How Blockchain Is Helping The Diamond Industry Look Beyond The 4Cs
Blood diamonds from the commodity rich country of Central African Republic (CAR) have made their way to the online marketplace of Facebook. This is according to an investigative report by Global Witness, an NGO that works to fight natural resource exploitation. Illegal digital activities were unveiled through a social media profile for a fictitious buyer. The organization found that messenger platforms such as WhatsApp have also been used as a tool to smuggle conflict stones into the international supply chain.
To stem the flow of conflict diamonds, the United Nations came to a landmark decision in early 2000 called the Kimberley Process. A three-step verification method was introduced wherein mining countries were required to provide a declaration of each stone. Over 75 of the world’s diamond producing counties comply with the scheme to set import export control systems. But the resolution only covers rough diamonds used by rebel groups to finance wars against legitimate governments. The process doesn't address the broader range of human rights violations that are often associated with the trade. Venezuela for example, was removed from the Kimberley Process after they failed to demonstrate strong legislation to verify the legitimacy of its diamonds.
Diamond miner in Democratic Republic of Congo's central Kasai region. The flare-up in the Kasai region began in September 2016, a month after government forces killed tribal chief and militia leader Kamwina Nsapu, who had rebelled against President Joseph Kabila. The unrest has claimed more than 400 lives and forced some 1.3 million from their homes, according to the UN. Unconfirmed local statistics put the number of dead as high as 3,000. Due to the insecure situation following the death of Kamwina Nsapu, the mining of diamonds has come to a standstill.
Still, unethical dealers find opportunistic buyers. Even legitimate diamonds have a reputation for being sold through back-room dealings with cash and a handshake. The problems surrounding these precious gems goes on. In the insurance sector, fraudulent claims for lost jewellery have resulted in billions in losses each year. “We see document tampering where one stone has been claimed across similar timelines with multiple insurers,” says Leanne Kemp, CEO and founder of Everledger, a company that's using blockchain to build a shared digital global ledger to track and protect valuable items. Using machine vision, they record 40 metadata points to create a unique thumbprint of each stone. It's “a forensic view like dental marks or iris scan,” compares Kemp. Around 1.6 million diamonds reside on that blockchain. Her technology helps verify the authenticity, provenance, and custody of diamonds using a single source across the supply chain.
Banks are known to shy away from the bright light because of risks associated with the sector. Standard Chartered Bank shut down its diamond unit last year because of both profitability and compliance reasons, leaving ABN Amro the only western bank left to service the industry. The nature of exotic assets like diamonds, a largely uncommoditized commodity offers enormous advantages for money laundering and tax evasion.
An employee grades a pile of rough diamonds at the Namibian Diamond Trading Co. (NTDC) diamond processing and valuation center. The world's biggest diamond producer has spent $157 million on a state-of-the-art exploration vessel that will scour 6,000 square kilometers (2,300 square miles) of ocean floor for gems, an area about 65 percent bigger than Long Island. Photographer: Simon Dawson/Bloomberg
The diamond industry has existing certification houses, labs that use spectography to identify color grading, but there’s no central database for the information. A lost diamond relies upon paper-based certification records. With the information residing in blockchain, it creates an aggregated dataset, a shared visible record, and an audit trail to prevent things like double financing, or lab-grown stones being falsely identified. E-commerce giant Alibaba saw a case where a synthetic diamond supplier was selling products with fake GIA certificates passing as natural stones. The company was later removed from the site and blacklisted, The Times India reported.
From online to offline, retailers are taking action to ensure more transparency for their diamonds as well. The world’s biggest jeweler little known outside of Asia, Chow Tai Fook, has taken the initiative to track their supply from the point of mine to market. Looking beyond the superficial characteristics of 4Cs -- color, carat, clarity and cut -- the Hong Kong based brand pioneered the 4Ts: traceable, transparent, truthful, and thoughtful. The T Mark concept records the journey of each stone from sourcing to production. “T Mark is what we call Intel inside,” explains Alan Chan, director of group branding for Chow Tai Fook Jewellery. The vertically integrated retailer procures from the most reputable diamond producers, and owns the midstream process of polishing, cutting and distribution, as well as the downstream point of sale platforms.
The closed system allows the company to record information that other sellers would not have access to. “We don’t yet use blockchain, but that’s under consideration. We are reviewing the technology in the marketplace,” said Chan. “But it’s a good way to help us move forward.”
Beyond placing diamonds valued as a piece of jewellery, more market makers are viewing these rocks as an alternative investment asset. This has been difficult to achieve in the past due to a lack of uniform standards in pricing. Like gold, the allure is rarity and longevity. But unlike gold and its public benchmark, diamonds have not seen price volatility because they’ve been dealt with behind a veil of secrecy.
While some argue that diamonds can’t be seen as a commodity because they are unique and require individual evaluation, the industry is beginning to change with the introduction of Singapore's Diamond Investment Exchange (SDiX), the world’s first commodity bourse of its kind. They too have deployed technology to enhance diamonds as a financial asset. Linus Koh, CEO of SDiX said, “although the implementation of blockchain is still at its nascent stages, we see its potential in bringing greater transparency and security to potential investors."