MARKNetwork Blockchain: Use Case Diamond Industry

Blockchain and Diamond, beyond the crypto bubble

Short summary of the article:

“Do not get left behind”

»The human right abuses and wars behind the screens of sparkling diamond industry is not a lesser known fact but still the demand for diamonds is growing by 3-5% every year. Can blockchain play some role in controlling the blood shed«

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In 2018 alone around 147 million carats of diamonds were mined all across the globe. The mining was spread across geographies like Australia, Botswana, Russia, South Africa and the Democratic Republic of Congo. The entire diamond supply chain in each demography is a potential source of infringements which range from violation of fundamental human rights (Story of Blood Diamond), compromised working standards, environmental impact, and corruption.

The world is paying a huge price for the natural sparkle which goes beyond the monetary cost.

The value chain of diamonds is superiorly flawed. In 2017 rough diamonds worth 17.5 Billion U.S. dollars were mined, after the processing, the price figure rose to 25 billion U.S. dollars which is a 42% increase in the price. If a supply chain inflates the price to such an extent, the issues need to be addressed with immediate action.

What is hard to comprehend is that the conflict diamonds remain a pain area in 2018 also. Little do the diamond jewelry adorners know who produced the big rock on their finger and how its mining is the biggest contributor to human abuse? As per Bain & Company’s seventh annual report on the global diamond industry, per year rate of mining of rough diamonds is around 133 million carats. Around 65% of these diamonds are mined in Africa out of which only 25% of diamonds are mined in a regulated manner. So every 1 out of 13 diamonds that reach the global diamond market has its roots in Blood diamond zone of Africa where violence due to diamond mining is a matter of international concern.


Startling facts around Blood Diamond

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  1. Diamond mining deaths aggregated to 3-4 million
  2. The average pay of a blood miner per day is $0.07
  3. 4% of the world’s diamonds are mined as conflict diamonds
  4. 1/5th of Sierra Leone’s diamond reserves originate as blood diamonds

The history has been witness to the devastating impacts of blood diamond:

  1. Angola Civil War – 1961-2002- 500,000 lives taken
  2. Democratic Republic of Congo Civil War – 1998-2003 – 3 Million lives taken
  3. Sierra Leone’s Civil War– 1991-2002 – 500,000 lives taken
  4. Liberia Civil War– 1989-1997, 2000-2003 -200,000 lives taken

To curb the blood-shed, United Nation established the Kimberley Process Certification Scheme(KPSC) in 2003 to prevent the blood diamonds from entering the mainstream market. The implementation significantly reduced the flow but recently the integrity of the KP has been questioned.

The transparency and integrity of the certification standards are being stated as ineffective. Furthermore, the certificate issued by Kimberley Process applies to the collection of rough diamonds and not every single stone which leaves a big window open for the smugglers to place conflict diamonds in the supply chain. As no single diamond leaves its trail, the tracking system around the Kimberly process fails miserably according to Guardian’s report in 2015.

Until 2020, the global demand for rough diamonds is expected to surpass 26 billion dollars which will fuel the growth of illicit trade of diamonds.

The industry is in great need of a track and trace model that ensures the high demand international markets receive only conflict-free diamonds with an assurance of the cost of purity the buyer ends up paying. Blockchain protagonists believe the rife corruption and smuggling levels in the diamond industry can be solved effectively using the distributed ledger technology.

Let us uncover the benefits of the disruptive effect of Blockchain:

Effective Track and Trace solution

In 1998 human rights violation and war crimes rooting from its diamond trade had peaked out. The United Nations Security Council Resolution 1173 was passed against National Union for the Total Independence of Angola (UNITA) which prohibited the diamond trade clearance without a certificate of origin.

In 2000, Robert Fowler, a Canadian diplomat, investigated the stance of Resolution 1173 and reported that UNITA was still funding its war by the trade of conflict diamonds in the international market. The UN clamp down initiative had failed miserably.

After the repetitive failures of the Kimberley Process that were discussed in the introduction of the article, the Diamond giant De Beers in mid-2018 announced the success of the diamond track and trace blockchain platform Tracr. The pilot tracked the journey of 100 top-value diamonds right from the site of mining to the buyer’s doorstep over the immutable blockchain platform.

In contrast to the KP certification process where a batch of diamonds is certificated, Tracr platform will be creating a Global Diamond ID for every single diamond. Each Diamond ID will be recording the characteristics of each diamond-like its clarity, color, and carat. The recording is expected to start tracing the characteristics right at the point of mining which will be verified at every point in the supply chain. With such blockchain initiatives, the introduction of blood diamonds will be curtailed. Once these conflict diamonds are not able to the entire supply chain, the production process will be stalled bringing in world peace.

Decentralization

Currently, KPCS is the only authority of authenticity of diamonds. The international diamond fraternity has reported fake KPCS certificates making round in the market for diamonds penetrating the supply chain from Congo, Angola & Malaysia and Ghana. While KP is aware of the stance nothing constructive has been done to address the forging damage.

2014 uncovered an elaborate scheme where diamond buyers were invited to Sierra Leone to purchase mined rough diamonds. When the buyers evaluated the stones later, even the fake stones were provided a fake Kimberley Process certificate. The fake certificate was a faint variation of real certificate SL 004199.

In 2018 U.S. Customs and Border Protection, along with the Department of State, Bureau of Economic and Business Affairs advised the public to stay aware of numerous diamond trade scams using Kimberley Process Certificates. Some of the scams were advance fee-scams conducted over the internet where buyers were promised KP certificates.

The dishonest certificates of purity of diamonds are not an issue around KPSC only. The organizations of the repute of International Gemological Institute and EGL USA Gemological Laboratory (EGL) have also been accused of providing inaccurate reports to consumers. With distributed ledger technology, the decentralization can be brought to the diamond ecosystem that will prevent any forged certificates of fake diamonds to reach the consumers. As the blockchain will store the diamond data in an immutable form, the market penetration of fake diamond certificates will be eliminated.

Chow Tai Fookand, a Hong Kong-based jewelry giant and the Gemological Institute of America (GIA) have associated together to build a blockchain platform which will store the origin and authenticity stats of the diamonds.

Immutable Lifespan tracking

The fake diamonds do not enter the supply chain at the point of mining only. The diamond supply chain has multiple clearance points where they are exchanged. Every diamond trader at this point needs to comply with relevant trading guidelines, Kimberley process, banking and anti-money laundering protocols. The concern right now is the traders are able to break through the process and trade in diamonds in a non-compliant manner.

The missing transparency in the trade of diamond gives traders a perfect environment to breed dishonest transactions, fake certificates and money laundering using diamonds.

This is the exact problem that blockchain promises to resolve. As all the data concerning the lifespan of diamonds are recorded onto the blockchain, the trading and clearance process is bound to become 100% transparent increasing the reliability of the supply chain.

There is no single point of failure where the traders can alter any detail related to the lifespan of the diamond. Every attempt to alter any information will be tracked on the diamond making sure the end consumer knows he is paying for what he is getting. Pure Diamond Lab, in Tokyo, is a specialized lab for the creation of synthetic diamonds. These flawless diamonds are half the price of mined diamonds but the Pure Diamond Labs is planning to take their product to the next level by reaching to its consumers using a blockchain platform. The platform will store all the details of the production of diamonds like the production process, refinement, appraisal and sale so that their user base encounter no low value or fake encounter of synthetic diamonds.

Secure supply chain

Trading diamonds involves high-value transactions. Utilizing blockchain to secure such high-value transactions will preserve stones value and legitimacy at the same time. Not only will the use of blockchain expedite the sales, but it will also stamp out the illegal money transfers without regulation.

Today, diamond trade is making knitting the nations closer which puts a high demand on the ecosystem to support transparency between all the stakeholders like traders, regulators, banks and retailers. The distributed system of blockchain brings a promising opportunity for the diamond trade ecosystem to address the supply chain streamlining issues.


To wrap

At MARKNetwork, we are embracing the disruption blockchain technology is about to bring in. With the development of customized enterprise solutions, we are expediting the adoption of technology. Our solutions will establish transparency, legitimacy and support paperless global trades in diamond ecosystem challenge head-on.

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