After Russian rough and polished diamonds were given the ‘persona non grata’ status by the G7 countries, the efforts of the established market players have been and are aimed at ‘sifting the wheat from the chaff’ - how to reliably segregate the ‘bad’ Russian rough and polished diamonds from the ‘good’ ones supplied by other producers and manufacturers? An ambitious attempt by Spacecode to introduce a new system by late 2023 that was supposed to reliably determine the deposit where a diamond was mined has failed, which was to be expected. Now, all the hopes of the advocates of sanctions imposed on the Russian diamonds are pinned on blockchains - distributed digital ledgers - expected to contain complete information about the ‘curriculum vitae’ of diamonds throughout the entire diamond pipeline, starting from the mine. This refined idea was reflected in Martin Rapaport’s recent article Diamond Source Certification, which I will make reference to.
In general, the procedure should look as follows. A mined rough diamond is ‘scanned’, i.e. its unique digital ‘portrait’ is made, an identification number is assigned to a stone, this information is recorded in the distributed digital ledger and then all transactions with this rough diamond, as well as the process of cutting &polishing it to make a polished diamond (diamonds) and further transactions with the resulting polished diamond (diamonds) are recorded in this blockchain. This is supposed to guarantee determining the origin of rough and polished diamonds at any stage of their existence and thus segregate them from sanctioned rough and polished diamonds. Today, this virtuous idea is partly embodied in the Tracr™ blockchain platform created by De Beers and supported by GIA, GSI, Brilliant Earth, and it is open to be used by all market players, excluding, of course, the sanctioned companies.
All this looks great, but some serious problems become apparent upon closer inspection. Let’s start with the fact that creating digital ‘portraits’ of rough diamonds to be recorded in the blockchain is a costly procedure that increases the cost of a stone by a certain amount, and the lower its base value is, the higher are the relative costs of recording it in the blockchain. Rapaport is well aware of this, that is why digital ‘portraits’ are not provided for small-size diamonds because “Smaller diamonds not suitable for scanning can be tamper-proof bagged and assigned a unique blockchain identification number”. Simply put, the sacrosanct ‘digital fingerprint’, which supposedly cannot be faked, is replaced by a tag with a number. I believe that Mr. Rapaport is well aware that any packaging with any marking can be now manufactured in China upon the request made by phone and can be delivered within five days to any place in the world. Thus, for small-size diamonds, the ’blockchain’ turns into the well-known ‘I swear on my mother!’ argument, and its effectiveness depends on how dramatic the expression on the face of a person who says these words is.
Who should pay for the creation and maintenance of a blockchain of rough and polished diamonds? Should mining companies pay? Certainly, De Beers can afford such a ‘toy’. What should artisanal miners working on placer deposits do? In order for their rough diamonds to be ‘scanned’ and recorded in the blockchain, they will probably have to pay for this? Do African diamond producers also have to pay extra for the pleasure of segregating the Russian-origin rough diamonds? We can agree that this is a weird way to increase the competitiveness of ‘good’ rough diamonds.
Well, the rough diamond is ‘scanned’, a unique identification number is assigned to the stone, it is recorded in the distributed digital ledger, several transactions are made with it, also recorded in the blockchain, and finally, the rough diamond comes to the cutting&polishing unit, most likely in India, where it will be made into a polished diamond (or diamonds). These polished diamonds must also be recorded in the distributed digital ledger with their own unique identification numbers, and their connection to the original rough diamond should be clearly traced. According to the authors of the ‘diamond blockchain’ idea, this result can be achieved in two ways:
- the entire manufacturing process of transforming a rough diamond into a polished diamond (diamonds) is recorded in the form of digital images, uploaded to the distributed digital ledgers and linked to a gemological report describing the characteristics of the resulting polished diamond (diamonds);
- using the GIA technology that allows to confirm the origin of a polished diamond from a certain rough diamond. In this case, the rough diamond must initially be provided to GIA for study, where GIA studies the resulting polished diamond(s) and confirms compliance. The success rate of the method is about 90 percent.
Any of these options require additional time and money and increase the diamond-cutter’s production costs. Moreover, it is quite obvious that these costs are more significant than the initial ‘scanning’ of a rough diamond at the mining site, since it is necessary to record not only the characteristics of the stone, but also the manufacturing process; and in the second option, an additional payment for gemological laboratory’s services to make a comparative study is also required. Thus, the most significant costs of maintaining the blockchain are placed on the lowest-margin part of the diamond pipeline - the cutting&polishing sector.
So, when a polished diamond is manufactured, it receives a GIA certificate and is marked with a corresponding number on its girdle. Now, when a gemstone crosses the border of any G7 country, a customs officer can enter its certificate number into the blockchain and see the ‘curriculum vitae’ of the polished diamond - starting from the mine where the original rough diamond was mined, to the latest transaction. If the laser mark matches the diamond’s certificate number, the customs officer’s smile is guaranteed, the goods are allowed into the civilized market. But there are nuances... The matter is that a marking laser is an easily available and affordable equipment today. And applying the same laser mark on several polished diamonds with similar characteristics is not difficult. In an ideal case, the basic characteristics (4Cs) of polished diamonds can be completely identical (for example, GIA REPORT 2221760501 and GIA REPORT 2417430941). But only one of those polished diamonds will be made from the rough diamond originally included in the blockchain, and the other(s) may be cut&polished from sanctioned rough diamond(s). Thus, there will be several ‘identical’ polished diamonds in the G7 market and each of them can claim a single position in the distributed digital ledger. Of course, they differ slightly - in proportions, for example, but to identify these differences, at least one more expert study is required. And who needs this? Does the end buyer need this? He was not deceived - he was sold a natural polished diamond featuring 4Cs corresponding to the GIA certificate. Does a retailer need this? He received his profit and his customer has no complaints. Does a holder of the distributed digital ledger who was offended that the blockchain turned out to be ‘leaky’ need this? Well, perhaps, he needs this - and then, the future ‘banquet’ will be at his expense.
An Indian diamond cutting&polishing company that has to join a blockchain platform to ensure that its goods have an easy access to the G7 markets can feel sorely tempted to work using the above scheme. When working with a blockchain platform, diamond cutters have to buy rough diamonds, the price of which includes maintaining the blockchain, and the company has to carry out costly procedures to ensure that its goods are included in the blockchain. And nearby, there is a huge flow of sanctioned Russian-origin rough diamonds sold at a discount, which allows hedging the risks, and no blockchain costs are required to work with them. Therefore, the increase in the production cost of each polished diamond included in the blockchain will most likely be compensated by manufacturing a dozen ‘replicas’ made from the Russian-origin rough diamonds having the same ‘unique identification numbers’. The funny thing is that, unlike counterfeit banknotes or fake paintings, these polished diamonds are not fakes - these are real polished diamonds made from natural rough diamonds, and in the ideal case, of the same quality.
In summary: the blockchain platform scheme built on the principles used in Tracr™ has a number of vulnerabilities that do not allow it to be considered an effective barrier for the penetration of sanctioned rough and polished diamonds into the G7 markets. Counterfeiting the labeling of batches of small-size diamonds recorded in the blockchain is a problem that is easy to solve, and recording any part of large-size Russian diamonds in the blockchain is possible through making a channel using companies from a number of African countries that can join the system. At the cutting&polishing stage, it is possible to manufacture ‘replicas’ of polished diamonds (featuring the same identification number) using sanctioned rough diamonds. At the same time, for bona fide market participants, blockchain inevitably increases the cost of rough and polished diamonds, especially in low-margin segments of the diamond pipeline, and the blockchain is essentially an additional tax levied to pay for such dubious experiments.
Sergey Goryainov for Rough&Polished
