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Changing preconceptions in the diamond and financial markets

13 august 2018

‘People have a tendency to stick with their perception of reality, even when conditions have changed. This is because familiarity provides them with a sense of stability, which may not be justified. Resistance to accepting change can be risky’: Eli Avidar, President, Carats.io. 

eli_avidar_xx.jpgEli Avidar is a man on the move…literally. In April, the former Israeli diplomat stepped away from the CEO’s office at the Israel Diamond Exchange, a position he had held for more than two years, and from the Israel Diamond Institute, where he had been CEO for more than a decade. Two months later he was named President of Carats.io, a Fintech startup that has created the worlds’ first digital currency wholly backed by gem-quality diamonds.

As Israel Diamond Exchange CEO, Avidar was closely involved in the establishment of Carats.io, which until June had formally been associated with the bourse.

Here Eli Avidar speaks with Rough & Polished about the recent developments.

Some excerpts:

Eli, congratulations on your new appointment. Tell us how the idea for Carats.io came to be? And, what was that crucial information that really convinced you?

Many thanks.

About a year and a half ago, a young man asked for a meeting with me in my capacity as CEO of the Israel Diamond Exchange. He told me that he had developed a concept for creating a financial market for diamonds, in the same way that financial markets exist for gold, silver and other precious commodities. My initial take was that it was another good idea that was not really connected to reality. But then he added a detail that really caught my attention. He said that his group had developed a sophisticated algorithm that can accurately price diamonds in real time.

This convinced me enough to invite two bourse members to join the meeting. They heard what the young guy had to say and were persuaded that he knew what he was talking about. They weren’t sure that such an algorithm could work with 100% accuracy because they said there is no such thing as absolute precision in diamond pricing. He told me that he would send through a business plan, and I said there was no need because we could write one together. I also suggested that he set up a company and find initial investors so that the bourse could create a contractual relationship with him.

Why is such an algorithm so important? What about the Rapaport price list?

There is no replacement for the Rapaport price list. What Martin Rapaport managed to do was and remains an act of genius. He turned his price list into a primary sales and marketing tool for diamond wholesalers.

However, the algorithm becomes essential the moment you wish to establish a financial market, which requires the creation of a single index, in a manner that is transparent and void of any suggestion of human intervention.

This is not a simple task, and certainly not with diamonds. Remember, no two natural stones are the same, and that makes the diamond different from other commodities that have become financial markets. Crude oil, for instance, has only six different varieties and there is a single standard unit of gold, silver and other traded precious metals.

The difficulty that exists in unitizing diamonds is the reason that, historically, people have struggled to establish them as a tradeable commodity. The algorithm cracked that problem, and thus could be considered a real breakthrough.

What role does the index play in the Carats.io concept?

Carats.io issues a digital currency called the CARAT coin, which is fully backed by real diamonds and its value set by trading activity in the international diamond market. The number of CARAT coins that can be issued is theoretically infinite, although Carats.io must be holding an equivalent value in diamonds in its vaults.

Therefore, unlike other cryptocurrencies like Bitcoin, the value per CARAT coin is not governed directly by the forces of supply and demand for the token itself, but rather by the market forces that govern diamond prices. Consequently, it is extremely unlikely to see the types of fluctuation, sometimes of tens and hundreds of per cent, both up and down, which is common in those markets.

In short, the CARAT coin is a non-volatile financial asset, whose value is linked to our DFX index. The index is generated on a continual basis by our algorithm, fed by massive volumes of real data from the diamond markets.

Why do you believe the CARAT coin will be perceived differently from other cryptocurrencies, which often are considered as types of financial pyramids?

Precisely because it is stable. In fact, of all digital currencies there are today — and there are at least 1,600 being traded in the market – only a handful are backed by anything of tangible value. For most, their values at any point in time are set purely by a relationship of supply and demand for a specific coin in the marketplace. Most have a finite number of coins that have been issued, meaning they can skyrocket in value if demand suddenly spikes, but then fall just as quickly if investors are rushing to get rid of them. 

We are upfront about what we are offering. For speculative investors looking to make a quick buck and ready to assume often a considerable risk, we say that we are not the right address. We are geared to those investors who are looking for stability. There is a number of backed cryptocurrencies, some linked to the U.S. dollar and others to gold, silver or some other tradeable commodity. These are redeemable assets that investors can use to park capital for short periods of time, while they wait for an opportunity to deploy them, or for longer periods when the primary objective is wealth preservation. They are also assets that can be used to obtain lines of credit, which is the direction where we took the CARAT coin in our recent agreement with Celsius.

We saw the announcement about you signing a MoU with Celsius. Can you elaborate on what it will involve?

Celsius has created an online crypto-wallet that, in essence, is a fully functional banking platform for digital currencies, of which today there is more than $1 trillion worth in the global market. A holder of digital currency can already deposit funds in his her Celsius crypto-wallet and earn interest on them.

More importantly, a person with a Celsius crypto-wallet can use the digital currency as collateral for a loan in U.S. dollars or euro. If a volatile digital currency is used, Celsius will require collateral worth two or three times the amount that it would require to secure the same loan with diamond-backed CARAT coins, which are inherently non-volatile.

Do you see the potential for such financing alternatives in the diamond sector? Also, do you believe the diamond sector is ready for the change?

We see massive potential, which we intend leveraging. Indeed, a great portion of our work in this area has been carried out with the intention of providing solutions to the diamond sector, which in recent years has seen a very significant erosion of its access to traditional bank credit. We believe that we can bring about real change.

About whether the diamond sector is ready… the truth is that only time will tell. But as the trend of fewer lines of bank credit being made available to an ever-contracting number of diamond companies now enters its tenth year, what is becoming clearer is that the option of sticking to an old business model is no longer really viable.

People have a tendency to stick with their perception of reality, even when conditions have changed. This is because familiarity provides them with a sense of stability, which may not be justified. Resistance to accepting change can be risky.

We need to consider that what we have always believed to be true is no longer the case, especially when our industry continues to decline. We have to be open to new ideas.

Your agreement with the Israel Diamond was terminated several months ago. There was something that I did not understand in the bourse’s announcement at the time. It said it had set up its arrangement with Carats.io despite the fact that there was no legislation in Israel governing the trade in digital currencies. But, according to the announcement, it was the lack of such legislation which was one of the reasons for it withdrawing. Can you explain?

Well, the Israel Diamond Exchange announced that it was terminating its agreement with Carats.io because the Israeli Controller of Diamonds had denied our application for a diamond trader’s license. The Controller had said that we did not meet the criterion of three years’ experience of working in the industry, and added that the legal framework for the field in which we are involved has still not been clarified in Israel.

There are several points I would like to make. It’s no secret that we did not have three years’ worth of experience since the company had only been set up one year earlier. Despite this, we had felt it was worth a shot applying for the license since it would allow us to buy the diamonds we needed to back up our CARAT coin by ourselves, rather than having to rely on the services of other Israeli diamond traders or foreign companies. But already when we first made the application, the Controller had said he was unlikely to overlook the three-year requirement, and as things turned out he did not change his mind. His decision never caught us by surprise.

But Carats.io never actually needed an Israeli diamond trader’s license because it is a UK-registered company. The idea behind the agreement with the Israel Diamond Exchange was that we would exclusively buy the diamonds we required at the bourse to support the market in Ramat Gan. Now, we are no longer bound by that restriction.

I bear no grudge. The Israeli Diamond Exchange is made up of good people, many of whom are personal friends. I care about them and wish them the very best of luck for the future.

This means that the company has now left the Israel Diamond Exchange? So, you can now operate as free agents? And, what makes you optimistic about the future of Carats.io?

Yes, it has, and this actually eases a good number of restrictions that we had to deal with, in addition to the exclusivity arrangement I just mentioned. Our agreement had also dictated that we first would only look for investors from among the Israel Diamond Exchange members, before turning to the much larger pool of investors in the international cryptocurrency sector. That constraint no longer exists.

Yes, absolutely… there is a big world out there, with other diamond centres and investors keen to get in on this growing financial sector. And, as I am sure you realize, it’s also possible today to buy diamonds online, without even having to enter a diamond exchange. Not only that, you can buy from places where the going price is often lower than it is in the secondary markets.

It’s our company’s primary asset that makes me most optimistic, and that’s our human capital. I am talking about a group of people including the founders and workers where the common denominator can be summed up in one word and that is “brilliance.” They traverse a variety of disciplines, including data analysis, big data, artificial intelligence, financial modelling and also the diamond business. They radiate enthusiasm, and it is infectious.

Not a single day goes by without at least one of our team coming up with a new and exciting idea, and each time it’s like injecting adrenalin directly into our veins. This is what provides me with the confidence that we have the ability to change preconceptions in both the diamond and financial markets, providing opportunities in both worlds. Most importantly, there is a principle that I have always cited to all those who have worked with me and that is that something will succeed if you make it succeed.

Aruna Gaitonde, Editor in Chief of the Asian Bureau, Rough & Polished