Business

DLT makes the diamond industry more transparent

Diamonds are among the world’s most valuable gemstones, and the global diamond industry has managed to stay afloat despite being partially eclipsed by the advent of modern equities and novel virtual assets.

However, the diamond industry seems to be undergoing a paradigm shift in recent times – the incorporation of modern technologies like blockchain to improve diamond production, tracking and final sale.

Leanne Kemp, CEO of independent technology company EverLedger, stressed the need for blockchain integration in the industry to better trace a stone’s provenance.

Speaking about the issue of data manipulation regarding a diamond’s origin four years ago, Kemp noted that “we are seeing document manipulation where a stone has been claimed by multiple insurers over similar periods of time.”

While there is not yet a direct solution to all of the diamond industry’s concerns, blockchain is being used to solve some of them by enabling transparency that helps trace the origins of diamonds. This is primarily intended to prevent the sale of “conflict diamonds”. Diamond mining company De Beers Group has pointed to the potential of blockchain in the industry for more accuracy, trust and transparency in determining a diamond’s provenance.

The diamond industry maintains its distinction

Despite the impact of the Great Recession of 2008, which caused an unprecedented fall in the general stock market, the diamond industry has managed to maintain its prominent position despite a marked decline in global rough diamond production.

The idea of ​​integrating blockchain into industry – which has only been adopted in recent years – is likely to rekindle mainstream interest and further improve global production.

In the years up to 2008, the production of rough diamonds increased steadily. According to data from the German database company Statista, the global production of rough diamonds never went below 160 million carats between 2005 and 2008.

However, following the economic downturn of 2008, average production over the past decade has averaged 142 million carats, with 116 million carats produced in 2021. 2017 saw the biggest sales of the decade with 152 million carats of diamonds produced.

About 99% of the world’s diamond mining is carried out in nine countries, with Russia, Botswana, the Democratic Republic of the Congo, Australia and Canada each being the top five most affected countries. Diamond mining is almost monopolized, with companies like ALROSA and De Beers controlling a large chunk of the industry.

Ethical concerns about the diamond industry abound

There are a few reasons investors don’t seem to be flocking to the $68 billion diamond industry company, especially recently.

As lucrative as it is, ethical concerns about the backbone of the diamond industry are widespread. This has deterred potential investors, especially in times like these, when investor behavior is increasingly influenced by consumer moral and ethical positions.

According to Johannes Schweifer, CEO of Crypto Valley’s CoreLedger, security and transparency issues as well as ethical concerns are plaguing the diamond industry. For over a decade there have been claims of a link between diamond mining and regional hostilities, as noted in some parts of Africa. Schweifer told Cointelegraph:

“The biggest problem in the diamond industry has always been transparency. Most gemstones are unable to tell their origin story. But what if the stone on your wedding ring is actually a blood diamond, wouldn’t you want to know? Knowing the origin and ensuring transparency from ‘lead to finger’ can not only help you sleep better, but also save lives.”

Conflict diamonds, also known as blood diamonds, are diamonds mined in areas controlled by rebels who oppose a legitimate government and are subsequently used to fund those rebel movements.

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Diamond prospectors in Sierra Leone. Source: AP

Some instances of the unethical use of blood diamonds were evident in countries such as the Democratic Republic of the Congo, Angola and Sierra Leone in the 1990s. Evidence proved these diamonds were mined and used to purchase weapons and ammunition for military and paramilitary movements.

Aside from selling diamonds to fuel conflict, numerous reports have surfaced of unscrupulous labor tactics being used to exploit mine workers. Child labor also appears to be widespread in most of these areas.

In addition, the diamond industry has come under fire because of the existing patent monopoly over the control of mining processes, distribution and sales of diamonds. This has fueled concerns about an existing cartel dictating the flow of the industry.

In addition, the industry appears to be swamped with issues such as the environmental concerns of mining, hazardous work environments and insecurity to name a few.

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Blockchain begins where traditional methods end

In light of the blood diamond issue, global mining giant De Beers announced the pilot operation of its blockchain program Tracr, designed to ensure the company does not handle blood diamonds, particularly in distribution and sales. This announcement was made in January 2018.

However, De Beers would not be the first to make plans to pursue diamonds to solve the problem of diamond distribution conflict.

Almost 20 years ago, in 2003, the United Nations established the Kimberley Process Certificate Scheme with the aim of preventing blood diamonds from entering the global diamond market. This decision was made after the 2000 Fowler Report which showed that blood diamonds were still being used for conflict funding by the National Union for the Total Independence of Angola.

However, the Kimberley Process has been condemned by organizations such as the Canada-based NGO IMPACT and Global Witness, a London-based NGO that aims, among other things, to prevent the exploitation of natural resources and human rights abuses. They claimed inefficiency.

Speaking to the BBC in 2011, Charmian Gooch, founding director of Global Witness, observed that “nearly nine years into the Kimberley Process, the sad truth is that most consumers are still unsure where their diamonds came from.”

Gooch noted that the initiative failed three different tests, particularly in addressing unique concerns in Ivory Coast, Venezuela and Zimbabwe when her NGO exited the process.

In addition, IMPACT cited the failure to provide accurate reports on the provenance of diamonds and the “false trust” placed in consumers as reasons for its criticism of the Kimberley Process. Joanne Lebert, Managing Director of IMPACT, noted this when the NGO withdrew from the initiative in January 2018.

IMPACT withdrew from the case days after the announcement of De Beers’ Tracr. Tracr was trialled in early May 2018, with initial plans to launch later that year and a vision to bring the platform to the global diamond market.

In the pilot, De Beers announced that it was able to successfully track 100 high value diamonds as they progressed through the conventional route from their birthplace, mine and final retailer.

“Blockchain technology and tokenization can provide a way to fractional ownership — instead of placing full risk on a single brick, one can spread risk across many investors. Even the rating and evaluation process can even be outsourced or shared. From an investment perspective, tokenization is a great way to open up diamonds to the average person,” Schweifer added.

Tracr uses an identification tag called De Beers Global Diamond ID, which is specific to each diamond and identifies the diamond’s individual attributes such as clarity, color and carat weight. The unique information inherent to a particular diamond according to its ID is then logged in a public ledger, which Tracr uses to track the diamond’s progress through the distribution chain.

Tracr was officially launched in early May, with De Beers noting that the initiative is already integrated into its business module globally. About a quarter of De Beers production by value was already logged on Tracr in the first three sights of 2022. A sight is a term for a sales event with a corresponding quantity of diamonds being offered for sale.

De Beers also pointed out some of the key benefits of the blockchain used, which include immutability, security, data security, privacy, transparency and speed. According to De Beers, the blockchain should be able to “register one million diamonds per week on the platform”.

Blockchain increases transparency for everyone involved

De Beers isn’t the only company working on blockchain tracing solutions for the provenance of diamonds. IBM launched the TrustChain initiative in April 2018 in partnership with an association of jewelry companies.

The TrustChain initiative was founded with the aim of increasing transparency for consumers by tracing the provenance of jewelry using the IBM blockchain platform.

On January 12, 2021, diamond marketplace Rare Carat partnered with EverLedger to bring more transparency to the provenance of diamonds on its platform by using EverLedger’s blockchain.

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Despite its many challenges and murky past, the global diamond industry is at the cutting edge. Like finance and a variety of other sectors, blockchain has proven useful in enhancing the diamond industry, particularly in solving issues related to diamond provenance.

The right ledger for tracing the provenance of jewelry should be immutable and transparent, therefore a public ledger should be used with no central control point. Otherwise, the whole idea of ​​transparent assessment is dead, as allegedly stated in the Kimberley Process.

“When it comes to transparency, the biggest beneficiaries of blockchain are consumers and government. Eventually this will keep the industry at a higher level and hopefully improve the working conditions of the miners as well. In a business as murky and dangerous as diamonds, that really can be seen as an advantage,” Schweifer said.

He added that diamonds are highly value-dense assets, so “it’s almost impossible for the average person to own a large, investment-grade stone.” Even for those who can afford it, diamonds are a tricky investment as it takes a lot of experience not to get scammed or lose money.