“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.