Keeping too many secrets and a lack of good math has held the investment diamonds business back for centuries, until now
Canaries in a diamond mine — Recent efforts in the path to diamond fungibility has been an accumulation of counter-party risk, often causing centralized efforts to fall short and consistently missing basic features of a financial product. Some of these initiatives include basket vehicles and funds, slightly easier matching-trading interface or narrow specifications of the underlying for “futures” trading, yet diamond experts still mutually agree that no current solution can qualify diamonds as a true, liquid investment commodity. Combining algorithmic modeling with digital identity, ABC Platform and Consensys’ uPort have partnered to uniquely solve this dilemma through open-sourcing and self-sovereignty solutions.
Open-sourced algorithms & self-sovereign identity unveil the illusions behind the diamond industry
- Investment diamonds possess very powerful financial properties and have demonstrated their capabilities as effective portfolio diversifiers
- Mainly due to diamond’s non-fungible qualities, current barriers of entry costs heavily outweigh the benefits for some prospective investors
- Previous diamond-exposure “products” have missed very basic functions, leaving them as broken representations according to industry experts (no proper redemption, non-fungibility, opaquely priced)
- Creating a pricing standard under an independent issuing foundation with proper checks & balances originally spawned the modern gold reserve standard after many turbulent iterations (Latin Monetary Union, c. 1865)
- SwissDiamondCoin by ABC Platform, allows any non-expert to intuitively price, easily trade and physically claim high-quality diamonds through an open formula under a public benefit, non-profit foundation —with a singular index. Launched on 21 Feb 2019
- Creating new and global secondary markets poses significant KYC/AML risk, especially as anyone can get physical diamonds by delivery and given diamonds’ high value-weight ratio (esp. since criminals exploit all assets)
- Consensys’ uPort provides scalable decentralized solutions for digital identity, reputation, and multiparty trust built on Ethereum — allowing self-sovereignty of data for a global market network. Learn more here.
- The partnership strives to provide fully universal and easy access to the diamond market to the global public like never before, turning the luxury asset into a global investment commodity
Old diamonds are learning new tricks
The diamond industry has been undergoing its largest identity transformation in history — from CFTC’s ruling on lab-grown diamonds, De Beer’s launch of a recycled diamonds arm and rising interests by Indian and Chinese consumers over Western buyers amid trade war volatility. Nevertheless, the asset primarily remains in the realms of illusion businesses despite provenance efforts by IBM’s Tracer, Tiffany’s, Everledger and GIA’s Mine2Market to sidestep blood diamonds originations. Industry knowledge remains asymmetric toward experts, and there is no liquid secondary market for diamonds. While academic articles have purported investment diamonds to exhibit effective portfolio diversifier characteristics (and even outperforming equity markets), expensive barriers to entry for the non-industry insider greatly outweighs such benefits.
For past millennia diamonds have been guardians of value, yet the asset has never truly achieved the status of an institutional investment or a true commodity — diamonds are often regarded as the “last old commodity.” Given that all the infrastructure is already built out from mining to standards to delivery, the source of pricing in-transparency and illiquidity generally is identified in diamond’s “non-fungibility” attribute. A lack of standardization within diamonds — their non-fungibility — continues to remain the largest obstacle in turning investment diamonds into a new asset class.
In an industry where privacy matters the most, but where transparency is needed to keep the industry afloat, the millennia-old search for solutions to mediate the multiple interests may be found in distributed ledger technology and open-sourced, evolutionary algorithms.
A short and turbulent history of diamond fungibility
For an asset to be represented as a “true commodity,” it must be:
- easily tradable
- easily redeemable
- fairly priced
- intrinsically measured
- mostly information symmetric
Previous attempts to make diamonds fungible did not have a proper objective pricing model, therefore no true redeem-ability mechanism. An early attempt at gaining direct exposure into the underlying commodity was through basket funds, a method used by Gemshares. With a “basket”, a fund buys bulk diamonds and re-divides the whole company so people can buy select exposures; through this method, however the buyer can not easily redeem individual diamonds from the fund in “arms length” scenarios, a basic requirement for any physical commodity basket. Unsurprisingly, Gemshares has not provided a public update since their announcement back in 2013 and is now embroidered in legal battles.
While streamlined, in the case of SDIX (Singapore Diamond Investment Exchange, 2016), diamonds continue to remain “non-fungible” and are traded individually or by baskets instead of a spot price. Seemingly synonymous, “physically settled” is not the same thing as “redeemable,” they remain very different operations: buying and selling processes still operate on a per-deal basis as opposed to a single number or index. The company has since launched Diamond Bullions, which are diamonds held in a small box: while boxes with diamonds provide temporary liquidity, Bain reports little traction with such products.
ICEX illustrates the most recent attempt in creating a commodity-like product with its launch of “diamond futures.” The fact that they have multiple future products based on carat sizes (1.0, 0.5, 0.3 carats) self-illustrates that it’s still not fungible. In the specifications for on-boarding polished diamonds, the diamond suppliers are rigidly limited to ICEX “certifications” on what can actually be traded, setting up a trade-off between inclusiveness and tradability. While it certainly captures some of the diamond supply, the specification provides little flexibility — the exchange will likely need to launch dozens of diamond variations to capture a meaningful fraction of the entire investment diamond market. Likewise, the Polished Prices index is a ex-post index, calculated as an average of all stones having entered the market. While useful, the index does not provide the user the confidence in buying an individual stone.
Very basic features continue to be missing, but an evolutionary quantitative finance lecturer and veteran commodity trader in the small town of Zug, Switzerland may have the answer that industry players have been waiting for. Coincidentally, “Ein Stein” happens to be German for “one rock.”
E=MC² for Diamonds
Dr. Mathias Bucher is the Founder of ABC Platform, a CommodiTech project that creates the infrastructure and market network to make inaccessible commodities tradable. On February 21st, Dr. Bucher and his team launched their first product on their platform, SwissDiamondCoin, to tackle the fungibility problem with an algorithmic approach to allow all investment diamonds to not only be fairly and efficiently redeemable, but also open-sourced and issued by a non-profit foundation.
After completing his interdisciplinary PhD in evolutionary quantitative finance at the University of Zurich, Dr. Mathias Bucher was traditionally trained as algorithmic hedge fund trader at Rainer Marc-Frey’s Horizon21 and as a consultant at McKinsey & Co. He co-founded his own award-winning commodity hedge fund and, after a long decade of trading, pivoted back into teaching and blockchain entrepreneurship in 2015 —he now teaches at Lucerne University for business, algorithmic finance and blockchain technology. Initiatives include helping Polkadot and Web3 Foundation as a board member/advisor, starting the Ethereum Zurich meetups, creating a Swiss government-backed clearing- and settlement platform for Swiss equities, and starting ABC Platform:
“After two and a half years of development, our patent-pending value scale model allows any participant to buy and sell investment diamonds easily and transparently, removing barriers such as black-box pricing or asymmetrical expert knowledge and opening this industry to new businesses and users.”
His statistical, patent-pending model is specifically designed to be an intrinsic value model, where it is anchored to a set investment diamond standard as opposed to a set USD price. It allows for any person to confidently compare diamonds by removing the complexity of understanding the influence of individual characteristics and their interdependencies on the price. To compare it to ICEX or SDIX, SwissDiamondCoin has an open-sourced, robustly evolving algorithm for anyone to measure their diamond characteristics to both onboard on and redeem off, leaving a singular standard to spot trade and individually redeem diamonds. In addition, to exceed institutional expectations, SwissDiamondCoin centers around a public-benefit, non-profit foundation with proper check-and-balances and independent third party providers.
History of the Gold Reserve Standard
Strong and safe, but has “safe” ever been enough?
While the gold (and silver) reserve standard is certainly a feat of internationalism, its path to true standardization was very turbulent and a long process of persistent reform. Since the Latin Monetary Union (1865), the initial coinage rules were insufficient in controlling compliance as self-interested nations sought to print their own “gold certificates” for lavish fiscal spending amid other political issues. What emerged out of the era was a need for organizational ingenuity and most basic institutions to reduce counter-party risks: the efficiency of a central bank yet the independence of a benevolent foundation.
After many iterations and shifting roles of gold (post-Smithsonian in ‘73), the gold reserve system has proved its resilience and is still in use by nations and financial institutions such as US fractional banking system or the London-based SPDR gold share ETF (Ticker: GLD). While currently one of the more reliable international structures of confidence today, the spirit of the gold reserve system strives only to stay alive from its intrinsic issues instead of preemptively finding a cure.
The New Diamond Reserve Standard
As shown above, the new Diamond Reserve Standard aims to provide the transparency and reliability beyond sufficient benchmarks and the accepted status quo, producing a resilience and anti-fragility unseen in any institutional-facing industry comparable. SwissDiamondCoin’s set-up adopts and mirrors the best parts of any gold reserve system with its hub-and-spoke model to best comply with institutional-friendly standards. The central issuer of the token is a public-benefit, non-profit foundation, SwissDiamondCoin Foundation, based out of in Liechtenstein — this gives passport rights to both Switzerland and the European Union. SwissDiamondCoin and its foundation provides audited and evolving layers to provide continued protection in future simulations for the underlying commodity reserve, choosing best-in-class service providers for each situational need, such as uPort’s scalable and decentralized identity platform for a global public.
Creating an open and new secondary market should not be done nonchalantly. To address the possible exploitations that may occur in identity or KYC/AML risk, ABC Platform preemptively partnered at launch with uPort, the Consensys- incubated self-sovereign identity platform that delivers scalable decentralized solutions for identity, reputation, and multiparty trust built on the Ethereum blockchain. It’s not their first rodeo either, Mathias has worked with uPort before in bringing the product to the City of Zug where citizens can now conduct government voting on Ethereum blockchain.
Keeping the lid on Pandora’s box with uPort collaboration
Free and equal choice for redemption opens a new can of worms for the new secondary market, exposing the industry to money laundering and post-traceability issues. As they represent one of the highest value-to-weight ratios across all physical assets, diamonds have and will continue to be a medium and value transfer system that criminals will try to enter. Creating this new and open secondary market comes with it a host of KYC and AML issues not only at the enterprise level but also in retail. Redemption is an extra layer of security given that it is the first time the object can exit the system; therefore, a strict but flexible gatekeeper must be able to handle the unprecedented flow of transactions. Given the reputation of diamonds, a robust, technological identity solution is an imperative need with the new feature of universal access, especially as major institutions like Morgan Stanley are beginning to show their vulnerabilities.
“uPort delivers essential capabilities for businesses implementing KYC/AML, reputation management, and multiparty trust,” said Thierry Bonfante, Head of Product, for uPort, “We’re pleased to showcase our partnership with ABC Platform’s SwissDiamondCoin product, our first partnership in the trade finance industry. It’s a perfect demonstration of how using a decentralized immutable ledger can preserve the privacy of users, while achieving both the spirit and letter of KYC/AML regulations.”
There are other benevolent initiatives that address the KYC issue in diamond trading as well such as AWDC and GJEPC’s MyKYCBank. SwissDiamondCoin, however, plans to expand its operations to areas beyond India and Antwerp, and uPort’s privacy-preserving feature provided a scalable solution for a free, global blockchain network.
For the diamond industry, especially on the redemption side, transparent identity yet full retained privacy are very oxymoronic requirements. Provenance projects are helpful in reducing ethical problems stemming from diamond mining in developing economies (entering the system). On the other side of the value chain, KYC/AML come out of global-scale money laundering– there are other ways that malicious players can enter the commodity trading world than the origination point (exiting the system). Both are very important, but there has not been many decentralized solutions on the trader-identity part of the spectrum. As projects like Everledger or IBM’s Tracer help keep precious objects from coming from blood diamonds, SwissDiamondCoin and uPort are putting the extra layers of security to make sure that diamond’s store of value doesn’t turn into Pandora’s Box. As the value chain infrastructure from mining to storage to tradability is established, uPort’s identity solution and provenance projects work in complement by approaching the identity issue from different orientations: object and human-user.
“According to the United Nations Office on Drugs and Crime, shady transactions continue to reach as much as $2 trillion a year.”
— Alan Katz, Bloomberg, The Cost of Dirty Money (2019)
As gatekeepers, uPort’s identity solution helps SwissDiamondCoin’s redemption process remain fully clear of malicious actors through a privacy-preserving ledger, solving the counter-party risk dilemma/paradox. A most prevalent example would be what happened with Bitcoin and other cryptocurrencies: while originally created by online, benevolent coding enthusiast after 2008 as a way to open source financial centralization, malicious actors entered the fray and took advantage of the underlying commodity to launder illicit income (e.g. Silk Road). In a recent report by Bloomberg called “The Cost of Dirty Money,” Alan Katz illustrates that it’s not only cryptocurrencies that can act as intermediaries of money laundering issues, and this includes Airbnb and Uber credits. Since launching their City of Zug collaboration with Dr. Bucher and ti&m, uPort has been actively expanding their Swiss ID projects with major enterprises and public infrastructures across the self-sovereign nation.
At ABC Platform, we are very excited to launch our first product with our initial institutional clients, including a ~$1bn AUM fund (Ruvercap investments), the largest diamond trader in Germany (Diamondas.com, exclusive precious stone supplier for Bugatti) and other high net-worth individuals.
They have already on-boarded with uPort’s identity platform seamlessly and within a few hours of launch. All future institutional and retail buyers of CHD will have to go through the same uPort-powered portal.
The Foundation, ABC Platform and uPort continue to partner with stakeholders in catalyzing a market for SwissDiamondCoin while exploring new commodities to onboard on the broader inaccessible commodities market. A roster of partnerships will be announced in the following months.
More about uPort
uPort is a user-centric data platform built on the Ethereum blockchain. uPort delivers scalable decentralized solutions for digital identity, reputation, and multiparty trust. uPort’s open system is built on open standards and open source libraries, offering a collection of tools and protocols allowing users to establish, send and request credentials, sign transactions, and securely manage keys & data.
uPort is backed by ConsenSys, one of the most influential blockchain companies in the world. For more information: www.uport.me
More about ABC Platform
ABC Platform is a blockchain infrastructure and market network created to open up difficult-to-handle and hard-to-access commodities to a global audience. The team and advisors of this CommodiTech project consist of experts from various industries and academia (PhDs). They have previously worked for companies like Google, McKinsey, Polkadot/Web3 foundation, Ethereum, Deutsche Bank, UBS, Merrill Lynch, SwissRe, Lufthansa and others. Dr. Mathias Bucher, the founder of ABC Platform, has been involved in several high profile Blockchain Projects in the past such as OTC Swiss Blockchain, where he led a large Swiss Industry Consortium. Dr. Bucher also architected the City of Zug eID Project, and is an advisor to Web3 Foundation / Polkadot.
Recently, ABC Platform was selected as a Top 5 Startup (Growth Stage) for the prestigious Swiss Fintech Awards — to contextualize, Zurich ranks 2nd as a global Fintech innovation city according to Thomson Reuter’s recent survey.
Learn more at our website www.abcplatform.com or in our recent interview with CNNMoney below.