One of Marilyn Monroe’s signature moments was her rendition of the song “Diamonds Are A Girl’s Best Friend.” But diamonds haven’t been an investor’s best friend for the simple reason that diamonds by and large weren’t an investible commodity like gold or silver.
A company called Diamond Standard Co. in New York City aims to change that by creating several investment vehicles designed to make diamonds the next great tradable commodity. According to the company, diamonds are a $1.2 trillion market, or more than all of the world's silver and platinum combined. Until now, diamonds have lacked the transparency, liquidity and standardization to be marked-to-market for wide-scale trading. Most diamonds are used for jewelry, and sellers of used diamond jewelry often get 50% or less of the original price for their precious gems.
Some reports indicate that diamond mines are being depleted, and Diamond Standard believes that creating an investible diamond market will unleash a supply-and-demand dynamic that will significantly boost diamond prices and make them a profitable investment. The higher prices would be bad news for people buying diamond wedding rings, but it could be good news for investors looking for a natural resource that potentially offers both price appreciation and an inflation hedge.
The company’s product portfolio includes futures contracts and a small diamond bar, both of which have been approved by regulators but remain under wraps. It also includes an exchange-traded fund currently in registration at the Securities and Exchange Commission.
For now, its sole product on the market is the Diamond Standard coin, a physical coin roughly the width of a half dollar and seven millimeters thick. The coins are made of ultra-clear transparent plastic resin, and each coin is embedded with eight or nine diamonds calibrated to be of equal value regarding carat, color and clarity.
Inside each coin is a wireless computer chip that provides auditing to enable the owner to track a coin’s whereabouts. Transportation and custody of the coins are handled by Brinks, a global leader in cash-in-transit and vault storage services.
“You’re able to audit the coin while it’s sitting at Brinks, and your computer over the internet actually talks to the wireless chip inside the coin to make sure it’s there,” said Cormac Kinney, Diamond Standard’s founder and CEO.
The wireless computer chip comprises a thin white layer that’s the exact diameter of the coin and about .7 millimeters thick.
“Around that whole circle is a wireless antenna; it’s like a spiral that goes all around that circle,” Kinney explained. “That antenna is what powers the chip and what provides the signal.”
In addition, the chip stores a blockchain token. “That token is the receipt for the vault,” Kinney said. “Whoever owns the token owns the coin that’s sitting in the vault. They can take it out anytime.
“But the most useful application is that by trading the token on an exchange, or sending it to whomever, you can trade that coin like a bitcoin even though it’s a physical asset,” he added.
The token is transacted on the public Ethereum network. Kinney said several other platforms are in development, and he expects the coin to be listed on various exchanges.
A Wife’s Complaint
The coin sounds far-out and futuristic, but making it happen first required the creation of a substantial global infrastructure to source, buy, transport and grade the diamonds contained within the coins. And the idea to make diamonds a tradable commodity came in part from Kinney’s wife of 21 years, Mimi So, a noted jewelry designer.
“For 20 years I’ve heard how frustrating the diamond market is in how there’s no transparency and liquidity,” Kinney said. “So over the years I learned a lot about diamonds and became fascinated by them. I realized this is a computer science problem where I could use the skills I developed using big data, software, statistical arbitrage, automated market making and the blockchain. All of those technologies were needed to make this technology possible.”
According to his bio, Kinney, 50, started four software start-ups later acquired by public companies. He’s described as a quant finance pioneer who invented heatmaps, designed more than 100 institutional trading systems, and perfected a system of sentiment analysis for statistical arbitrage that he used to manage more than $500 million for hedge funds at Tudor Investment Corp. and Millennium Management.
Kinney’s first diamond-related project was the creation of the Diamond Standard Exchange, which he bills as the world’s first and only electronic venue for trading loose diamonds.
“Through the exchange we bid on about 16 million varieties of diamonds, and we buy diamonds from all over the world,” he said. “Our exchange, when it bids and buys, moves the diamonds wherever we need them. We never touch the diamonds; all of them are inspected and graded twice by competing gem labs. One gem lab grades it, and the second one will inspect that to make sure the diamond matches the grade.
Those gem labs are the Gemological Institute of America and the International Gemological Institute.
The coins are made in the IGI gem lab in New York City, and Kinney expects production to expand to IGI facilities in Dubai, Hong Kong, Belgium and India.
To get the ball rolling, Diamond Standard earlier this year held an offering that sold 5,000 coins at $5,000 apiece, worth a total of $25 million. The company said subscriptions to this initial public commodity offering exceeded the offering limit by 50%.
The offering was supposed to begin last September, but it was delayed until earlier this year as Diamond Standard went through audits and other regulatory scrutiny that addressed matters related to the diamonds’ provenance and money laundering concerns.
“That first offering was very special because it calibrated the diamond index that must go into every Diamond Standard coin forever,” Kinney said. The index is known as the Diamond Standard.