Can Natural Resources and Digital Currency

Can Natural Resources and Digital Currency

Several days ago, Kommersant reported that ALROSA, Russia’s main diamond producer, and a Singapore investment fund called Diamundi Pte Ltd will launch an initial coin offering backed by Russian diamonds. The D1 Coin will be implemented on the Ethereum platform, and is slated for launch some time in 2018 with the target size of one billion U.S. dollars.

This is not the first time a valuable natural resource will serve as the basis for a digital currency. You can already invest in Sparkle Coin, an initial currency offering backed by African diamonds. Attempts have been made to launch a digital currency backed by gold and by oil. A project is underway to bring freshwater from Lake Baikal to India, and so forth

Such “resource digitization” is not limited to minerals and metals. For those who prefer organic substances, Banana Coin is available, with its price linked to the price of 1 kilogram of bananas on the international market.
But these are exceptions. The vast majority of ICOs to date have no link to any type of natural resource.
Why is that?

 Would you buy a cryptocurrency backed by gold?

It has been noted that the initial success of Bitcoin occurred because of its similarity with gold: both substances are in limited supply, both require “mining,” and both can be easily transferred from buyer to seller.

But such similarity is fairly superficial. Gold and bitcoin are much more different than they are similar. The biggest distinction is that, unlike bitcoin, gold is “real.” The precious metal possesses certain physical properties that are permanent and cannot be changed by humans. The amount of gold in nature is fixed, and there is no such thing as philosopher’s stone that could turn another metal into gold.

Bitcoin, on the other hand, is a human creation. It is true that the maximum number of bitcoin is limited to 21 million. But this fact is based on the property of SHA, secure hash algorithm function developed by the United States National Security Agency. The laws of mathematics that underline cryptography are universal, but the design of the bitcoin algorithm is not. If the human race disappears tomorrow, bitcoin will disappear with it. Gold, on the other hand, will not. The same goes for other natural elements, including diamonds.
This raises a logical question: why not use all valuable natural resources as a basis for digital currency? After all, this would easily solve the problem of unlimited supply and proof of stake.

But this is what humanity has been doing for the past several thousand years. Gold has served as a measure of value and as a means to store wealth since ancient times.

If fact, gold is a good example of why a cryptocurrency based on a natural resource can be problematic. The reason is simple: why buy a gold-based ICO if you can simply buy gold?

A few decades ago, one could argue that buying physical gold is cumbersome. But today, any investor can by an exchange traded fund backed by gold with limited transaction costs.

Another possible argument for a gold-based ICO is that the blockchain technology would enable buyers to track gold provenance. But this system already exists.

Tradable gold ingots are numbered and stored in institutions called gold banks, who only accept gold ingots produced by refineries approved by the London Bullion Market Association. This protection is so strong that, for example, the government of South Sudan has been not been able to sell large quantities of gold it possesses because of the Sudanese gold lacks the LBMA seal of approval.

How the convergence can work

Gold is a bad candidate for an ICO, but there certain situation when marrying the blockchain technology with a natural resources makes sense: when (a) the supply chain is opaque, and (b) when the provenance of the natural substance matters.

One example of such situation is blood diamonds. Other examples include, according to the report produced by World Economic Forum , land in countries with weak property laws, human trafficking, music and other industries where copyright matters.

In light of the above, does the ALROSA D1 Coin offering make sense?

So far, it is unclear.

Simply using diamonds as the basis for another cryptocurrency, in the long term, is not enough. There has to be some additional regulatory or business rationale for the project.

Perhaps, ALROSA is planning to use the newly created crypto currency as a competitive tool. Today, the diamond business is still dominated by De Beers, and the most of the diamond production takes place in Rotterdam and New York.

But the fastest growing market for diamonds is China, which is in ALROSA’s backyard. So, perhaps the Russian diamond producer is using the cryptocurrency craze as a means of reshaping the global diamond trade away from the traditional markets.

With or without cryptocurrency, such a move would make a lot of sense.