What is blockchain—and why do so many people consider it the future of the diamond and jewelry industry?
De Beers hails its blockchain technology as a “game changer.” Another company boasts its blockchain project will “revolutionize” the diamond biz. A third aims to simply “transform” it.
A lot of people in the trade are talking about blockchain and its possibly industry-changing powers. Yet not everyone talking about the concept truly understands what it is. (Even this author is still a little confused.)
Blockchain is, plainly put, a digital ledger. It was invented and popularized by the (pseudonymous) creator of bitcoin, Satoshi Nakamoto, as a means to record transactions in that cryptocurrency. It works by decentralizing data. So instead of having information stored in one place, it’s housed at several different locations, with each link on the “chain” needing to agree that every piece of data is correct. As a result, the information is far more difficult to tamper with, and each entry is immutable: Once information is entered into the blockchain, it can’t be changed, and every new entry needs the assent of every link of the chain. That makes transactions more secure, but also could speed them up, since they are done peer-to-peer, without a middleman. It’s what allows bitcoin to function like a currency, even though there is no central bank involved to record transactions.
The Economist calls blockchain the “trust machine,” and adherents believe it could solve one of the central problems of the internet: Its Wild West nature breeds considerable insecurity. Let’s say—to use a jewelry-specific example—someone wants to buy a used Rolex online. The way things work now, the buyer must trust that the seller is offering a genuine watch. But what if the seller could provide 100 percent unforgeable proof that the watch is the real deal, thanks to a blockchain-based registry? That opens up a host of possibilities.
Blockchain has become the rage in both tech and investor circles, hailed as the future of everything from voting (no need for recounts!) to energy (a shared grid!) to credit cards (no more fraud!). Some even see it as transformative technology, comparing it to TCP/IP, the protocol that gave birth to the internet.
Given all this, it’s perhaps not surprising that some want to bring blockchain to diamonds and jewelry, an industry that just about everyone admits is ripe for reinvention.
At press time, JCK counted at least seven blockchain-related industry projects. Most of these initiatives have overlapping visions and goals. They all aim to boost transparency in the business. Some hope to increase liquidity; others aim to make trading easier. Plus, their backers all believe they will bring massive change to the industry. And who knows? Some just might.
1. De Beers
De Beers is the biggest company in the diamond industry, so its blockchain project—done with BCG Digital Ventures, a division of Boston Consulting Group—has generated a lot of noise.
The idea is “to create a tamper-proof, immutable, absolutely trustworthy public ledger that will follow the path of a diamond along its journey,” De Beers CEO Bruce Cleaver tells JCK. This will, Cleaver says, provide more transparency about a diamond’s origins for both banks and consumers.
From what the company has said in private briefings, it plans to limit this tracking to stones 2 cts. and above. The project will not be administered by De Beers but, in keeping with the decentralized nature of blockchain, will be run by an independent foundation made up of industry representatives. Still, it’s not clear what De Beers ultimately plans to do with this newfound ability to track diamonds—the miner says it intends to leave that up to the industry. It has suggested that companies could eventually develop apps that can operate on top of its platform, as they do with the iOS or Android operating systems.
One of the first companies to talk about blockchain in the trade, Everledger has been mainly focused on building an “insurance fraud detection system” for diamonds. The system links previously “siloed” insurance company databases, giving them a way to validate claims and alerting them if someone has submitted multiple claims for the same stone. Everledger eventually aims to link up gem labs and law enforcement to the system and provide an all-around system for the recovery of stolen property. So far, close to 1 million diamonds have been entered into its system.
But now the company has expanded into verifying the sources of diamonds, and hopes to create what Leanne Kemp, the company’s GIA-educated CEO and founder, calls a “digital twin” for each stone. It’s working with Indian manufacturer Dharmanandan Diamonds on its Diamond Time-Lapse Protocol, which—like De Beers’ program—tracks a diamond through the supply chain. A similar project involves e-tailer Brilliant Earth, which wants a system that will provide data about the working conditions that created the stone.
Everledger is also dipping its toe in the gemstone arena, working with the Gübelin Gem Lab on a chain-of-custody system for gemstones to back up the data generated by that lab’s DNA-like Emerald Paternity Test. Eventually, the program will be expanded to paraiba tourmalines and cultured pearls.
All this activity has attracted notice, and not just in the industry. Everledger just received $10.8 million in Series A funding.
Carats.io is an ambitious initiative developed with the Israel Diamond Exchange, which encompasses a price list, a trading platform, and no less than two cryptocurrencies.
The first component is a price index for diamonds, called GDX. Based on actual trades conducted at the Israel Diamond Exchange, the index provides both daily and weekly price quotes using a proprietary algorithm that takes into account 14 different diamond parameters. To ensure the index’s independence, it is monitored by accounting firm Ernst & Young.
The GDX will provide value for the basket of diamonds that back up Carats.io’s two blockchain-backed cryptocurrencies—Cut and Carat.
Cut, a trade-only currency, will be used as the basis for a dealer-to-dealer trading network, letting dealers buy diamonds by trading Cut tokens from one digital wallet to another.
This has certain advantages, says the Israel Diamond Institute’s outgoing managing director Eli Avidar. “If you are trading with the token, you can limit your interactions with the banks. That will save us time and payments. It will assist a lot of the small- and medium-size companies in our trade who are finding it difficult to open up accounts.”
The digital trail could also be used to improve trade transparency. That represents a change from bitcoin, which has become notorious as a haven for money laundering and ransomware payments, says Carats.io CEO Avishai Shoushan. “Instead of using bitcoin to hide money, this will actually shed light on the money trail.”
The second currency, called Carat, is a diamond-backed cryptocurrency that will bring new money into the business, Avidar says. “Until now, investment bodies couldn’t invest in diamonds because they could never price the stone,” he says. “There were too many elements. This provides an avenue for outside investment into our industry.”
4. Diamond Chain
A lot of Carats.io’s ideas also form the basis of Diamond Chain, a still-new initiative—it has no website as of yet—that hopes to develop a diamond tracking system, an international trading network, and a diamond-backed cryptocurrency.
The currency aspect fuels the founders’ most ambitious visions: Their intent is to create a new monetary system that can be used worldwide.
“Bitcoin is backed by a social consensus,” says cofounder Miguel Diaz Montiel. “It goes up and down. This [diamond-backed] currency cannot go to zero because it’s backed by a real thing. If bitcoin was backed up by something tangible, you could have a universal currency without boundaries.”
The company believes it can secure more than $1 billion in diamond inventory to back its new coins. According to Montiel, the gems wouldn’t be housed in just one location, but—in true blockchain style—they would reside in different places, as a kind of decentralized Fort Knox.
5. And the Rest…
And as if those initiatives weren’t enough, Canadian miner Lucara Diamond Corp. recently bought Clara Diamond Solutions Corp., whose blockchain-based technology tracks diamonds and optimizes diamond yield. In the meantime, Mumbai, India–based manufacturer H.K. Group is using blockchain to boost the back end of its diamond-selling app. And a company called CEDEX has developed yet another diamond exchange and cryptocurrency, in conjunction with trading network IDEX, with the goal of “transforming diamonds into a new asset class,” according to its website.
That’s a lot of projects—as even boosters like Kemp admit. In fact, she worries there may be too many initiatives involving diamonds—an industry generally known for being slow on the uptake. She feels the “nerds” of the diamond business need to forge a common protocol.
“If the industry doesn’t get together, we will spend the next few years unraveling the spaghetti,” she says. “It will turn into Apple versus Android. This industry can’t do that. We are too small.”
Still, she has no doubt that blockchain will become the future of the industry—and of many other things.
“In five years, we won’t be talking about blockchain,” she predicts. “It will be ubiquitous.”
Illustration by Infomen