six months of 2020. It then resold them for an average of $10 from July 2020, and in some instances for as much as $19.

"I made a lot of money on the acquisition of cheap carbon credits," said Adaime, adding that exploiting such arbitrage opportunities would make markets more efficient over time.

And while Moss publicly assured buyers its MCO2 token was based on assets of the "highest possible quality", a document seen by the Thomson Reuters Foundation suggests otherwise.

In September 2021, Moss's lawyers complained in an extrajudicial notification that 172,000 carbon credits Moss had sourced from Fortaleza Ituxi REDD, a Brazil-based project for sustainable cattle-rearing and forest management, were of "low quality", and requested compensation because of this.

On top of their certified CO2 reductions, the Ituxi credits lacked an additional Verra seal showing a project has positive social and environmental impacts - which Moss had expected and said was needed for credits "to reach their maximum potential".

But that did not stop Moss from tokenizing and selling the Ituxi offsets - bundled with others that did have the extra certification - as MCO2 on cryptocurrency exchanges for a much higher price than it had paid per credit.

Ricardo Stoppe, Ituxi's administrator, told the Thomson Reuters Foundation that Moss's criticisms of the credits were "unfortunate" and "completely uninformed", adding that they arose during a contract dispute that had since been resolved.

In an about-turn on the Ituxi carbon credits, Adaime said in comments emailed to the Thomson Reuters Foundation this month that the offsets were considered by the market to be "good quality" as they were officially registered with Verra.

The extra seal Moss had sought - Verra's Climate, Community & Biodiversity (CCB) label - was not mandatory, he added.

Stephen Donofrio, managing director of Ecosystem Marketplace, which publishes reports on the carbon market, said projects with CCB certification "do get a higher price" as they go through another round of vetting for their social and nature benefits, beyond CO2 cuts.

Moss has publicly positioned blockchain and cryptocurrency as a way to boost the transparency of carbon offsetting.

The firm's white paper also says it does "extensive due diligence" on the environmental projects that generate the credits on its underlying ledger.

Yet WhatsApp messages obtained by the Thomson Reuters Foundation suggest Moss was unsure of some claims made about projects' positive impacts.

In the case of Ituxi REDD, for example, an internal WhatsApp conversation showed the Moss leadership did not trust the project's own assertion it had created 150 green jobs at Ituxi and 1,000 more indirect jobs in the community.

Ituxi administrator Stoppe told the Thomson Reuters Foundation this month the number of people who had benefited was even higher, but provided no evidence to support the data.   

Moss re-sold some of the Ituxi credits it bought to Brazilian clothing retailer Hering, which used the jobs information in a media release published by industry press.

Hering told the Thomson Reuters Foundation it had not been approached to correct the claim, but would do so if required.

Moss also privately expressed doubts about the integrity of the companies that developed and marketed the credits it bought, with Adaime referring to one firm as "bandits" in a WhatsApp conversation with a corporate client, adding the "Amazon has a lot of rogues".

A former Moss employee, who requested anonymity, questioned why Moss would buy credits from suppliers it did not trust.

"If they are bandits, and we bought carbon credits certified by them, what does that make us?" he told the Thomson Reuters Foundation.

Gaps between projects' aims and what is happening on the ground are endemic in the carbon credit sector, said Polly Hemming, a senior researcher at The Australia Institute.

Crypto companies "are just repackaging something old and adding a distracting shining crypto layer to it", she added.

Moss bought carbon credits from at least four projects in the Amazon to back its MCO2 tokens, and made a large profit margin on these trades, causing tension with project managers.

Last November, Stoppe of Ituxi REDD sent an audio message in a private WhatsApp group, saying he felt swindled by Adaime.

In a profanity-laden tirade, Stoppe said Moss had bought credits from him at $2.50 each and sold them for $15.  

Stoppe also said Moss had struggled to buy good-quality credits, sourcing offsets from initiatives like the Madre de Dios Amazon REDD Project, a Peruvian scheme to reduce emissions from deforestation that was dogged by formal allegations of timber smuggling involving one of its top representatives.

According to a Verra document signed in October 2020, Chinese timber magnate Xiaodong Ji Wu was director of Maderyja SAC, a company that ran a concession comprising half of the Madre de Dios project's land.

Along with about 50 regional officials, Ji Wu has been under investigation since September 2020 for belonging to a criminal organization, collusion, bribery and influence-peddling, according to Dionisio Quicaño, an anti-corruption prosecutor in Peru's Attorney General's Office.

He told the Thomson Reuters Foundation last month that police and prosecutors had raided Ji Wu's business premises in October 2021 and found a stash of suspected illegal mahogany.

Moss purchased more than 400,000 carbon credits from the Madre de Dios project in the last six months of 2020, with Adaime saying Moss was aware of the official investigation at the time.

Silvia Gomez Caviglia, vice president and founder of Greenoxx, the non-governmental organization that developed the Madre de Dios carbon-credit project, told the Thomson Reuters Foundation last month that Ji Wu was no longer the representative for Maderyja SAC, adding that prosecutors had cleared the concession of any illegal activities.

This April, however, the Forest Stewardship Council (FSC), a global standards body for sustainable forest management, blocked three Peruvian certificate-holders run by Ji Wu, including Maderyja, because "they were unable to verify the origin of wood they sold and purchased from the Amazon".

Peru has halted the sale of carbon credits issued since 2021 as it tries to reform the sector by bringing forest emissions-reduction projects under state supervision.

Stoppe told the Thomson Reuters Foundation he had retracted his allegations about Moss and Madre de Dios after a legal threat from Moss, and was still doing business with the firm, including taking a loan to buy more land in the Amazon. 

Despite the confusion behind the scenes, Moss has enjoyed some success on the crypto carbon market.    

SkyBridge Capital, a hedge fund owned by Donald Trump's ex-communications director Anthony Scaramucci, bought 38,500 tonnes of carbon offsets via Moss in August 2021.

And in early 2022, Moss partnered with KlimaDAO, a crypto project that bought and held more than $100 million in tokenized carbon credits from numerous sources and counted American billionaire investor Mark Cuban as a major backer.

Moss's business model was initially aimed at getting retail investors interested in buying its MCO2 tokens.

"We have to sell it to ordinary people," Adaime said in a WhatsApp message to employees in April 2021.

By September 2021, MCO2 was available on Gemini, one of the world's 10 biggest cryptocurrency exchanges, for purchase by its 56 million users in more than 100 countries. MCO2 can also be traded on other web-based platforms including Coinbase.

But Martins Barata, also senior climate director with the U.S.-based Environmental Defense Fund, warned that crypto-carbon investments were risky due to their lack of transparency.

"I don't like the idea that you take a variety of credits - some good, some crap - you tokenize them into the blockchain without any additional controls, and the buyer has no idea what the hell they are buying," he said.

Adaime told the Thomson Reuters Foundation this August that retail speculation was "not the purpose of the token".

The Moss token, like others, can be "burned" to show it has offset emissions. But, so far 90% of MCO2 supply has not been used to do that and is held by crypto investors, Adaime added.

In an interview for a podcast last month, he was still urging the public to buy carbon credits and "sit on them", predicting they will be "worth more" in the future.

Moss says it has funneled more than $30 million for Amazon conservation through its sales of tokens and carbon credits, to help fight global warming and achieve positive social impacts.

But locals living near FSM are ambivalent about the benefits of the forest carbon project in their backyard.

"They (FSM) are not following what was established in (project) documents way back in 2012," Colniza councilman Luis Carlos Silva told the Thomson Reuters Foundation.

FSM had promised to work with the local government to build a technical school to teach high-school graduates agroforestry techniques, but the project never got off the ground.

And a plan to restore degraded areas nearby was not launched, confirmed Caraguá, which currently runs FSM.    

FSM also lost the certification it gained in 2013 from the Forest Stewardship Council for sustainable forest management because the body's requirements - including monitoring to show any logging done there was legal - were not met.

In 2021, FSM hired a company to do a validation report on the forest project's social and environmental impacts, but the audit team never went to Colniza, conducting a remote site inspection via video conference, the report noted.

The audit report also said that FSM "is the only owner of the property and it holds all the legal rights since 2005, including rights for using property resources."

But in 2017, FSM sold just over 9,100 hectares to a local logging company called Junp Madeiras. The firm and its partners have received at least 10 fines from national environmental agencies, with the most recent issued for deforestation in 2018.

Local people said the forest at FSM had largely been preserved under the project's stewardship.

But a 2020 study by Thales West, the auditor who initially approved the project a decade ago, found that deforestation may have been displaced to land nearby.

Moss CEO Adaime acknowledged that the FSM project had failed to keep some of its promises. But, he added, "we cannot un-buy what we bought."

Since May 2022, most of FSM has been owned by Caraguá, which is looking to keep the carbon offset program going and said it had agreed with Junp to leave its part of the land untouched.

Two former Moss associates, who worked on checking the environmental and legal aspects of its deals, are also trying to make good on the project's original promises to bring gains for Colniza residents.

Munir Soares, an ex-consultant for Moss, and Tiago Ricci, a former board member, are now partners at Systemica, a firm hired by Caraguá to validate FSM for a new carbon-crediting period with Verra.

"We are striving for a significant improvement of the project," said Soares.

That would include rolling out social programs for Colniza and earning FSC certification once more, as well as a Climate, Community & Biodiversity label from Verra, the two said.

One thing is clear: crypto firms will need to find a more effective way to ensure the quality of the projects whose credits they are trading, in order to meet their goals of curbing climate change while supporting local development.

Verra's public consultation on setting up a credible system to turn credits into crypto tokens runs until early October - but its suspension of that process has left backers in limbo.

Alongside a crash in the value of crypto assets this year, the price of MCO2 - after topping $21 - tumbled to just above $3 in August, the lowest level since it was listed.

After Verra's move to suspend tokenization of credits, Moss, KlimaDAO and other crypto players issued an open letter, urging Verra to open a public consultation "immediately".

"We stand by with a white flag and extended arms," Adaime wrote on Twitter in June, tagging Verra and Gold Standard. "We are all in this fight against climate change together and desperately and sincerely wish to collaborate."

Yet while crypto firms want a quick solution, the institutions behind the registries are moving more slowly.

Hugh Salway, head of markets at Gold Standard, which is also discussing how to integrate crypto into the carbon offsetting system, said trust in the carbon market itself was at stake.

Cullenward of CarbonPlan said crypto players' involvement so far had shown little sign of boosting support for high-quality nature and climate protection efforts. 

"Is it stupid or is it evil? Sometimes it's hard to tell," he added.   

Reporting: Fabio Teixeira, Avi Asher-Schapiro and Dan Collyns
Text editing: Megan Rowling, Laurie Goering and Barry Malone
Photography: Rogerio Florentino
Graphics: Tereza Astilean
Producer: Amber Milne