Israel’s diamond exchange has launched a digital currency to make trading more transparent and efficient. However, it will take concerted effort to integrate the new technology into an institution that has long been governed by backroom dealing and cash.
Transactions in the exchange have been “carried out anonymously, with the shake of a hand and minimal documentation,” Israel’s Justice Ministry said in a recent report. Because of the opacity, FBI and Europol are investigating the trade for money laundering and crime financing.
This scrutiny comes at a bad time for the industry; narrowing profit margins for the polishing of rough gems has lead to declining investment, as ever more banks reduce lending.
“We foresee alignment behind this currency because it’s going to make things easy,” said Eli Avidar, managing director of the exchange, while talking with Reuters.
“This industry is facing challenges, and this is going to in a lot of aspects address those challenges … the profitability element of the business, the speed of doing business, money laundering aspects and the problematic elements of banking nowadays,” said Avidar.
The exchange will launch two coins.
“Cut,” the first coin, will only be available to dealers for a peer-to-peer exchange. Traders around the world will gain access to digital wallets after vetting and background checks by the exchange.
Transactions will be verified within minutes and be transparent to the public on blockchain – a ledger maintained with a randomized and anonymous group of peers. This will also allow the exchange to provide information to regulators more rapidly.
However, the currency has been greeted with skepticism from some traders with concerns that it won’t resolve issues regarding transfers to retailers.
“Transfers of money have become increasingly difficult. With banking regulation, even the smallest move becomes complicated. It can take days,” said a dealer, who spoke on condition of anonymity to Reuters.
“Buyers don’t want to give the money till they get the stone, and sellers don’t want to give the stone till they get the money.”
Many of the concerns over the currency arise from the lack of a clear picture of how it will be regulated. The currency is being launched without government regulation in place, so the exact responses of regulators are yet to be seen.
Bitcoin, the cryptocurrency that brought digital currencies to the international forefront, has dropped 70 percent in value since its peak in December. Although bitcoin advocates say regulation would be positive, uncertainty about future regulation is driving the value down.
A spokeswoman for the Israeli Economy Ministry, which regulates the diamond trade, said there has yet to be an in-depth discussion on potential regulation for the coins.
International Diamond Week, which started on Monday, was used as the venue for the launch of the coin. CEO Avishai Shoushan of CARAT.IO, the company that made the coins for the exchange, announced that the coins would come into use within a few weeks.
The coins are valuated on indexing using 14 parameters, somewhat oddly, because just four characteristics are used to price diamonds.
The other coin, “Carat,” has not yet been issued, and is meant for investors who want to profit off of the diamond market without actually possessing physical diamonds.
[Title Image: International Diamond Week, February 2015. Photo by Yonatan Sindel/FLASH90]
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