Alt Investments

Get Ready For More Assets To Be "Financialized"

Tom Burroughes Group Editor September 19, 2022

Get Ready For More Assets To Be

We talk to a business using cryptocurrency and blockchain tools to make diamonds a more efficient commodity market, overcoming historic factors that have previously prevented this. So far, only 1 to 2 per cent out of a total size of $1.2 trillion of gem-quality diamonds are owned by investors.

Diamonds are becoming “financialized.” They are far more investible than before, creating inflows and boosting liquidity, the founder of a tech-driven business has told this publication. 

Last week, Diamond Standard, which has developed a “diamond commodity” investment offering, closed a $30 million investment round. The round was led by Left Lane Capital and Horizon Kinetics. Additional participants include Gaingels and

The fundraising program came after the group launched the Diamond Standard Fund, enabling investors to allocate to diamonds through shares, rather than holding physical diamonds directly. In the past, the specific qualities of diamonds – every one of them is different – has tended to make it hard to treat them as an homogenous asset class, such as gold. Diamond Standard is using technology from the cryptocurrency and blockchain space to drive development. 

At the core of the firm’s approach is bringing previously hard-to-enter asset classes closer to the mainstream. And that chimes with the rise of “tokenization” of asset classes such as venture capital, private equity and forms of real estate. (See articles here and here for more on the trends.)

Cormac Kinney, founder of The Diamond Standard, uses the term “financialization” to describe what his business is, to some extent, all about. 

“Diamonds are getting financialized and that is driving up their price,” Kinney told Family Wealth Report.

And it is not just diamonds that could could be treated in this way. Kinney noted that the Uranium market has become much more “financialized” in recent years, as with the rise of uranium-linked exchange-traded funds.

There are possible uses in areas such as carbon credits and forms of real estate. “We have been approached by a number of companies,” Kinney continued. 

The Diamond Standard might hold part of the solution to the problems that have hit the stablecoin market this year, when prices slumped dramatically and in some cases, were wiped out.  

“There are a lot of uses of diamonds – as a store of wealth, as a hedge and all the vectors that drive diamond demand,” Kinney said. 

The business has been through rapid change – even the two-year pandemic didn't prove much of a barrier. 

In September 2021, the firm announced that it had new headquarters on Fifth Avenue, New York, overlooking the city’s diamond district and near the Gemological Institute of America. Last year it also announced that agreements were in place to develop diamond futures offered by MGEX™ via the CME Globex® platform, and options via MIAX™.

The above-mentioned Diamond Standard Fund is approved by the Bermuda Monetary Authority (achieving reciprocity with the Securities and Exchange Commission). It invests in fungible diamonds via standardized coins and bars and is targeting an initial capacity of $500 million working with wealth managers, high net worth investors, family offices, IRA platforms, and institutional investors.

How does the Diamond Standard work?

The firm’s process produces “coins” and “bars” composed in such a way that they reflect the proportions of diamonds’ defining qualities (carat, cut, etc) across the entire diamond market as found in the earth. This creates a standardized measure of such qualities – allowing a fungible commodity to develop, which can then be tokenized via blockchain distributed ledger technology. The fungible sets of diamonds are sealed in transparent resin – to create the Diamond Standard Coin or Diamond Standard Bar – containing a military grade wireless encryption chip. 

Custodians store the commodity in smart cabinets, which audit them constantly, enabling owners to transact them remotely using the “Bitcarbon” token. The owner alone has the digital key. For every transaction, the encryption chip is challenged by the blockchain in a process called "proof-of-asset.” When the commodity is held by the owner it can be authenticated and sold using a smartphone anywhere in the world.

The size of the market for such a modern diamond market is large, Kinney argues. So far, only 1 to 2 per cent out of a total size of $1.2 trillion of gem-quality diamonds are owned by investors. Diamond Standard wants to propel this figure to 15 per cent in the next five years, spurred by a deep array of potential vehicles – including an ETF, fractional exposure to its coins and bars, futures, and options contracts, and a UCITS vehicle.

The development of this investment entity is important in markets such as the US because advisors such as RIAs are required to hold listed shares/securities. 

Understanding this sphere is not easy, and Kinney said that a lot of what the Diamond Standard does is about educating clients and advisors. 

Diamond prices, which have risen since January this year, rose about 40 per cent in 2021. They are often uncorrelated to other assets, he continued. 

Diamonds have been relatively ignored compared with some other commodities due to bad publicity about “blood diamonds” or “conflict diamonds,” but the vast majority of them don’t come from Sierra Leone, but conflict-free countries, Kinney said, adding that DeBeers no longer dominates the space. 

“It is a great contrarian investment,” he said. Interest is coming from hedge funds, family offices and high net worth investors. Some RIAs have added diamonds to certain portfolios and it provides an inflation hedge.

FWR asked what the ETF is going to be called and about the likely launch date.

“We will likely call it `Diamond Standard Trust’, and the NYSE has reserved the ticker DIAM. We have been approached by a large ETF sponsor, so they would add their name to the front,” Kinney said. 

“We hope to launch the listed fund in early 2023, and I can imagine an ETF being approved perhaps late 2024 at the earliest. The constraint is that we need a large volume of spot or futures trading on a `national market’ such as CME.

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