Diamonds as money?

September 14, 2017

Pat Heller

Last week, the Israel Diamond Exchange announced that it had signed an agreement with a start-up company named CARATS.10 to create a diamond-backed digital cryptocurrency.

Although details are sketchy at this point, the concept is that the new currency, to be called CARATS.10 Diamond Currency (with the acronym CDC), will be based on index derived from the trading activity within the Israel Diamond Industry on the Israel Diamond Exchange.

The Israel Diamond Exchange states that it is the largest diamond exchange in the world. It operates two commercial bourses, one for polished and one for rough uncut diamonds.

Yoram Dvash, the president of the Israel Diamond Exchange, said, “For the past several years there have been many attempts to turn diamonds into a viable financial instrument, but none have succeeded.”

A statement from CARATS.10 states, “The diamond industry can be an attractive investment channel for many investors in digital currencies. This currency is unique as it will be backed by investments in diamonds, which have steadily appreciated over time. There is a large community of investors in digital currencies throughout the world. By backing this currency with diamonds, we are significantly decreasing the speculative level of the investment. Our cooperation with the Israel Diamond Exchange is an important step in making this currency a reality.”

The implication is that either the currency or the value of the currency is somehow backed by diamonds. Yet the announcement refers to the currency being based on an index of trading on the Israel Diamond Exchange rather than on physical diamonds. The available information does not make it clear exactly how diamonds may or may not back this proposed cryptocurrency.

I also find the statement by CARATS.10 to be less than fully accurate. Diamond prices have declined at times. Here is one example involving my company. Along with gold and silver, a number of other collectibles and valuables hit a peak in 1980. Among them were stamps, Persian rugs and diamonds. In 1981, a customer offered us a very large high-grade loose diamond with a Gemological Institute of America certificate. He was hoping to sell it for what he said he paid for it, namely $440,000. After doing some research we were only able to offer him $220,000. He declined to sell.

A year later, he returned to ask if we would still pay $220,000 for the diamond. We checked our wholesale contacts once more and said we could not. Instead, the best we would offer him was $110,000. He did not sell and never again offered us that diamond.

The lesson to learn from this example is that the value of a diamond had declined by 50 percent in one year, which belies the claim that diamonds steadily appreciate over time. Maybe they do over very long time periods, but that is not necessarily true for one-year periods and perhaps longer.

So, is it really possible to be able to use diamonds as money or as backing for money? In the 4th Century B.C.E., the Greek philosopher Aristotle listed the five functions that “money” needed to serve. They are durability, divisibility, standardization, convenience and store of value.

How do diamonds meet these functions? Not well enough. Diamonds are among the hardest substances in existence. However, this hardness also makes them brittle. Diamonds can break if hit at the very wrong spot, and it doesn’t necessarily have to be hit hard.

Diamonds are divisible in that they are available in a full range of sizes. But they totally do not meet the standardization requirement. Two diamonds may be of exactly the same size, cut, clarity and color but have far different values depending on proportions, the appearance or absence of fluorescence, symmetry and polish.

Diamonds may be convenient to transport, but stones small enough to use for everyday commerce are so small that they are not convenient for using as payment, ignoring the technical difficulty of coming to agreement on the quality of the specific features of each stone.

As a store of value, diamonds might generally satisfy that function.

So, the idea of using diamonds as a medium of exchange does not appear to be a practical application.

Having said that, though, people have been able to transfer ownership of precious metals stored in a vault, where the form, weight and purity are in a standard form that is acceptable for all parties. Often these ingots in vaults are of a size too large for day-to-day commerce (a 1,000-troy ounce silver bar, for instance, weighs about 68-1/2 pounds).

Could it be possible that certified diamonds could be stored in a vault where they might be traded directly while remaining in the vault?

Or could a group of diamonds be the store of value backing a circulating medium of exchange, such as may be proposed for this forthcoming cryptocurrency? It is always possible. Stay tuned for developments.