Bitcoins: Blockchain looks to block blood diamonds

Leonardo DiCaprio in the Hollywood blockbuster Blood Diamond.
Leonardo DiCaprio in the Hollywood blockbuster Blood Diamond.
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What do diamonds and bitcoin have in common?

On the face of it, not a lot.

Diamonds have been revered as a gemstone for thousands of years, while cryptocurrency Bitcoin has yet to significantly be recognised outside the digital world since its launch in 2009.

Only a select number of forward-thinking establishments - mostly in and around London’s Silicon Roundabout - would let you open your Bitcoin wallet in exchange for a coffee.

But beneath this controversial digital currency is a technology that could, among other things, help halt the illicit trade of blood diamonds from some of the world’s most brutal conflict zones.

Blockchain is open-source software that acts as a ledger for Bitcoin transactions. Free to download and use, it is a secure, multi-user record of what is going where.

Dr Garrick Hileman, economic historian at London School of Economics (LSE), said blockchain is the “rails” on which Bitcoin travels, as well as serving as a “gigantic information management system”.

He said: “In traditional finance, we have the pound in note form but also in digital form for currency, then we have networks like Visa, Mastercard, Faster Payments - the rails on which cash and currency flow. Bitcoin is unique in bringing those two things together.”

Blockchain is increasingly it is being seen as having far wider - and potentially most important - applications than shifting digital money.

Despite protocols and export bans, blood diamonds - gems extracted in places of conflict and traded to finance insurgency activities - are still estimated to account for four per cent of the global diamond trade.

Iain Clacher, professor of accounting and finance at Leeds University Business School (LUBS), said the blockchain is now being proposed as a means to track and trace diamonds, enabling buyers to confirm their origins.

He said: “If you’re buying diamonds from anywhere via a blockchain, you know you’re not going to be buying blood diamonds.

“You’re going to have a digital signature that traces it all the way through that can’t be tampered with, which will then allow you to clamp down on the horrific trade.”

Recording diamonds in this way is just one of the uses blockchain could have, which is wholly separate from finance.

Recently, Honduras announced a partnership with blockchain platform Factom to transferred its land registry to the software.

Dr Hileman said: “Records to real estate deeds often exist in offices in paper form, it’s very difficult to access, very difficult to identify who owns what.

“It’s not unheard of for these records to be tampered with in other parts of the world. The other nice thing about a blockchain is it’s out there, it’s been verified, it’s very difficult to manipulate the record and it can be accessed by anyone with an internet connection.”

Back in the world of finance, Bitcoin and blockchain are unlikely to be widely adopted due to the currency’s decentralised nature - no Government or institution stands behind Bitcoin to honour its value - and its link to illegal transactions on the so-called ‘dark web’, such as dealing in guns, Mr Clacher said.

While blockchain is unlikely to become an important part of consumer finance, it has the potential to transform financial institutions, Dr Hileman said.

“You don’t have to go out and convince millions of consumers to change behaviour,” he said.

“You can go to a manager in the back office of a bank, who is under pressure to cut costs anyway, and say, ‘why don’t you take this paper-based process that takes 30 days to finish, move the security settlement process onto a blockchain, and it takes 10 minutes to an hour.’”

While Dr Hileman noted that blockchain is not the only way to automate contract exchanges, it has caught the attention of more than a dozen of the world’s leading investment banks.

As the technology remains relatively new, it could be another five to 10 years before the true potential of blockchain is realised, Mr Clacher added.

But in future, it may be thanks to Bitcoin that you know the next diamond ring you buy is not from a war zone.

Last month, 13 banks, including HSBC and Deutsche Bank, joined a consortium led by financial tech firm R3 that is working on a framework for using blockchain technology in markets.

One of the issues it is likely to look at is the transparency and security of the existing blockchain.

A selling point of blockchain - it is not controlled by one single organisation - is also one of its weaknesses as far as banks are concerned, Dr Hileman said.

Because there is a “mystery” around Bitcoin and its associated blockchain, banks may choose to develop their own, private blockchains, potentially losing some of the advantages of the technology in the process, he added.