From Rings To Returns: How Blockchain Brings Diamonds To Portfolios

Before the release of the war thriller Blood Diamond in 2006, most diamond buyers did not know or care where their sparkling stones came from.

The movie revealed to the world how diamonds mined in Sierra Leone were being sold to finance brutal internal wars that were benefiting only warlords and unscrupulous diamond merchants around the world.

The movie democratised the conversation around conflict diamonds by showing how they were mixed with clean stones to hide their tainted origins so that ethical buyers could not tell the difference.

The public became more aware after the film, and the certification systems did improve. But some legacy issues remain.

For example, diamonds continue to go through multiple intermediaries before reaching buyers, with each participant in the supply chain keeping its own version of the record.

Prices of diamonds are discussed privately and sometimes arbitrarily, often depending on relationships between buyers and sellers, while those outside the core trading circle remain clueless about the provenance or the real value of the stone.

Outside Precious Circle

Another big challenge with diamonds is their benchmarking. Gold, for instance, can be stored in uniform bars, and oil is traded against recognised benchmarks.

But diamonds are handled one by one. At times, stones with similar grades are sold at arbitrary prices depending on who is buying and who is selling.

Because of that, diamonds, despite being more valuable than most precious commodities, have little demand in formal asset markets.

Investment Vehicle On Blockchain

But some efforts have been made to show how diamonds could be an investable product.

The ‘Diamond Standard Fund’, launched by New York-based Horizon Kinetics, is one of them, which ensures that a $1.2 trillion natural resource becomes “suitable for investors as a store of wealth, hedge, and speculative asset”.

The fund, though closed-end, works like an ETF. Its net asset value, or NAV, is calculated monthly, and the underlying spot commodity index, DIAMINDX, is listed on Bloomberg.

Launched in 2022, the fund does not trade individual diamonds, but combines multiple stones into fixed units that follow defined rules on quality and grading.

It holds standardised units made up of several stones that meet predefined quality and sourcing criteria.

Like any other ETF, investors do not handle the diamonds themselves. They buy and sell interests in a fund that owns the physical inventory. And these interests are issued and managed on a blockchain.

The blockchain does not assess the quality of diamonds or fix prices. But it verifies the ethical sourcing and provenance of diamonds within the fund's inventory.

The fund, which requires a $100,000 minimum investment, only includes natural diamonds that have the conflict-free certification. Meaning that all diamonds must be certified under the Kimberley Process Certification Scheme, which prevents the trade of "blood diamonds".

The blockchain also maintains a record of ownership so that the buyers and sellers are protected against potential fraud.

By the way, this fund is not the first diamond-linked investment vehicle. There have been a few others before the blockchain era, but they did not succeed.

One of them was launched by Zurich-based Finanz Konzept AG in 2012, which invested in natural, polished and coloured diamonds. As of today, it is closing down via liquidation proceedings.

Another product — a diamond and gemstone ETF introduced by PureFunds in 2012 — was listed on the New York Stock Exchange, but it stopped trading in January 2014.

An ETF for India

For Indian investors, the Diamond Standard Fund makes more sense because of the prevalent ETF structures they’re familiar with.

Diamonds, unfortunately, could never be part of that world primarily because it was difficult to standardise or price them convincingly.

This fund has tried to change that by packaging diamonds into a pooled structure, where investors do not deal with storage, certification, or individual stones.

In India, an ETF like that is possible if a financial institution takes the first step. An institutionalised ecosystem is also in place in the country, as India has been selected for the third time to head the Kimberley Process, the conflict-free diamond body, from this month. So, we have experts who know everything there is to know about diamonds.

But a fund won’t make diamonds similar to gold. Trading volumes could be lower, and exits may not always be smooth.

But the structure, which involves an NAV and an external index, could be easier to imitate if it is regulated properly.

For Indian investors who already use ETFs as a vehicle to invest in precious commodities or benchmark indices, a fund like this could put diamonds much more within their reach.

And with blockchain in the picture, the exposure could only be ethical stones. Not blood diamonds.

This series is brought to you in partnership with Algorand.

Author:   Vishwas Ved

Bought mostly for love or status, diamonds are now being repackaged like an ETF, with blockchain ensuring investors get exposed only to standardised and conflict-free stones.