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.
As one of the world's largest diamond centers, the exchange hopes its virtual currency will make trading more efficient and transparent.
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 program believe it will help address these challenges.
"We foresee alignment behind this currency because it's going to make things easy," IDE chief Eli Avidar said.
"This industry is facing challenges and in many aspects, this is going to 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 "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 IDE, 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 – while ownership identities will be kept private. The exchange can provide ownership information to regulators upon official request.
The Cut could solve increasing problems involving the transfer of money between traders and retailers, one mid-size diamond dealer said.
"With banking regulation, even the smallest move becomes complicated," one dealer said. "It can take days."
"Buyers don't want to give the money until they get the stone, and sellers don't want to give the stone until they get the money," he explained.
He wanted to see how the currency 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% 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 will 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 Carat.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 in the year 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."
IDE data shows that $23 billion changed hands between local and foreign diamond traders in 2017.
Israel's diamond exports in 2017 fell 12% to $15.5 billion. In a 2017 industry review, consultancy firm Bain & Company said 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 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 said he thought cryptocurrencies were "a bit of a fad," adding that he was 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.
