Carats.io is for the risk-averse investorc: Eli Avidar

Eli Avidar, a prominent senior member in the international diamond sector for more than a decade took over in June as the President of the Board of Directors of Carats.io, a fintech startup that has created the world’s first digital currency wholly backed by gem-quality diamonds.According to its founders, it provides an inherently stable alternative in a new financial class that, to date, has proven notoriously volatile.Avidar spoke about Carats.io, cryptocurrency and other recent developments with Diamond World.

Eli Avidar was closely involved in the establishment of Carats.io, which until recently was associated with the Israel Diamond Exchange, where he had served as CEO, in addition to his role as CEO of the Israel Diamond Institute. He is a former diplomat, a published author, and Vice President of CIBJO, the World Jewellery Confederation.

What, in your opinion, are the key challenges facing the industry?

There are a range of challenges, but, if I were reputation. All of this had almost no effect on our perceived status.

to choose the one that I believe to be the most critical, I would say it is the eroding status of the diamantaire in the eyes of the financial community. This dates back to the sub-prime crisis of 2008, when the diamond sector’s status was dramatically downgraded, shifting from that of a valued asset to one of a calculated risk. And it’s this perception that has held firm since, leading to a continuous reduction of available bank credit,not to mention more than one major player deciding to withdraw from the business entirely.

Our leadership sought for ways to change this school of opinion among the bankers, but to little avail. Major industry players invested huge amounts to bolster their positions, and responsible business protocols were drawn up to defend our reputation. All of this had almost no effect on our perceived status.

So where, in your opinion, does the solution lie?

It certainly will not be found in the institutional financial community.

I believe it lies in the financial alternatives that are developing in the digital world. It’s an area that is expanding despite the stubborn resistance of the financial establishment, regulatory bodies and a still apprehensive client base.

It is a growing out of dissident spirit and revolutionary zeal, which are founded on a general feeling that we no longer want to be beholden to the whims and fancies of the banking or political establishments.

But don’t you think new approach brings unacceptable levels of risk for the diamond industry? Does it pose a greater risk than those which face today?

I cannot point to any major commodity exchange that is seriously considered adding diamonds as a primary offering. But, if you read the business press, you will realize that that there is hardly a single serious financial institution that is not considering involvement in the digital economy. Have you heard of a single country intending to turn diamonds into a tradeable commodity? I haven’t. But I can tell you of more than one that is seriously considering turning its national currency into a cryptocurrency.

Does Japan strike you as a serious player, for example? Its Government has sanctioned the trade in Bitcoin and is looking at regulations to oversee the process.

Millions of the diamond industry’s clients and potential clients are already in possession of digital wallets. They are buying pizza and paying their rent with digital cash. So, why would a diamond-backed cryptocurrency require so much of a stretch of the imagination?

About a year and a half ago, a young man walked into my office. He said he had come up with an idea for creating a financial market in the diamond sector, and to do so had developed a system that overcomes a critical obstacle that has stood in the way of such efforts to date, which is the inherent difficulty that exists in unitizing diamonds. Because of the difficulty involved in objectively demarcating standard units of natural diamonds, they have struggled to establish themselves as a tradeable commodity. No two stones are the same, unlike crude oil that has only six different varieties, and gold, silver and other precious metals, where one unit always has the same value at any point in time as another standard unit of the same metal.

Did his claim make an impression on you?

Not initially. But he told me that he had developed a sophisticated algorithm that is able to accurately decide the price of a single stone or a large number of diamonds. I asked two members of the ISDE Board of Directors to join us. They asked a range of questions related to pricing, after which they felt convinced that he knew what he was talking about. This paved way for what became a contract with the bourse.

But we heard that not too long ago the Israel Diamond Exchange cancelled its contract with Carats. io Is that correct?

That’s correct, but it’s also okay. The original agreement provided ISDE exclusivity, meaning that all diamonds acquired by Carats.io to support the cryptocurrency would need to be purchased from bourse members.But what would happen, for example if, as the result of a massive cash inflow, we would need to buy tens of millions of dollars’ worth of diamonds that, for whatever reason, are not all available in Ramat Gan? Remember, our tokens must be backed by diamonds.

This was a strategic problem built into our former agreement. However, now we are free to buy goods wherever they are available, although we will do so mainly in the major diamond trading centers.

The ISDE press release said that Israel’s Controller of Diamonds did not issue a company with a diamond trader’s license. What is your reaction?

I spoke with the Controller of Diamonds, who explained that an inter-ministerial committee is currently looking at the regulation of digital currencies, including their launch in the diamond sphere.It could set about issuing regulations in the near future.

Whatever the case, Carats.io never required a diamond trader’s license to operate. We are a UKregistered company that applied for a diamond trader’s license in Israel, because we believed it would be helpful under our old exclusivity agreement with ISDE.

Why are financial markets considering including oftenvolatile cryptocurrencies, while they have been reluctant to consider generally-stable diamonds as an investment asset?

Diamonds were never rejected because they are inherently risky. Indeed, there is an agreement that they could be a stable and non-volatile asset class, certainly based on past performance. What made the financial markets reluctant was the inherent difficulty in creating standard units for diamonds, where every item is unique. Carats.io’s business model exists because we first tackled that problem with new technology.

Are there banks looking to become involved in cryptocurrencies?

Yes, there are number of banks that are already at quite an advanced stage in their preparations. We believe that if a digital currency is solidly backed, like ours is, then your way forward is already paved.

For the record let me stress that Carat.io’s basic cryptocurrency model is being used elsewhere. There are cryptocoins that are 100 per cent backed by U.S. dollars, and there are those that are backed by silver and gold.

We also are interested in the credit market. For example, if you have cryptocurrency worth half a million U.S. dollars,but you believe that its value will rise in the future, does it not make sense to hold onto your cryptocurrency and rather take a loan from a cryptocredit provider? Your cryptocoins will become collateral for the loan you require.

Q: Where does Carats.io go from here?

Carats.io will continue to bridge the gap between traditional diamond market and the financial world. We also want to provide advanced financial tools that enable diamonds to operate as a financial market in every respect. Ours will be for the riskaverse investor. While unlikely to offer yields of hundreds of per cent, it will not bring withit a likely risk of collapse. Carats.io will also provide alternative solutions to the growing number of diamond companies that have failed to obtain the financial facilities that were once offered by the commercial banks.