Tokenization

Diamonds are forever: tokenization of precious metals and stones

Precious metals and stones have always been a solid investment. In times of global crises, the cost of precious metals remained the most stable. However, the precious metals and stones market is facing major challenges in the form of fraud and theft.

Gene Deyev

Feb 17, 2022 • 5 min read

One of the most exciting implementations of blockchain technology is the backing of physical gold. Since security tokens can be subject to constant and global trading, tokenized precious metals or stones are more liquid than any other form of jewelry ownership. Tokens are also more secure and cannot be physically stolen, which is always a risk when holding physical metals and diamond assets. Safe storage, high liquidity, and regular third-party audits will increase investor interest in tokenized diamonds and precious metals.

Below we will consider how to tokenize diamonds and precious metals and the prospects for growth in this area.

Gold

Gold has been used to accumulate wealth for thousands of years. However, the purchase of bank bars is not available to everyone. Most importantly, the physical accumulation of gold raises storage, security, and liquidity issues.

Currently, gold-backed tokens are generating a lot of interest among investors and can be a catalyst for new and innovative investment products. Popular projects include Novem Gold, Asia Broadband, Tether Gold, Perth Mint Gold Token, and others.

Silver

Many investors believe that silver is undervalued, and the market can expect a significant price hike for this metal in the near future. In addition, silver has industrial and medical uses and is relatively limited in production. In 2022, a silver bar will sell for approximately $24 per ounce (28 grams). This means that if an investor wants to buy $20,000 worth of silver, they will have to store around 25 kilograms of the bulky metal. Tokenization simplifies storage, ensures transparency of transactions, and allows you to profit from increases in the associated asset price.

Platinum group metals

Tokenization is not limited to gold and silver; other precious metals can benefit from tokenization too. Tokens make it easier to store, buy, and trade precious metals, as well as provide increased accountability in supply chains. Goods can now be registered on the blockchain from the production source using photos and scales. Tokenization largely solves the issue of fraud in the production and sale of precious goods.

Tokenization of metals such as palladium, platinum, and rhodium grows rapidly.

All in all, it has never been easier for an investor to buy and hold such assets. In the global economy, precious metals are the best hedge against inflation and the effects of the panic created by the current global pandemic.

If you are interested in tokenizing diamonds or precious metal assets, please contact our team. We will be happy to tell you about possible options for tokenization.

Diamonds

Diamonds are not only a girl's best friends but also of the wealthy and powerful. However, the industry is facing evident problems:

Poor liquidity;
Lack of transparent pricing;
The demonetization of the market;
Unreliable storage of valuables; and
Fake and "blood" diamonds.

At the moment, diamonds are not very attractive to most investors and are often characterized as "non-commoditized commodities." Also, only the wealthy currently have access to investing in diamonds.

Moreover, many valuation factors are used to determine the value of each stone, which makes them less liquid. Then add the logistical difficulties, paperwork, and double taxation (if the seller and buyer are in different countries).

The opacity of the price is out there because the key benchmarks generate data based on the value of the largest player, not on the current market situation. Stone parameters such as cut, carat, and clarity are of little importance in pricing. In fact, each seller sets their own price for each stone without any transparency. And most transactions are P2P and paid in cash, while large investors prefer to remain anonymous.

How can tokenization change the diamond market?

Combining the two major blockchain innovations (tokens and smart contracts) with the multi-billion dollar diamond industry could lead to the successful development of this investment sector. In 2018, diamond veterans KGK Diamonds and Alrosa appeared in the headlines of the leading crypto media after having tokenized diamond assets worth 17 million dollars to combat stagnation in diamond sales. This shift resulted in around 68 billion dollars in annual profit.

However, tokenization is not as simple with diamonds as with precious metals, as the stones are not interchangeable. Each stone has its unique characteristics: shape, color, transparency, weight. It's impossible to simply replace one stone with another, as their value will differ. When buying a token equal to a 999 gold bar, it doesn't matter in principle which bar is tied to the token; however, it doesn't work that way with diamond assets.

One of the most successful cases occurred in 2020 when Icecap launched Ethereum-based diamond tokenization. Since each diamond is unique, NFT technology is ideal for this area.
Before tokenizing diamonds, each stone is graded at the US Gemological Institute (GIA). The stones are then sent to the Gemstone Certification and Appraisal Laboratory (GCAL), which issues its opinion, based on which the value of each asset is set. Then the diamonds go to the OpenSea exchange, where they are physically stored in a reliable custodial vault.

Diamond tokenization projects aim to change the current market by allowing retail investors to add tokenized diamonds to their portfolios. Also, the goal is to launch a secondary market. It is estimated that diamond tokenization will increase demand from 8 million carats in 2018 to 292 million in 2050.

In short, there are 7 steps of how to tokenize a diamond, with expert companies providing advice and comprehensive assistance each step of the way.

Ensuring that the diamond is suitable – tokenization companies have different requirements for shape, clarity, color, etc.
Sending a GIA certificate number and Ethereum public key to the company that undertakes the tokenization of assets. If confirmation arrives, the tokenization process begins.
Submitting the diamond to GCAL in New York to check for certificate compliance and damage.
Transfer of the asset to safekeeping.
Creating an ERC72 token and transferring it to your public key address on the Ethereum blockchain. You now have a diamond token associated with your stone!
If you want to sell a token, you can list it on an exchange like OpenSea.com. When selling, the diamond itself also passes into the new token holder's possession but continues to be stored in secure storage.
The diamond token owner can cash it out for a small fee and shipping costs if necessary.

As you can see, the process looks quite simple and requires minimal participation of the diamond's owner.

Summary

Buying and selling a tokenized diamond or gold bar is now easier than ever. The tokenization of precious metals and diamonds solves several problems at once: illiquidity, opacity, lack of access for retail investors to the multi-billion dollar market, and many more. At the same time, the assets are fully protected and are managed by reliable companies.