Israel’s diamond
exchange is turning to digital currencies to inject new life
into a marketplace long ruled by cash and backroom handshakes,
but it must first persuade traditionally conservative players
that the technology can work.

One of the world’s largest diamond centers, the exchange
hopes its virtual currency will make trading more efficient and
less opaque.

Current transactions are “often carried out anonymously,
with the shake of a hand and minimal documentation”, according
to a recent report by Israel’s Justice Ministry. That murkiness
has led the FBI and Europol to target the trade as a vehicle for
money laundering and crime financing.

Narrow profit margins between rough and polished gems make
it hard for polishers to get financing, and banks have cut back
lending or pulled out entirely.

Backers of the digital currency programme believe it will
help address those issues.

“We foresee alignment behind this currency because it’s
going to make things easy,” Eli Avidar, managing director of the
exchange, told Reuters in an interview.

“This industry is facing challenges, and this is going to in
a lot of aspects address those challenges … the profitability
element of the business, the speed of doing business, money
laundering aspects and the problematic elements of banking
nowadays,” he said.

The exchange is planning to launch two coins.

The first, to be known as the Cut, will be available only to
dealers on a peer-to-peer basis. Traders from around the world
will receive digital wallets after being vetted by the exchange,
similar to today’s background checks.

Each transaction will be verified in a matter of minutes and
be available to the public on blockchain – a digital ledger
maintained by a random group of peers – but the identity of who
owns what will be kept private. The exchange can provide that
information to regulators upon official request.

DIFFICULT TRANSFERS

The Cut could solve increasing problems moving money between
traders and retailers, one mid-size diamond dealer said.

“Transfers of money have become increasingly difficult. With
banking regulation, even the smallest move becomes complicated.
It can take days,” said the dealer, who asked not to be
identified because of the sensitivity of the process.

“Buyers don’t want to give the money till they get the
stone, and sellers don’t want to give the stone till they get
the money.”

He wanted to see how it will be regulated, however, which
may take some time, given that the coins are being launched
without any government regulation in place, as is typical in the
cryptocurrency world.

Bitcoin, the original cryptocurrency, has lost 70 percent of
its value from its peak in December partly because of market
concerns about a global regulatory clampdown. Many bitcoin
backers say regulation should be welcomed.

A spokeswoman for the Economy Ministry, which oversees the
diamond trade, says there has been no in-depth discussion yet on
how the coins would be regulated.

Presale of the Cut went live at the International Diamond
Week that started on Monday. The coins should enter into use
within a few weeks, said Avishai Shoushan, CEO of the year-old
CARATS.IO, which created the coins for the exchange.

The coin is based on an index using 14 parameters, compared
with just four characteristics used to price physical diamonds.

Price is determined by an algorithm, because whereas gold is
priced by the ounce or oil by the barrel, for example, diamonds
are priced individually since each diamond is so different from
the next.

A second coin, Carat, will be issued later and is meant for
institutional and retail investors who want to invest in the
diamond market without taking possession of physical diamonds.

“We are creating a way for people to invest in the market
without actually buying and selling diamonds,” Shoushan said.

A quarter of the market value of both coins will be backed
by diamonds held by a third party. All this, he said, should
make the tokens “much less volatile compared to any other
cryptocurrency.”

HIGH SECURITY

In the high security four-tower complex on the outskirts of
Tel Aviv, $23 billion changed hands between local and foreign
traders in 2017. The area is known as the diamond district, and
visitors coming by train access it across Diamonds Bridge.

Visitors are fingerprinted before they can enter the
buildings and look down on the world’s largest trading floor.
Should a diamond go missing, the entire complex locks down.

Israel’s diamond district is full of polishers who
specialize in large, high-end diamonds. The country cannot
compete in smaller stones with massive operations in India and
China. The trade by nature is global. The State Bank of India
has a branch beside the exchange.

Israel’s diamond exports in 2017 fell 12 percent to $15.5
billion. Consultancy Bain said in a 2017 industry review that
diamond jewelry sales, which according to De Beers hovered at
$80 billion in 2016, were “stagnant”.

Slowing long-term demand and the shaky financial position of
polishers are two big concerns, it said.

Martin Rapaport, chairman of the highly influential Rapaport
Group whose diamond price list is a global industry benchmark,
has a big presence in Israel and may have to compete with the
new system.

He applauded the effort to expand diamond demand, but told
Reuters he thought cryptocurrencies were “a bit of a fad” and is
unsure of their sustainability.

“Diamonds have an inherent value and that inherent value has
been around for centuries. Whether or not you can take that and
hype it into something modern and something interesting like a
cryptocurrency is highly questionable,” he said. 

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