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.

“During that process we used the proceeds to buy a statistical sample of diamonds, and that purchasing forces the market to do price discovery,” he added. “That tells us how much carat weight, color and clarity you can acquire per dollar spent. That yield, which is the yield of the market or the yield of the Earth, becomes the permanent diamond standard and that’s the index of what must be in every coin and bar.”

He noted that the initial public offering involved two audits by Deloitte. The first audit was done mid-process to look at the segregation of client monies and the transparent bidding on the diamonds. The second audit was done at the offering’s completion. After the first audit, Diamond Standard got $50 million in additional approvals for another public offering comprising five tranches of $10 million each. That process started in July with the initial tranche priced at $5,750 per coin. The ongoing second tranche is priced at $5,825.

The offerings are regulated by the Bermuda Monetary Authority, which also enforces the auditing process and other matters related to the coin. “Bermuda is one of the only governments to establish clear laws for digital asset offerings, and it took up to two years to get their approval,” Kinney said.

Diamonds Are Forever, But Are Computer Chips?
Kinney noted that when they designed the coin they didn’t decide how many diamonds would go into each coin, but instead would let the market decide.

“When we first planned the offering, we guessed there would be about 12 diamonds per coin. We were wrong,” he explained. “As a result of the buying, it turned out to be about 8.5 diamonds per coin. You can’t put half a diamond in a coin, so what that means is that every coin will have either eight or nine diamonds. The coins with eight will have diamonds that are a little larger or are more flawless or a little more colorless.

“We’ve invented and perfected a process—through our transparency, bidding and statistics—to always put the equivalent aggregate amount in every coin,” he continued. “The coins are all very similar, and they all contain a distribution of carats, and they’ll look similar even if some have eight diamonds and others have nine.”

Kinney said that dropping the coin in paint thinner will dissolve its plastic resin substrate. It will also dissolve the computer chip and render obsolete the blockchain token embedded within the chip that enables the diamonds to be transacted.

Dissolving the coin would mean “the diamonds are no longer fungible,” he said. “What you have are eight diamonds, but it’s no longer a [tradable] commodity.”

But even if a coin avoids a paint thinner bath, what happens if the computer chip inside a coin goes kaput?

“The NFC (near-field communication) chips are military grade and have no battery,” Kinney explained. “They are powered by the radio waves from the device communicating with them.” He added that their number of uses before expected failure is 500,000, which “should last many decades if not a century. If they fail, our system can recover and authenticate the diamonds, and install them in a new coin.”

Investment Thesis
In addition to the coins, Diamond Standard will offer diamond commodity futures that have been approved for listing on MGEX via CME Globex. The diamond bar, which Kinney describes as being roughly half the size of a candy bar, has been issued a license by the Bermuda Monetary Authority. He expects the bar’s initial public offering to occur in this year’s fourth quarter.

Elsewhere, Diamond Standard has filed a registration statement with the SEC for an ETF under the ticker symbol DIAM that will be based on the price of the Diamond Standard coins and bars as determined by the futures market.

“First, we’re launching the futures on the CME, which has already been approved, and the futures are based on the underlying digital market,” Kinney said. “The futures traders, just like with gold, will establish the futures price. And that price will be used for the ETF.”

He estimates the futures will launch in next year’s first quarter, meaning the ETF won’t be eligible for approval at the earliest until the second quarter. And he believes that DIAM will juice the market for diamonds among retail investors and the financial advisors who serve them, much like the SPDR Gold Shares (GLD) did for the yellow metal when it launched in 2004.

Kinney is confident his company’s investment products will reach a broad audience, unlike past endeavors by other companies that tried to tap into the diamond market. That includes an effort in 2011 by Harry Winston Diamond Corp. and Diamond Asset Advisors AG to establish a polished-diamond investment fund. It also includes a stalled attempt by IndexIQ to create a diamond-backed U.S.-listed ETF. A spokesman for the company said there has been no movement on this product in a long time and that it’s not really a focus at the company.

And Kinney is also confident his company has created the level of transparency, liquidity and price discovery needed to make diamonds a tradable commodity on a large scale. But others aren’t so sure.

“I would love for this to be a game changer, I just don't see how,” Tamar Katzav, chief operating office at IDEX Online, said via email. IDEX Online is a diamond industry data company and online diamond-trading platform for professional diamond traders.

“I do see how they can become a large diamond buyer for the smaller goods, they buy goods of 0.75 [carats] and below, in what we call 'bread and butter' categories where there is the most liquidity, but these goods are not the most significant drivers of price in the polished diamonds universe,” she added.

Either way, Kinney expects Diamond Standard’s various investment products will unlock an additional layer of diamond demand.

“There’s never been a major commodity, a trillion-dollar commodity, that’s available to investors for the first time at one moment,” he proclaimed. “Getting in early gives you the ability to ride out that accumulation phase.”

Perhaps it will play out that way. Meanwhile, holders of Diamond Standard coins should avoid keeping the coins near paint thinner at all costs.