Are diamond tokens a girl’s (or boy’s) best friend?
ICOs (Initial Coin Offering) might well be described as a potential goldmine. It’s less common to hear them called a ‘diamond mine’, but that might change after a couple of token-issuing programmes seek investors in the coveted jewels.
Carats.io, launched earlier this year, is a token backed by real diamonds. The token is backed by the Israel Diamond Exchange and offers improved transparency in diamond investment. Not only that, but investors will be able to buy part of a diamond, which allows participation from those who cannot afford to buy an entire diamond.
The ICO for CARATs will open first to accredited investors who must invest at least $20,000 to participate. The second round will be open to those spending $1,000 and the final ‘crowdsale’ allows participation from a minimum of $100.
Russia joins the diamond token rush
A similar scheme has recently been unveiled by the Far East Development Fund (FEFD) of Russia, which plans to issue D1 tokens allowing investors to buy shares of Russian diamonds. The FEFD is state-owned and, if the diamond investment is a success, it could be expanded to allow investors to buy shares of the regions gold, gas or water.
Both schemes are tackling the fact that there is no commodities market for diamonds, because the stones are all different. Thus, trading has until now been limited to buying actual stones.
However, these investments are different from ICOs that issue a digital currency or some kind of token to use a service. Because the value of the token is tied to a physical object – a diamond in this case – the amount that it can increase is also tied to the value of that object. Diamonds are valuable things, albeit mostly because their supply is tightly controlled, but they do not offer the same wild returns as cryptocurrencies have seen over the last year or so.
Asset-backed tokens raise questions
That will put off those investors who are hoping for a quick return, but it might attract those looking for something more stable. Anyone who does invest, however, will have to accept the fact that they will own a token of a thing and not the thing itself. Someone who buys diamonds can store them in the safe; a token needs verification.
This is a reversal of the standard effect of blockchains, which usually serve to remove middlemen and outsource trust to the network. In this case, middlemen will have to be involved. First to check that the physical assets exist and are worth what the seller claims they are worth. And second, to act as a ‘custodian’ for the tokens. Custodial companies are common in financial services and typically hold securities or other assets in a physical form on behalf of their clients.
The big question for asset-backed tokens, like these ones and others that have launched to allow investment in gold, is whether investors feel that the middleman provides enough value to justify their place in the system.