NFTs can help solve diamond certification fraud

Diamonds may be a girl’s best friend, but unfortunately, the billion-dollar diamond industry is riddled with scandal and fraud. There have been a number of cases where lab-grown diamonds have been graded as natural diamonds. An example of this was seen last year when the International Gemological Institute analyzed and graded a 6.18 carat lab-grown diamond, which was previously claimed to be a natural diamond in the Gemological Institute of America (GIA) report.

It was also reported in 2005 that the Gemological Institute of America – which is one of the most trusted sources for evaluating the quality of gemstones – accepted bribes to upgrade its GIA reports. According to sources, a lawsuit was filed against the GIA in 2005 over payments being accepted to “upgrade” the quality of diamonds submitted for grading.

In addition, consumers may resubmit a diamond for examination by the GIA for any reason. This is known as a follow-up service. As a result, diamonds can be linked to multiple grading reports. This can be problematic for consumers as they may not receive original diamond certificates upon purchase.

NFTs as a single source of truth

Unfortunately, diamond certificate fraud is becoming more and more common. Regions such as India have even developed new frameworks to combat fraudulent activities, as seen in the Diamond Charter drafted last year. Although innovative, industry experts have also begun to look towards blockchain technology to help solve this growing problem.

In particular, non-fungible tokens (NFTs) can serve as a solution when it comes to preventing diamond certification fraud. Mike Moldawsky, founder and creator of Diamond Dawn, told Cointelegraph that diamond certification reports should be placed on a public blockchain network to ensure that documents cannot be manipulated. “Having a diamond certificate as an NFT on the Ethereum blockchain can ensure immutability, proof of ownership and visibility for both merchants and consumers,” he said.

To demonstrate this, Moldawsky explained that Diamond Dawn is a high-level NFT art project that will place 333 GIA-certified diamonds on the Ethereum blockchain as ERC-721 tokens. Privately invited participants will then be able to purchase these diamonds as NFTs. According to Moldawsky, participants will be able to purchase a limit of one diamond NFT, with weight varying between 0.4-0.8 carats, at the price of 4.44 Ether (ETH). Once an NFT is purchased, a smart contract will automatically send the diamond’s GIA certificate to the Ethereum blockchain, serving as proof of ownership and verification.

Given the rise of NFTs tied to physical counterparts, Moldawsky further noted that NFT holders will have the ability to create a tangible work of art containing a GIA-certified diamond via the Diamond Dawn website.

“NFT holders will start with a digital rough diamond and develop the NFT on the blockchain (on chain) with a process that exactly mimics the natural diamond process in real life. Ultimately, the collector must decide whether to keep the diamond digitally or burn it and transform it into its physical form,” he elaborated.

According to Moldawsky, such a process is also intended to raise awareness of the idea that digital NFTs may become scarcer over time and therefore more valuable. “As more collectors decide to claim the physical artwork and burn NFTs, this will reduce the overall NFT supply. As a result, digital NFTs will become more rare,” Moldawsky explained.

He added that all the digital diamond artworks are created by artist David Ariew, who recently sold his first artwork at Sotheby’s Contemporary Art Evening for $224,000, alongside well-known artists such as Banksy and Basquiat.

My collaborative piece with Jia Aili, “The Road Ahead,” just sold for $224,000 in @Sotheby’s Modern Evening Auction! I am at a loss for words. Thank you very much @trippel_x_interspace and congratulations so much @raoulmarks also! You guys are incredible!! pic.twitter.com/oeff7zUuku

— David Ariew (@DavidAriew) 27 April 2022

In either case, Moldawsky explained that Diamond Dawn’s diamond certificates will remain on the Ethereum blockchain. “If a user chooses to create a physical diamond artwork, they will receive the paper GIA certificate in addition to the certification on the blockchain network. The goal of the project is to demonstrate proof of ownership, transparency and immutability of diamond certificates,” he noted.

Olivia Landau, a GIA-certified gemologist and co-founder of The Clear Cut — a digitally native diamond engagement ring and fine jewelry — told Cointelegraph that her firm is also using NFTs for diamond certification after launching an NFT platform on the Authentic blockchain network in January. She said:

“NFTs give couples purchasing an engagement ring the ability to have all of the diamond’s certificates, insurances, photos and even the proposal history stored safely on the blockchain for years to come, eliminating the worry of hanging onto hard-to-replace hard copies.”

Landau added that the purpose behind the NFTs offered by The Clear Cut is to digitize and authenticate a diamond’s GIA report and insurance documents. “The Clear Cuts NFTs are not intended to be resold on secondary marketplaces,” she said.

According to Landau, clients who purchase a diamond ring from The Clear Cut will have the option to purchase an equivalent NFT for an additional $500, to be paid in fiat instead of crypto. She noted that existing customers will also have this option.

“In the beta testing phase, over 90% of customers expressed their initial interest in this new NFT feature. Customers will receive a hard copy of their GIA certificate and a copy of it will be stored digitally, ensuring lifetime value,” she said .

Will NFTs replace traditional diamond certificates?

NFTs such as digital diamond certificates may be innovative, but it remains questionable whether this concept resonates with the mainstream.

For example, Moldawsky pointed out that he believes more education around blockchain is necessary for traditional organizations to understand the potential behind NFTs. “We need to ask the GIA why they haven’t gone digital yet. Once that conversation is initiated, we can explain why blockchain technology is transformative,” he said.

While this may be, it is notable that GIA is open to digital transformation. Stephen Morisseau, director of communications for the GIA, told Cointelegraph that early next year, the GIA will begin transferring all of its gemological laboratory reports to digital forms. “This should be completed by 2025,” he said. Morisseau added that all of GIA’s printed reports have several security features, noting that the information on any report can be verified using the secure online GIA Report Check service.

Adoption of NFTs within the diamond industry may also gain traction as mainstream retailers begin to implement the technology. For example, De Beers currently uses the Tracr blockchain to track the origin of its diamonds.

Jason McIntosh, product manager for Tracr, told Cointelegraph that NFTs are likely to be part of the platform’s solution in the future. “Diamonds on the Tracr platform are ‘NFT-ready’ in the sense that the Tracr diamond record can be easily incorporated into an NFT wrapper,” he said.

Given this level of innovation, Landau believes that in the future all diamonds will be authenticated via a blockchain network. However, she pointed out the importance of ensuring that consumers do not have to worry about the technical aspects behind NFTs:

“Customers don’t need to have any crypto or blockchain experience to access our NFTs. Everything is handled for them seamlessly. I think this will drive mainstream adoption.”