Everledger’s Leanne Kemp on Why Diamonds Need a Blockchain

March 5, 2020

Why the high class assets? Everledger started in 2015. And we believe that there’s not a platform
provenance in the world. We’ve seen applications come into the marketplace
for procurement systems, but there is no platform provenance. And then, when you imagine what a provenance
platform would entail, we have to go deep within understanding the material science
of an object. We’ve seen a lot of activity in this space
with provenance now, from tracking fish to avocados and pigs, I think is one. But diamonds have some underlying constructs
that are really important. Firstly, every diamond is unique in the world
and to be able to capture the uniqueness of that diamond in a digital twin was able to
be done not purely from a block chain perspective, but a combination of other technologies. So, we take high-definition photography, we
can enable the identity of that through stress mapping. We can also use resin and ultrasound — there’s
a whole bunch of other science that has to be combined to take that digital identity
into the blockchain. And we’re not talking about just putting a
label on it, unlike some other things — for example, a motor vehicle would have an RFID
tag or a serial number. So that’s one reason why. The second reason is the value construct around
documents, of course, has enough yielded margin and enough yielded value to offset the requirements
of the development of a platform. So there’s a value construct there that actually
might a lot will sense. The ability to track a diamond that might
start at a rough of 10 million dollars in a wholeness of stone through to a diamond
in the marketplace, where that’s still in the thousands or tens of thousands. It’s a very different economic proposition
to tracking it tomorrow. That might be worth less than a cent. So my question is now, who is still buying
diamonds? Because I’ve heard some media reports, you
know, like, millennials don’t want to buy diamonds for engaged married anymore or things
like that. So, who is the diamond market still aimed
at really? Well, I think it’s aimed at the same, you
know, the same set of people that it’s been aimed at, you know, generations ago. There are certainly life events that want
to be celebrated. Whether it’s a marriage or whether it’s the
birth of a child, these types of life events are often celebrated with diamonds or something
that’s precious and memorable. So, they, you know, these events are still
happening — people are still being getting married and people are still having babies. And so that’s certainly one part of the the
consumer market. Millennials are asking themselves a lot of
different questions. You know, they are involved heavily in conversational
commerce, so they are making certain aspirational choices. They’re really looking now around sustainability
and where do items come from. Hence, the reason why Everledger is providing
the service that it provides to the market. Certainly, we are seeing synthetic stones
being manufactured and, of course, there are other life events that might be as memorable
as a one time marriage or birth of a child. But there are still celebrations that are
happening in the space of a new job, you know, a career choice, a Ph.D. that’s being celebrated. And we see that, potentially, some of those
lesser — but just as equivalent — celebration topics that people could choose fashion-type
jewelry. And that’s really where synthetic stones sit. So, I don’t think it’s all or nothing, the
light switch isn’t going to be just turned on or turned off on one day. We still have healthy growth within the industry. Whilst natural mining of stones is retracting
back, certainly we still see that diamonds and luxury jewelry — I mean I’m just looking
at you, you have probably 15 pieces of jewelry on you today. And I would guess that every woman that walks
in the door has some form of luxury piece that’s important to them, that would have
an natural stone in it. That’s true, yeah. These are all from my grandparents. There you go. Exactly right. Yeah. No, It’s true. I guess my next question has to do with your
work as part of the Hyperledger community and working with IBM. So, how is Everledger part of that? How do you guys all work together? So Hyperledger, in the first instance, is
open source and we make contributions into that community. It’s a very important construct, the relationship
that we hold with IBM at an enterprise-partnership level serves two roles for us. The first role is clearly from a secured cloud
deployment environment, with the HSBN, I think they called it in the first instance — I
don’t know what they call it now, actually, Blockchain Cloud or something. So that’s one part — you know, the opportunity
for our customers, the big names within the industry, to choose whether they wanted to
host it within an IBM infrastructure or an AWS infrastructure sits well within the constructs
of what we do. And the second part is we work very deeply
with the R&D team and I’m appointed as a board advisor for the blockchain advisory group
for IBM. So helping to lead and understand from a perspective
of fabric, where that needs to grow, where the engineering could be placed to suit certain
market applications. But from a perspective of service offerings,
you know, we service the industry directly because we’ve all come from industry — we
know and understand the diamond industry and the jewelry industry intimately well from
a technology standpoint. So, what industry did you come from before
you were working Everledger? I’m a software engineer, so I’ve spent 25
years working in and around software. And, in fact, in the mid-90s, I worked in
RFID, which is radio frequency identification — so at the silicon chip and inline level
— so, I understand the constructs of that technology and did a fair bit of work on scatter
devices, which is remote connections on machines. I’ve had a couple of companies and been okay
— I’ve never had to ask dad for money, so I’ve sold them at the right price. But, you know, for me, I invested some money
in a jewelry business and that gave me some intimate learning of industry, generally,
more than just the experience of a consumer to buy a diamond. So, it’s the combination of all of that together
and I think I’m old enough to be a mom. So, when you have world experience, you get
to understand that when technologies come together like this, it’s not necessarily just
about the technology and how cool it is, it’s about addressing a particular topic set of
challenges within the industry. And that’s exactly what we probably did different
very early in the stage than maybe in a couple of others in the industry. So, we knew exactly what problems were to
be solved, the challenges in the economic pain points and then the economic benefit
to applying it. And then the rest is sort of history. You know, you see where we are now in the
market and we have seven locations, we service the largest names within industry and we’ve
extended well beyond diamond — so colored gemstones, emeralds, rubies sapphires, tanzanites
are important to us. We look deeply at wine and wine authentication. So, how can we apply all of the geniuses that
we’ve built in terms of our engines with machine vision, how can we apply it in wine. And, you know, last week we were awarded 2018
Tech Pioneer for the World Economic Forum, particularly around the work that we’re doing
in sustainability. So, not just about tip the grower for the
coffee that we’ve drunk but, you know, more deep constructs on how do we enable actual
artisanal, small-scale mining communities? How can we enable that so that marketplaces
can be built with fair pricing? And that’s really the big work that you’ll
start to see start seeing coming out of Everledger in the next, sort of, 12 months to two years. I was going to ask, are there any new asset
classes you wanted to add? I mean the wine I hadn’t heard. That’s interesting. How did you guys come up with? How do you track the wine? So, when we were first tapped on the shoulder
with a wine expert — her name is Maureen Downey, she’s the Sherlock Holmes of wine,
heavily involved in the U.S. with the FBI and which, you know, parts of investigation
led to the conviction of Rudy Kurniawan, which was about a $200 million fraud. You know, there certain types of knowledge
when you were a wine expert, like Maureen is, that you can gain from just being within
the industry for 30 years. So, most of these experts within industry
have sat within industry for 30 or 40 years. But the reality is there’s no underlying system
or construct to capture know each of those methodologies or systems or inside. And that’s a part of the work that we’ve been
doing from a technical standpoint. So, we were just asked to have a look at and
we said, “Sure, that makes sense.” But, for us, we’re really interested in physical
assets — how can we digitize those at a material science level, and some objects won’t
be able to easily or affordably — and then we’re interested in rising asset classes. So, I guess when you look at our portfolio
— diamonds, jewelry, watches, wine, collected automotive cars, maybe even helicopters — I
guess it’s motivated by me, the things I like to eat, to drink, to fly, to wear — handbags
— you know, selfishly, why not be motivated by that? What about, like, nice cheeses. Is that something that you could track? Well I don’t know actually. We haven’t looked into food. For us, I think it’s around a rising asset
class, it’s items that we also believe that might want to have fractional ownership. We’re interested in futures. So diamonds, you know, there’s no financial
products on diamonds, at the moment, there’s no ETFs, yet, no futures market. But you could imagine that that would be the
next sensible step for the industry to walk towards. But it can’t enable that unless there’s
pricing and transparency. And so, you know, when you think about the
positioning that we hold today, we could become just an important, one part of an ingredient
towards that new economic modeling for diamonds. And speaking of fractional ownership, I read
a few weeks ago that an Andy Warhol painting in the U.K. was sold on the blockchain for
fractional ownership. So, people actually own parts of the painting
now. Which, what do you think about that? Does that make any sense? Do you think anyone wants to own, you know,
like this pixel of a painting? If you can think of it like that. I don’t think that they would explicitly own
the pixel of a painting. So, it sounds like saying I have a fractional
ownership of a property, it’s unlikely that the positioning of that ownership would — unless
it’s under strata title environment — that it would own this window or this door within
the house. So, I don’t think that that is the construct
that was being built out. We’ve certainly seen fractional ownership
with diamonds. You know, one of our very first customers
was the Singapore Diamond Investment Exchange, which has looked at how do we take diamonds,
put them in a fungible sort of form and then how can we enable the ownership of those? So, three carats could be made up of three
stones, or you could have a three carat diamond being owned by three different people. And I think this type of fractional ownership
is likely to occur across many different asset classes. The trick is going to be how can you ensure
that the economic value of that investment is yielded correctly out over time. And that’s, you know, that’s difficult to
know how you price a market — how do you provide for indexing around those types of
asset classes, because they haven’t been seen as a traditional asset class with fractional
ownership. So, until we get the contract where banks,
insurers recognize that these are potential — or asset managers can start to recognize
these as investable vehicles, then I think it’s likely to be potentially too early in
the stage to have far reach. My next question is like, if you could explain
simply to our viewers how you track a diamond from the mine to the store on the blockchain. Like, how to visualize that? Sure. So, diamonds, you know, to understand the
process is actually a highly complicated supply chain, but it’s also relatively consolidated
geographically and within each part of the process. So, diamonds mined within a number of countries
in the world and those countries probably end up on two hands and there are sort of
10 to 12 major mining companies globally. Diamonds will be extracted out of the ground,
it will go through a certain set of washing, bay processes and sorting. And there is machinery that actually exists
inside of mines and so you can capture, you know, the the diamonds in parcels. Those diamonds already — if they are part
of the Kimberley Process — are already packed within tamper-proof containers. And so, those tamper-proof containers are
recorded on a batch and the stones are recorded within those parcels. The diamonds, as they cross borders, are then
attracted with a certificate called a Kimberley certificate, which is also recorded as a part
of the chain as well as the invoice, so for the commercial construct of the pricing. And then diamonds will end up in a place called
Surat, where they are cut and polished. And those parcels are then opened under the
camera. And so, the parcel and the under-camera opening
is then matched back to source — again with the matching of the appropriate trade documents. Then a diamond will actually go through to
the next stage, which is where it’s cut and polished. And typically, they’re actually polished within
sight of one control mechanism in a factory that also have connected devices. So, we’re a quite IoT-enablement company,
where we connect not only the opinion of experts, but actual machines across the network. And these machines scan, they use a whole
bunch of different technologies — whether it be high-definition, spectrography, resonant
ultrasound, light refraction — there’s a number of different methods and each of those
methods captured. So, think of it like how I would be able to
know you as an identity. I know your name today, I know your height,
your weight. With a photograph, I now know facial recognition
about you. But I don’t know medically how you are made
up. So, you would need to have a blood test for
me to know your DNA. I take a piece of your hair and I test that
as well. Maybe your teeth records also give me some
indication. So, it’s all this forensic layer that we get
involved with, and the forensic layer is already captured within the industry within laboratories,
particularly if they’re certified diamonds. So, we have capture points there. We underpin part of the work in digital certification
with the GIA — the Gemological Institute of America. To understand where this sits, they grade
80 percent of the entire world’s diamonds — are graded by them in their laboratories
around the world. And so, that’s another very large, trusted
capture point. And then diamonds will eventuate out into
the retail network and then the retailers will again check the diamonds through machines
that are connected and then sold to a consumer. And so the entire story is captured and told,
then, to the consumer. So, there’s really no room for fraud in everything
you’ve just told me. There’s always room for fraud. Of course there is. How would that look? Well, I mean, you can see diamonds literally
go off stream. So, not all diamonds are going to be captured
on a blockchain. There’ll be some diamonds that might start
on the blockchain and then, all of a sudden, they do not eventuate into the retail network. S, the history will not be persuasive. I mean, you think about we’ve seen this type
of registry already enabled anyway in the capturing of information around second hand
cars. So, if I go to sell my second hand car and
I don’t have a, you know, a Kelley Blue Book record in the U.S. or Carfax — or, in Australia,
there’s another name for it — then, penultimately, the value of that second hand car is then
in question, right? The provenance is not there . So, we will see the same thing happen in other
types of assets. So, there’s always ways to defraud systems,
and there’s always ways to subvert certain constructs. But there’s a value reason why people would
be deterred away from doing that. There’s always going to be black markets,
and there’s always going to be fraud, and there’s always going to be crime, and there’s
always going to be anti-money laundering. It’s up to the governance controls to help
to reduce that, not eliminate it. Got it. And then last question, which is off topic
from what you’re doing with blockchain, but I’m just curious because blockchain and cryptocurrencies
are so connected. What do you think about Bitcoin? Do you invest in Bitcoin? Do you think that it’s something that’s also
going to be used in the future, like blockchain is becoming more prevalent now? I mean, I was fortunate enough in 2010 to
buy Bitcoin and so that was — believe me — it wasn’t an educated decision, it was
just one that I, kind of, felt like a derisk at the time, so why not buy some? And so, yes. I mean, I certainly believe that, you know,
in a cryptocurrency sense that Bitcoin, of course, is the grandfather of the industry
and has been there since day one. And at it’s at its inception, I think that
it has survival and longevity beyond just today’s current competition that may be staying
between Ethereum and Bitcoin. Where the entire future goes for that is not
really for me to say. We don’t, you know, we do not see ourselves
as a crypto company — and, to be honest with you, we don’t even see ourselves as a
blockchain company. We’re building a platform of provenance to
help with transparency, and conflict, and opaque markets. And we want to build an ethical trade platform. So, whether we start to see diamond-backed
cryptocurrencies come into the spice, which is, I think — we have seen a few. At the end of the day, we still need to have
a good anchor between the crypto and the real world. And that’s where we sit and we will probably
forever sit. I think it’s an exciting space to be in. We just chose to pick the boring end of the
exciting space. So you mentioned also Ethereum and we’re at
the Ethereum meetup today. Do you have any — I mean, you said Bitcoin
is the grandfather — what about all those other altcoins like Ethereum out there? Yeah, I mean, I certainly didn’t make the
comment about Bitcoin being the grandfather to the exclusion of everybody else. But, you know, undeniably Bitcoin was the
first white paper with peer-to-peer that came out. So, we always must recognize where, you know,
where this came from. I think it’s important. And Ethereum is a very powerful, powerful
network that’s being built with some incredibly talented engineers. I don’t believe it’s only a two horse or a
three horse race. And we will start to see, you know, we’ll
start to see some changes happen within the next couple of years, I think, in the crypto
world, as each of the economics — the macro economics — of cryptos start to become more
scrutinized and looked at globally. Whether that be from backing investors, whether
that be from a regulatory standpoint, this is really going to not necessarily make or
break industry, but it will start to define where it can live amongst the real world. So, we have a real world that we live in here. We’re still breathing oxygen and we have an
amazing view across the lake and crypto needs to find its place between digital and physical. And that’s really where we’ll start to see
it play out in the next few years. Alright. Thank you. That was my last question. No problems? Alright. I hope that was helpful. Yeah. No, that was great. You probably got lots of post-edits that you
can do on that.

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