Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Leanne Kemp: Everledger – Detecting Diamond Fraud and Theft

Episode Date: November 7, 2016

As is the case with most luxury goods, the diamond industry is faced with the issues of theft, fraud, and counterfeiting. Illegal activity is present at every level of the supply chain, which collectively costs the industry and its insurers hundreds of millions of dollars each year. In recent years, international treaties and regulation have been put in place in an attempt to combat illegal activity, but criminals are most often a step ahead. Leanne Kemp, CEO of Everledger, joins us to explain how her company is using advanced geological techniques, and blockchains, to bring more traceability to the diamond industry. Everledger, whose clients include many of the largest insurance companies, builds software which allows for a diamond’s unique characteristics to be hashed and notarized in the blockchain. Hence, a stone’s provenance, and the trail of ownership can be traced, therefore limiting the opportunities for fraud and making it difficult for stolen diamonds to re-enter the market. Topics covered in this episode: Leanne’s background as a technologist A broad overview of the diamond industry A look at the diamond supply chain What roles banks and insurance companies play in the supply chain How diamonds are uniquely fingerprinted The Kimberly process and other regulations Everledger’s technology stack and business model Other sectors which can also benefit from increased traceability Episode links: Everledger Kimberley Process This episode is hosted by Meher Roy and Sébastien Couture. Show notes and listening options: epicenter.tv/156

Hey everyone. We're looking to hire a part-time communications manager to join the Epicenter team. You can get more information about that position at epicenter.tv slash apply. So if you're interested in learning more about that, if you think you have what it takes, go to that website and you'll find the job description and the instructions on how to apply for our communications manager position. Thanks. This is Epicenter. Episode 156 with guest Leanne Kemp. This episode of Epicenter is brought you by Jax. Jax is the user-friendly wallet that works across all your devices

and handles both Bitcoin and Ether. Go to J-A-A-WL-X.I-O and embrace the future of cryptocurrency wallets. Hi, welcome to Epicenter at the show which talks about the technologies, projects, and startup driving decentralization and the global blockchain revolution. My name is Sebastian Kuchio. And I'm Mayor Roy. So a lot of you must have heard that there's this, area of blockchain technology application, which is provenance and tracking things as they

move through the supply chain of a particular industry. Today our episode deals with provenance, and we are going to talk to Leanne Kim, who is the CEO of Everledgeer. She's building a startup around the provenance tracking of diamonds in the diamond market. So we're going to talk about the diamond industry, how her solution works, and what kind of benefits, very accurate provenance tracking can bring about. So before we start, let's say hi to Leanne. Lianne, can we have a bit about your background? How did you get interested in the blockchain space? Hi, everyone. Thanks for having me, firstly. How did I get interested in the blockchain space? I guess I've been 25 years in emerging technology, so I've always been interested in technology first and foremost. And blockchain

happens to be one of those emerging disciplines that started to rise its head into industry. quite some time ago. So it wasn't really about just saying here's blockchain or Bitcoin and this is of interest. I mean, I've always been fascinated with technology. So instead of playing Sudoku on the weekend, you know, I'm tapping away on my keyboard. And so what were you doing prior to to working at Everledgeur or having founded Everledgeer? Well, I guess I've only just learned that I'm a serial entrepreneur. I've always had my own businesses and that spanned, as I said, 25 years so you could probably guess my age now. You know, the company before I started Everledgeer, which we only began last year, was actually

in the jewelry and insurance space. And the company before that was in, you know, large demographic data in, you know, survey information. So we could start with talking about the diamond industry. So most of our listeners are generally interested. in blockchains and many of them might not have ever encountered diamond industry. Personally, I have very little experience of it. So we could start off with some questions about that industry itself. So can you tell us, like, as a broad overview, how the supply chain works, like, where are

diamonds produced, what happens in the middle from production and finally to the distribution to the end consumer? Give us a brief overview of the supply chain. So I guess most people really have an affinity with diamonds when it comes to a special life event. So whether that be a marriage or a proposal or even the birth of a child as a gift, the diamond industry, you know, it's about 130 years old. So it boasts some pretty impressive track history. And the industry is often thought of in two segments.

The first segment is the rough segment of diamonds, so where they are mined and as they come out of the ground in a crystalline form. And then it goes through one iterative manufacturing step, the diamond becomes cut and polished and ends up as a polished stone, which of course most of us would be associated with or if not wearing inside of a piece of jewelry. You know, the industry boasts some pretty impressive numbers. Rough diamonds come out of ground at around $15 billion annually. And by the time that one diamond in its form hits the cutting and polishing

sector of the supply chain, it transforms to about a $47 billion market. and after it's cut and by the time it hits the retail network not set in a ring, it's around $80 billion, about $75 billion. And that's an annual throughput. So, you know, there's some pretty interesting numbers involved. The size of the jewelry market itself at a retail level, that boasts around $300 billion. And that's set with inside of jewelry. So, of course, you're adding on, you know, components of gold and even other gemstones to

complement that value. So in this supply chain, are there any areas in the chain where monopolies are concentrated? Where is the competition? How do those dynamics work? So, I mean, monopolies, by its definition, is one player and our industry doesn't have just one player. You know, when you think about two things. Firstly, the volume of the world's diamonds are mostly mined in Africa, but we also are seeing predominant forcing of mining coming out of Russia and Canada,

and of course Australia for mostly the fancy cuts or the pinks themselves. You know, when we talk about monopolies, as I said, one player, but that's not necessarily the space, the dominance in our industry, of course, and substantially so, you know, De Beers was one of the first originators or the grandfather of the industry, and they still, of course, proudly support the backbone today. We see a dominant player in Russia being a co-owned state force called Alrosa, and then you have a number of other dominant mining companies,

Dominion, you know, out of Canada as another example. You know, in the middle part of the pipeline itself, these are where we cut and polish. Whilst we've had technology assist in that, it is largely still an art form. So we often see generations of family businesses that have been born into the industry and have a love or an association for the art form of cutting diamonds. And we often see these are generational families in areas such as Brussels and Antwerp

and India predominantly today is probably the largest demographic or geographical sort of presence of the cutting section. And then in America, New York, you know, we still have a luxury in New York, and there's no doubt about it. A lot of the, you know, major diamond wholesalers and retailers are really situated inside of New York as well, and that's not, you know, that's not dissipating backwards. But emerging countries are playing some significant roles. You know, Venezuela have a rich seam of Kimberlite, which is, of course, where diamonds

are formed out of the crust of the earth. and but you know more recently they have not been involved in the kimberley process so you know the trading of diamonds is somewhat you know challenged out of that country even though they hold a very rich scene of mother's earth assets so you would probably see that the dominant player is still africa botswana and of course they you know created debzwana which was the joint venture between uh botswana government and debiers so you mentioned the the kimberley process can you explain what that is? Yeah, sure. So, you know, the Kimberley process, it actually began in the year 2000 when the United Nations came together and decided to make a landmark decision that any

diamonds that were traded or had come from a conflict zone needed to be ceased. And so in 2003, they formed a three-step verification process. And around 80 countries around the globe came together. And this represented about 99% of all diamond trading countries. They came together to form the Kimberley process, which sometimes I joke about it is like a Boy Scout promise that the world came together and said no longer. No longer will we accept diamonds that haven't had any disclosure of origin. And these countries, or this consortium, you should probably say, has come together as both a government and an industry initiative. And there are frameworks that are in. in place to ensure certain protocols and standards are met when diamonds are exported from one

country and imported into another country. So it declares not only the country of origin of the goods, but also the HS codes, so the harmonised sequencing codes around the goods that are physically being traded. And this declaration, you know, over the process of seven years since it was created, was largely successful. You know, over 25% of the conflict stones were reduced. And today, less than 1% of diamonds traded across the globe are from conflict areas. So if there was to be a guiding light and an example of how pseudo government and industry could come together and how they could form a change step for the better in terms of ethical trade, that would be a guiding light. But in terms of technology, each of these officers are, you know, armed with no more than a fax machine and an embossing stamp.

largely the certifications are still based on paper-based processes. There are physical filing cabinets in some of these offices around the globe that hold the certifications. And what we've seen, albeit not a prolification of fraud, but we have seen instances of it where, you know, and more recently there was actually an example from Sierra Leone to Hong Kong where a document, a Kimberley certificate, was fraudulently connected to a set of parcel rough diamonds being traded.

And it was, you know, luckily the line of sight or the trained eye picked this up, but there was very little systems in place to enable the cross-checking, you know, of these certifications well beyond the border. So, I mean, border control steps in, but certainly well beyond the border, there's very little visibility around the provenance. So, I mean, I guess the fundamental problem of knowing where a diamond comes from, The way I tend to think of it is it should involve like two aspects of it, right? Can for example one aspect is can a diamond be uniquely identified while it's flowing through a supply chain?

Right like other like numbers to each diamond and then the second question would be How does the documentation for something like a Kimberley process work? How do I know that this particular diamond with this with these characteristics that I'm trying to buy is guaranteed not to originate from a conflict area. So as I spoke about the different elements of industry, they actually command different disciplines of detection and different disciplines of identification. And thankfully, the diamond industry has a relative controlled environment.

And there's already been layers of different types of technology that have been accepted by industry and machines that enable us to machine grade the kind. of certain diamonds or even be able to 3D extract the digital points of the diamond. So rough diamonds are typically traded in parcels of stones. And so it's more about tracking the container of those stones as they pass through the pipeline rather than the individual stones themselves. But once a diamond really goes through a cutting process, it then becomes individualized

and the second set of certification is applied, which is really at the point where diamonds attain their value and their digital points. So to be able to identify a polished stone, we were able to provide a digital incarnation of that stone like a thumbprint, but it doesn't just end at the thumbprint or the dimensions of the stone or the serial number that is engraved on the girdle or the crown of the stone. You need to be able to go a little bit further.

You need to be able to use high-definition photographs to be able to take the view from the table. top down of the stone. And so just like, you know, I liken the same evolution of the technology that the police have applied to identifying criminals to how we are evolving in terms of our identification of diamonds. So if you were to think about yourself as a criminal in the 80s, the likelihood is that you probably got away with your crime. The only real way that they were able to detect you was probably by your thumbprint. But as facial recognition has become a little bit more advanced and even DNA hair follicles or mouth swab testing has become more advanced.

So too are these similar disciplines being applied in our industry or even in other industries, for example, you know, coloured stones and even in fabrics in luxury goods. So the very first iteration of what we did was we took 40 metadata points of the diamond as well as the serial number that was engraved on the girdle of the stone and looked no different to what has happened or what's existing in the market now for motor vehicles. So if a motor vehicle is stolen, there is a license plate registry that you're able to check if a car was stolen or involved in a ride off accident or was a victim of theft or crime. And if you were to buy that secondhand car, you could see the history of that car. You could see even if they were well kept service records,

you could see this. But there's no such registry available in the diamond industry. So once we were able to establish the identity of the diamond and really start around the certification process both at rough and then again at polished, it gives us a really good baseline to be able to then grow those certification layers further into provenance or the chain of custody. So the rough diamonds are a little bit different. You know, rough diamonds themselves can't necessarily be easily or uniquely identified and the industry itself doesn't uniquely identify rough diamonds whilst it trades in parcels. It often looks at fungibility so a parcel of stone might sit in a certain type of colour grading. But it's a really important step to be able to master,

which is the work that we've been doing more recently in the last number of months. The first 12 months of our organisation was focused on polished stones. The last eight months of our organisation was focused in rough diamonds and the Kimberley certification. and now we're actually heavily focused on the change step when the rough diamond transforms into the polished stones. So I liken that to being a parentage. So just like I would give birth to my children, I have the ability at that point in time

to have a birth certificate of the children that have come from my DNA. And this is the work that we're doing right as we speak right now. This is our Christmas present to ourselves, to challenge ourselves on how we can provide that parentage tracking at the time the transformation happens from rough to polished. So prior to doing this episode, I was trying to look at what kinds of certifications are already there for diamonds. And I came across GIA certification and SGA certification,

and perhaps our listeners could just search GIA certificate and see how they look like. But like I could see that the diamond industry already has these certification mechanisms where each, the characteristics of each diamond, so probably the diamond can be physically sent to a certification agency and that agency would kind of write down all the characteristics of it and give it a unique number. Now, why doesn't this certification process itself have provenance data? Like, why hasn't this already happened?

You know, that's a good question. I'm not sure why there hasn't been a natural level. to this, but it's very clear that the industry at large is, you know, focused on chain of custody and certification today and the ability to extend it for provenance. You know, why hasn't it happened before today? I mean, it is a good question. I guess, you know, why didn't Facebook and why wasn't social media a platform before it started? I guess it's one of those moments that it's a natural evolution in technology and in an

understanding of ethical supply chain. You know, one thing that is happening in the diamond industry is the onset of synthetic stones. And, you know, synthetic stones were created by GE for most industrial purpose grades, so drill bits and saw blades and what have you. But in the last sort of number of years, we've really seen an onset of venture capital money and we've seen new disciplines or even the robust disciplines of high pressure and high temperature or CVD enabling us to make synthetic stones at gem quality. standards. And so more so than ever now, I think it's an important time to be able to ensure the

provenance of stones. You know, well beyond the work that was done in the year 2000 with the Kimberley process around ethical stance, I think it's ensuring that we have a real disclosure around where the stones have come from, but also that the stone is from a genuine source in terms of coming from a mine or a natural resource rather than being a synthetic nature. You know, I'm just glad that the technology is able to afford a platform to provide a solution to some of these problems or even to be able to quench the thirst that the industry has to providing provenance. Let's take a short break to talk about Jax. Jax is a multi-coin wallet created by the people at the Central. Now, in the past, if he had a whole bunch of cryptocurrencies, it was a pain to handle

them. You either had to leave them on an exchange, which was insecure, or you had to have all these different wallets, which was a hassle. Fortunately, now with Jacks, those medieval days of darkness, misery, and suffering are over. Jack supports multiple cryptocurrencies and new ones are being added. But it's not just storing cryptocurrencies you can do with Jacks, but you can also exchange them directly from within side the wallet, thanks to their shape shift integration. And since there's only one seed, Jax makes it super easy to back up and sync to the other devices. Jax works with Windows, MacOS, Linux, Android, iOS, and has browser extensions for Firefox and Chrome. So go to jacks.io, that's J-A-A-W-X.I-O, to download the wallet and get started today.

We'd like to thank Jax for the supportive Epicenter. You mentioned earlier a case where some certification documents, so Kimberly process certification documents had been forged in a trade. Is this something that happens a lot in the area? industry, the forging of certified documents when this process is meant to eliminate this kind of fraud? So the quick answer to that is no. I mean, there are participants that have been in industry and they're generational,

you know, the generational businesses or they're, of course, you know, heavily regulated internally with best practice. You know, so the industry participants that are well known in industry, most definitely not. In fact, the industry as a whole moves as a pretty big force to ensure that we stamp out fraud. But of course, there are, you know, anarchic forces that run on the outside streams that recognise that we're talking about diamonds. You know, diamonds is a vehicle of value. You know, it's often become a vehicle for anti-money laundering and terrorist-funded activities. And we see elements of those that aren't trusted within industry that are taking advantage, you know,

of the poor paper processes or the poor technology that's currently afforded to industry. But I wouldn't say that it is large. I wouldn't say that it is something that we see on a daily basis. But when it does occur, it is material because we are dealing with a high value item and we are dealing with an item that is small in size, easily obscured in terms of transport and can be traded across borders without identity. And so, you know, when you start thinking about what industry does with banks and insurance companies, they often look at KYC, so they know the customer, and whether that

cost to be a corporation or an insurance center could be me as a person, but they don't look at the object, the KYO, and this is really the layer that we've been bringing to the market. So, you know, it's the diamond that's the vehicle of the fraud or the diamond that's the vehicle of the anti-money laundering. And I'm just purely, if I thought about me, I've stolen a car as an example, you know, what they're doing is they're checking the fuel pump station. Just to be sure that when the car stops to check with fuel, they're not even checking the number plate of the car.

They're just checking that the person who was traded is actually got a legitimate source of money. But, you know, we're kind of missing that bit, the KYO, so the object level itself. That's really fascinating. I mean, I like that you talk about KYC because this is, I guess it's hard to see the similarities there, But KYC and the problems there are very similar to the problems that you're addressing with diamonds is how to prove the providence of identity documents, for instance, that allow for an individual to say, I am who I say I am.

And I think that a lot of those, a lot of the complexities of trying to prove that certain KYC, for instance, a lot of the complexities around that process are, are inherent to a system that is paper-based. And the entire KYC process is just verifying that all of these documents that I provide to my bank when I open a bank account or that I provide to my telco or whatever are actual documents and that the documents that I'm presenting are my identity documents. So in a sense, I'd like you to talk about how blockchains and specifically the technology it used,

you've developed addresses this by dematerializing the process. I'd like to extend that just by saying that I personally think that although blockchains have a number of great advantages, specifically in traceability and providence and et cetera, one of the things that often gets overlooked is the fact that by implementing a system like this that provides all of these properties to establish Providence and traceability, we're also onboarding dematerialization. So I think a lot of industries are going to onboard blockchains as a means to provide more transparency, et cetera. At the same time, they're dematerializing a lot of processes that are still based on paper.

Yeah, sure. I guess a couple of things. You know, one kind of comment around K.C and KYO, when you, you know, when you're embarking on an emerging technology like blockchain that's super nascent. that potentially is misunderstood. And as a startup, you have a certain runway or a certain time to market. I mean, I think it's important to understand the frictional points of being able to have industry adopt.

And, you know, that often runs through an education process. And then when you talk about a financial backbone, you know, as Bitcoin and blockchain was really first touted in terms of payment services, there's a whole overlay of regulation and even more dangerously, privacy. And so when we kind of face some of this, this, you know, diamonds as an object have no rights. You know, the diamond itself can't turn around and say, you have to protect my privacy because it's an object. So, you know, this has enabled us to be able to really hone in on, you know, the very material points and being able to say, what is the

problem that we're trying to address? And what is the most potent positioning or the potent elements of the technology that we can marry to provide a solution. And how do we provide that solution quick enough to come to market, be revenue positive as we are, and actually have real customers within the first year or a year and a half of trade? And that was really the kind of the secret to the success of Everledgeer in this very first instance. When we talk about sort of dematerializing supply chain or dematerializing, you know, industries themselves, I guess, you know, the diamond industry is super fascinating. When you think about the elements of the technology, you know, this is a network technology.

The real power of the technology really comes into play when consortiums are able to work together, particularly trusted node points. And when you think about the diamond industry, the very core of its trading hubs, whether that be the consortium of the Kimberley process, a lot of these disciplines that electronically are translated by the technology of blockchain and smart contracts and Bitcoin already reside in a people sense, in a people community sense, in a consortium sense, in a discipline sense. But it's just that we haven't necessarily had the technology to be able to lay into the industry as we are today.

But not only that, the financial services industry sees a promise of this technology, but it's hampered by regulations and it's hampered by all of the talk around privacy of data and rightfully so. But in our technology, in our industry, we're not unwinding 40 years of financial services legacy. You know, we are not having to go back and unwind the layer upon layer upon layer of technology that's been added to it. We can literally take the industry into the very best of tech today by purely making a change step out of paper. And so, you know, there is.

kind of no greater time to be able to work with such an industry that vows, you know, some pretty impressive numbers from 15 billion in rough trade to 80 billion in retail. That's 500% value that's stacked across the supply chain with one iterative manufacturing step. So there's one, you would find another supply chain like this when you really think about it. You know, textiles, it's got to come from all sorts of extraneous parts of the world, zippers and ties and you've got to go through about 50 different iterations to be able to make the jumper that you're wearing or the pair of jeans, you know, that that you're wearing on a daily basis.

But diamonds go through one iterative step. And so to be able to capture this in such a way, not only does it provide a good baseline for the diamond industry, but also it takes us into other, you know, luxury goods or other things that actually are of object of conflict trade. So that one iterative step is cutting and polishing, right? Am I getting that right? Yeah, correct. Yeah, that's really cool.

I love this concept that you came about, which is like K-Y-O, right? It's a knock-out punch. Yeah, it's a knock-out punch. That's such an amazing acronym. It's such an amazing acronym. I've never heard of it before. Really? Yeah.

I talk about it a lot in the insurance industry because, you know, the insurance industry is really being focused on KYC and look I'm the best example of a customer for them you know I'm an international traveler I have property in multiple countries I have an amazing diamond but I also know where to buy the best fake Rolex in the world but when they are covering my insurance policy I tick all the boxes but they don't actually get to the point where they ask me about all of my objects that I'm insuring you know they do after the events so after the crime has happened or after the loss or the theft and then I need to bring what my proof of ownership was and what my proof of purchase was. But it's too late.

So if we're able to bring this in such a way up front, the insurers have more of a peace of mind around what it is that they're insuring and more so than now than ever, particularly with synthetic stones or even counterfeit goods. You know, so it isn't important. I talk about it all the time in insurance. That's interesting because I've been starting to attend some insured. insurance conferences and the the hype around blockchains at insurance events is usually more related to claims processing or payments processing.

Or perhaps like event, like being able to track with an Oracle that you had certain meteorological events happen in one place or another. but this idea of KYO had never really occurred to me either, that they can insure an item based on its original provenance and know that the item that they're insuring is in fact, you know, an authentic diamond or whatever. Yeah, I mean, there's a whole transformation that could occur in the insurance industry with this technology in KYO.

And that is, you know, instead of ensuring me as the customer first and my objects, actually insuring the object for life. And so you then start to think about the Holy Grail of Insurance. And the Holy Grail of Insurance is multi-generational insurance. So the ability to know that within a family and its set of heirlooms, that that diamond is insured for generations upon generations is a really interesting concept. And, you know, the insurance industry is doing this in some respects with buildings. And so they're ensuring the building for the longevity of the building

and the provenance of the services works. But to bring it into high value net items is a real transformation step that's occurring now. Today's magic word is Diamond, D-I-A-M-O-N-D. Head over Let's TalkBitcoin.com to sign in, enter the magic word, and claim you're a part of the listener award. So, Leanne, in many of your talks that you gave publicly, you always have this concept that good provenance data will allow us to build more financial services

on top of whatever product we're dealing with. So with diamonds, if you have good provenance data, then you might be able to build, you know, ETFs for diamonds, etc. So before we go into themes like that, towards the end, can we have like just a brief overview of how kind of a diamond supply chain intersects,

intersects with banking and insurance. Like what are the kinds of products that banking and insurance sector deliver to the diamond supply chain or the people owning diamonds? Yeah, so I'll pick on two things. I guess the easy one for me to pick on is the fact that everyone's talking about blockchain and smart contracts playing a substantive role in supply chain finance. And let's take that as an example in the diamond industry. So, you know, the diamond industry in the middle part of the pipeline where we talk about

cutting and polishing, that boasts around $20 billion annually. And there are effectively two brave Western banks that support the space, one being ABN Amro and the other is Barclays. You know, and there are other banks around the world, whether that be Indus or, you know, Bank Loomie, Pingan in mainland China. But one of the issues in our industry is that for the very first time in around 130 years, you know, the industry is at the most of the most of the mercy of financial services. We saw about eight weeks ago, standard chartered, pulling out of our industry and leaving around $3 billion short, two billion shortfall, sorry, in supply chain finance. Most of the banks are currently recording plant and equipment security and just enabling them to be

able to finance the trade flow of invoicing. And we've recognized and have seen in our industry a number of issues that are causing some concern for financial institutions. You know, some of them will be that they're double financing the pipeline. There's been, you know, an article that came out in the economists not so long ago, and most of those issues really came out of India. You know, and then, of course, we have round-tripping of diamonds, which is another problem around the pricing and transfer pricing. And so a lot of these problems that are in industry

are causing, you know, some concerns for banks that are highly regulated, that have to march through the regulations of Basel 3. And so when we think about the skyscraper of Everledge that we're building, if you are able to identify the object, and we can do that without the friction of getting to market quickly, which is what we achieved relatively fast. And then we can provide digital provenance of certification. So to know that the certification has been issued by an Oracle,

that it hasn't been tampered with, and that they know where that certificate is trading online. So, you know, most of the inventory inside of the diamond industry, whether it be traded online or even in exchanges or borses, is actually done on the power of the certificate. And to be able to know and understand where those certifications are being used, sold, have been traded, is something that the industry is blind to today. And the technology can afford us the ability to provide digital certification and provide digital provenance of that certification. So we have that complexity layer. But once you have certification as the central backbone that you know and understand that it's come from an oracle source,

that it hasn't been tampered with, you can extend it into provenance, but more importantly, for banks, you can give the bank the ability to provide collateral management. And so they can take a security over the top of the inventory of the diamond dealer or the, you know, or of the cutter and the polisher. And so if you think about a retailer,

you know, the retailer, some of the most largest part of the balance sheet for the retailer is holding stock rather than what else's chattels that is left is probably a good coffee machine and a really bad fax machine. So from a banking perspective, the ability to take securitization or the ability to take security or collateral management forward has not been seen in our industry before today. And that's something that we know that we can help with. And that's kind of exciting. Okay, so what you are essentially saying is, like, if you have some other industry, like, let's say the real estate industry or some industry like that, the basic unit inside that industry is like a loan, right? And financial institution makes a loan to a homeowner. But then what the kind of financial services exist on top of it is you have these loans and then you have systems of like packaging these loans, creating securities out. of these loans and then trading these loans all over the market etc now what now what you're

saying is once you have provenance data of diamonds things uh so today when you don't have provenance data of diamonds you really cannot build all of these financial products on top of the on top of diamonds because uh suppose you build a product on top of it and it turns out that the diamond is not a genuine diamond or it is a stolen diamond or it's a blood diamond etc right so whatever you build on top is an unstable foundation because the diamond itself may not be genuine or may be stolen. But once you start having good provenance data, then all of these financial institutions can package the inventories of retailers or the diamond ownership of people and create new kinds of financial assets around it. Yeah, and to provide this, you need to be sure that you have a seniority. So the banks must have a right or whoever the financial product service provider is, has a right to, you know, like a caveat or a mortgage over the top of that physical asset.

And we see this in property. I mean, this is normal in property. We just haven't applied this in a financial sense to the diamond. But why not? So if we can provide the transparency, we have the ability through smart contracts and certification to provide seniority and the legal framework around the recognition of this, then you, you. you know, you're really, you know, you're creating a new future. And we could also add that you could perhaps avoid some of the similar things that happened in 2008. If we had traceability of loans in the housing crisis, you know, perhaps the housing crisis

wouldn't have been so hard. Totally agree. Let's move on to the, yeah, let's move on to the, well, I mean, this is something that I think also is needed, not only for physical objects, but also for financial objects. We can provide traceability there and avoid some of those problems. I mean, like in reinsurance as well, not only in the sort of financial sector, but the insurance sector, we can also apply traceability all through the, all through the chain from the policyholder all the way to the insurer and the reinsurer

and perhaps have a system that has better traceability in all those layers. So these subjects are all very, very connected. in the end, whether you're talking about diamonds or whether you're talking about a loan or where you're talking about KYC, it all comes down to basically the same thing. So let's move on to Everledgeer and the technology stack that you've built and the product that you've built around that. Can you describe from a technical perspective sort of what Everledgeer looks like? What are you selling to your clients? Yeah, so I mean, we, so where do we start? I guess, you know,

In the very first iteration of Everledger, we came out of the gate with a hybrid. So we're both on the public Bitcoin blockchain, and then, of course, we have our private ledger as well, which is commissioned, and we break out federated consensus. And most of the consensus modeling is really mirroring the existing frameworks that we see in a people sense or a corporation sense in industry today. And, you know, that for us was actually, you know, an interesting and easy moment for us to be able to work out what the modeling was. We're not necessarily disrupting our industry actually. We're co-evolving the industry. We're involved in multiple points along the supply chain and we are a technology advancement. So we often describe

ourselves Intel inside. So Everledgeer is the Intel inside when it comes to, you know, some of these technology leaps forward. You know, there's a whole bunch of thinking around where does a public ledger play and what's really the role of a private ledger and I'm not sure that there is any hard and fast answer. And for me, I think some of the discussions that we embark upon in our industry is no different to a religion and there'll be different reasons why people make the association or the assimilation to certain decisions. But for us, you know, we have to anchor our decisions around what is the problem that we are solving

and how are we to be sure that the technology can be consumed by industry in such a way that we're solving those problems rather than creating even more. You know, when you also think about consensus and how you would form this forward in industry for the benefit of everyone, whether that be the public consumers or whether that be government organizations such as the, you know, Department of Imports or the Foreign Office here in the UK that handles the trading of diamonds, we have to be very mindful of how we're approaching the market themselves, not only from an architecture perspective, but also a privacy of data and what information can and should be seen by the public eye and what should be seen by the governments. So we actually haven't deterred

from our original thinking in terms of public and private and a hybrid model, what we have done is really started to understand as maturity of players have come into the market and they've afforded certain types of tool set, we've become relatively agnostic in terms of any brand or any platform that we work with or choose to work with. It's not necessarily, we're not chanting the religion per se. In fact, if anything, we're relatively agnostic when it comes to the association. So we have stayed, you know, relatively close to the original participants of our stack. So ERIS, of course, on a smart contract implementation. We still peg our records into the Bitcoin blockchain. And more recently, you know, we embraced wholly the tool set that was

afforded to us by Hyperledger and the high-speed security network with IBM and Linux 1. You know, most of the work in that sense was ensuring that we had a hyper-secured network that could be rolled out to governments around the world to support the Kimberley certification process. And that was the reason why we chose that integrated stack. What does it look like for us? I mean, our application in the first instance was really delivered through APIs. So everything was just an API layer in the issuing or the consumption of data. and then more recently with our certification platform,

we've grown that out as a web app so that each of the officers or the users of industry have the ability to physically issue, revoke, create cosign, track the digital provenance of the physical certifications themselves. And then, and more recently, has really been the interface layer with machine vision. So onboarding of high visibility scanning,

whether that be in a three-dimensional sense or whether that be in a two-dimensional sense in terms of the photographs of the diamonds from the crown down. And that's been highly challenging, but it's actually probably been more rewarding than dealing with the blockchain work, to be honest. So that's been the exciting stuff

we've been doing sort of secretly behind the scenes. So I'm curious then, so you're still using the Bitcoin blockchain as a public ledger for certification? Yes, we are. So we're issuing the records out onto the Bitcoin blockchain. So if you think about, you know, proof of work and proof of stake, it doesn't necessarily give us any confidence around the data that's within side of the hash.

And so hence we wanted to be sure that we had a private ledger that enabled us to confirm or have the right federated consensus agreement that the data that was being provided inside of our private ledger had the robustness of record, but that the public ledger assured that the record in time was actually proof in time. And so we, hence the reason why we did that from day one. For us, it was normal,

but many people came to us and said, oh, wow, that's actually a really interesting way to think about how you would construct this. But for us, it was day one. I don't know that we would change that. No, I totally agree. So we have a similar approach to start where you can have federated consensus of, say, different steps of a process on a private layer or permissioned layer,

and then you can have that be certified on public blockchain, which provides sort of auditability, external auditability and record keeping in time. So could you explain then what are the interactions within the private network that you've built on ERIS? What do those smart contracts do? and also who are the nodes in this network? Yeah, sure. So, I mean, smart contracts really lays into a number of things. Firstly, you know, the change of ownership or change of provenance

or change of control of an item. So proof in time that this custody event had occurred and that even though the custody event had occurred, for example, it could be a secure transport layer that it doesn't necessarily mean that the change of ownership has occurred. So who owns the diamond is very different to who has custody of the diamond, which is now even separate to who has seniority rights to the diamond in the event of, you know, a liquidity event or an insolvency event. And so the smart contracts are laid in and around some of those events that are relatively linear, actually. They're not that exciting and it's not a very complicated contract. Where we're starting to get something really quite cool, which will come out in Q2.

is around layering in, and you were talking about this before with the insurance world, where a lot of insurance companies recognize that the smart contract implementation really comes into its discipline when you have external or parametric data sources that can provide some type of definition of outcome or settlement finality. And when you think about the world of diamonds, most of our world has been constructed around reputation. So, you know, the reputation of experts is such an important. part of our industry. I'm an alumni with the GIA, so the Gemological Institute of America,

where you can run through an educational series on knowing how to grade diamonds or how to classify diamonds. And of course, if you were really that excited about the industry at large, you could become a gemologist. So, you know, to be able to then work with the insurance network, often you will have the insurance networks lean upon what they call loss adjusters. and loss adjusters are independent third parties that are often appointed by insurance companies to assist in the validation of claim. And they establish two things. They establish the circumstance of loss.

So what was the circumstance upon which this risk occurred, whether it was a theft or whether it was a lost item or in a PI sense, so a professional indemnity sense, was it something that that professional person did wrong? and how does that then affect the quantum or the claim amount itself? They're two very separate things, but they interact in terms of the settlement and claim. So some of the things we're doing in the diamond industry is looking at where can we bring either machine data that hasn't really been shared before in industry. Most of the data and most of the science that's been involved has been blackboxed. And we're in an afforded and privileged situation to be able to work with this data

and enable the ability for financial services, so banks and insurance companies, to reduce risk around either the finance of supply chain or in the issuance of insurance. So one really cool, cool part of the industry is where we have that transformative step. When we have a rough diamond, the rough diamonds are often scanned,

and there's a physical scanning machine that gives you the potential yield of that diamond. Now, if you were Lucara, as an Lukara mind, had a massive, massive diamond that came out of the ground, there'd be many ways you could take 100-carat stone and cut it. You could cut it into a very large diamond, an 80-carat diamond as an example would be huge,

but it mightn't have the right levels of colour and clarity. So the value of that diamond might be substantially large, but it could take a very long time to trade. And so often the industry is faced with these economic decisions around yield, and they are given this extraction of data to be able to make a decision as to how they want to cut their diamonds and whether they want to cut them into a lot of little ones or a large big one or a certain fancy shape. And that machine assists in this. But at the point where it's cut, there is both the art and the discipline of cutting,

which often, as I said before, goes into places like Tel Aviv and Antwerp in India, and there are machines that are used. And there is a risk that's associated with the cutting of diamond. And often if a diamond isn't cut correctly, it could shatter or that it might end up in a catastrophic loss. And there's an insurance cover that covers that. But to yield or to deem who is at blame, what is the risk, what is the value and what is the settlement finality, often resides upon experts in industry. And you can count those experts on one hand.

The ability now to be able to take the blockchain record as a proof at time before cut, an extraction of the physical scanning machine, overlay all of this into a set of smart contracts that overlays all of the parametric data as well as the mathematical calculations that the actuaries have typically either not bothered with or have bothered with in a single spreadsheet. And bring that into a sense of being able to settle the diamond claim

is something that we have been so excited about doing. And we're very close to being able to take this. out and showcase it in the diamond sense. Most of the smart contract work in insurance and in blockchain has really been looking at, hey, here's a weather event, or maybe the flight was late and you can have $200 in your pocket. You know, we're talking about settlement claims that could be anywhere from a million to $10 million, even to $100 million.

And so the ability to be able to bring science to this and at a proof in time that these things did occur will make a huge difference to our industry. That's interesting. I was wondering then who are the nodes on the Areslaar. So are you talking about having nodes that are being controlled by every diamond cutter or by traders? What is the interaction between all of these players in the supply chain and with the technology itself? So building a ledger like we are in a platform, I think it's important just to not only consider nodes, but to consider reputation.

And when we think about nodes, you know, nodes for us are not only about a physical company that's been onboarded, but actual machines. And are those machines trusted firstly as a machine that is accepted by industry? And secondly, are those machines calibrated? So, you know, and at what point in time if they've been? calibrated to perfection. And so when we think about our world, our world is not only about the nodes of reputation of experts that have an opinion that can pass the opinion in cosigning at a certain

point in time, but it's also machine to machine. And so we securely handshake with the machines that are on the pipeline and then recalibrate, or not recalibrate, that's a wrong word, and ensure that the calibration is kept up standard as well. So when you think about nodes, in fairness to our industry, we have very easily identifiable important points in the pipeline. The first is government organizations. So the governments themselves, as diamonds are physically exported out of a country, that's an authentication process that occurs today. And then, of course, on the importing into the country, it checks that the export was indeed a correct transaction. So we have government organizations. And the second is

diamond borses. So borses, of course, aren't necessarily in it for the commercial gain. They're in it for just like museums in the art sense. You know, they are there as a trusted node of industry. Exchanges themselves are physically exchanging houses of trade. And then you have actual traders, whether they be diamond dealers, cutters, polishes, wholesalers. And the very last mile is retailers and consumers. Now, retailers and consumers are not nodes on the platform at all. They're consumers of the provenance data. Okay. So they would have access to the platform via some, some, some, some web interface that connects to your APIs. Yeah. So our industry, I mean, besides the consumers that don't need to be identified, everything else is identified by a KYC

check, just as all of our other participants in industry are. So we have large existing trading houses that unless you are a diamond trader, unless you have, I mean, in the rough sense, unless you have a mining license, you just would not be able to participate. It's as simple as that. So you have to be authenticated. And so touching on authentication, it's an interesting point because oftentimes we forget that if you're operating on some sort of a blockchain system, there needs to be an authority in most cases for permission blockchains, that. That, provides identity. In this case, is Everledger then positioned sort of that's a certificate authority that issues keys to all the players in the system, or are you relying on some existing industry

consortiums or existing institutions to issue certificates and finally keys for people to participate in this permission network? So, I mean, we check back with the government organizations on mining licenses and so there are existing processes that are in place to identify legitimised traders under license but we physically issue the access to the Everledgeer platform currently. Whether that will change in the future I would like to think that it would. I would like to think that the industry itself forms a consortium and that you know that just like we've seen with the KPC the Kimberley certification process in the rough trading that we have the similar thing and

I welcome that. You know, we're not necessarily about becoming a central authority of issuance. That's not our business model. We're bringing transparency and a technology to the industry and that the industry is, you know, they're highly vocal about being sure that the industry at large has a say in where this goes. And I open myself to that in a big way. So, like, one of the questions would be,

that the way I imagine it is this there's this private blockchain that has the actual data the actual providence data and this data is maintained by a lot of different participants like as you mentioned players in the industry like borses exchanges etc so how does this data get get monetized like do the financial institutions that might need this data up to they pay for this data or what's the business business model here. Yeah, so look in the space of insurance fraud, you know, there is existing layers that are very costly to a claim process. And, you know, the cost of processing a claim in the insurance world is around 16% of cost of claim. And if you have the ability to reduce that

in such a way, then of course there's money to be spent. But shamelessly, you know, the industry has somewhat accepted fraud as just a cost of business. And when you start to think about the cost of fraud to the insurance industry, it's significant. significantly high. So, you know, I spoke before about loss adjusters and their role in terms of either establishing quantum or the finality of settlement. And if we're able to reduce that cost, and I know that, you know, on average in a jewelry claim, it's around $75 Australian, so it's about £30 a claim. If we're able to reduce that or somewhat assist in the reduction of fraud, then, you know, that's a paid set of processes. So yes, access to data is a fee charging and

And secondly, so too, is the likelihood to find or return a lost or stolen item. So at the time an insurance claim is paid out, and this diamond ring has been paid by the insurance company, and this diamond is in circulation somewhere around the world, and it's on the ledger at a future state point in time. And it comes back up onto the ledger. It's actually the rightful object of the insurance company. And so if you think about diamonds, they're appreciable in value. So a claim for a five-carat diamond ring might be $70,000. If that was lost two years ago, I mean, that one claim or that one diamond could actually

be worth at least another 10 or 15% more. So the insurance companies would want this back. It's an existing part of a process called repatriation. So there's that part of the process that we have driven based on success. So we will take a percentage of the value of the item that is rightfully returned to its owner and whether that owner be the insurance company or whether that owner be the claimant if a claim is left open. In terms of financial institutions and banks, you know, it's around what's the basis points that we can afford if we're reducing risk. And in a $20 billion supply chain finance market, we think that that's a fairly healthy opportunity to be able to codify into smart contracts and provide some transparency around.

If data itself is a thing of value that is being produced in the system, then doesn't the blockchain with its kind of decentralized architecture where this data is seen and owned by multiple players rather than a single player such as yourself? Doesn't that architecture inhibit good monetization? Like suppose you had this, all of this data on sort of a centralized database, then you could be the only access point to this data. But with a blockchain, because this data is shared across so many nodes, doesn't that introduce some form of competition where multiple nodes could actually supply that data and thus reduce the value of that data to ever leisure itself? Yeah, I think that, I mean, it can be answered as simply as saying that the sum of the whole is great is worth more than the sum of the parts. So we haven't come across that inhibitor. In fact, if anything, the decentralized nature of the data as well as the ability to track the providence of that data has actually opened up a shared revenue model that maybe

our industry hasn't seen before and that until this point in time, most of the siloed participants in industry have really selfishly kept the revenue to themselves. So it actually forms out entirely new revenue models that the industry itself hadn't necessarily even begun to experience or enjoy. And so I sort of see it in a very different light. So, yeah, in a sense, like you're kind of stitching together all of these participants and building this common data structure, then selling this data and then distributing the revenue to all of these participants that contributed it, right?

Look, our industry has seen, the GIA was formed to provide a certification benchmarking for standard. And, you know, it's a not-for-profit. profitable part of our entity. And it's a siloed central authority that there is some richness of data that sits there in the history and longevity in terms of certification for probably about 70% of the world's diamonds. Now, to enable that as a baseline of records and to enable that to grow out entirely new

financial services or services to market participants like banks and insurance companies or yet to be thought of industries like hedge funds and what have you, is a truly exciting time. I said before, you know, we're not a disruptor. I mean, a lot of people talk about startups being disrupting. We are co-evolving the industry. We are literally turning ourselves into, you know, marsupial animals that can, you know, that, you know, that, that, that, well, I mean, we're evolving. Well, then that's probably a good topic to lead into sort of the final part of the episode before we wrap up is other industries. So diamonds are obviously one industry where, as we've seen throughout the show, there's enormous value in providing

provenance throughout the supply chain. There's also quite a lot, quite a few other industries that are trying to tackle the same sort of problems that you're addressing with diamonds. You know, one can think of, you know, luxury wine, for instance, I know here in France, a lot of, a lot of people talk to me about, you know, providence of alcohol and specifically wines. But other industries as well, like, you know, there are things like industries like the, like the food industry, specifically fishing and fisheries where a lot of regulations are being applied in order to sort of save the fishing industry from, collapsing under the over fisheries. Another interesting idea is to provide providence for electricity. So if we think of the smart grid, a lot of the thinking around smart grid has been, how do I efficiently allow for local consumers and local producers to trade energy credits? But really what that comes down to, the foundational idea is how do I trace?

electricity how can I make sure that this electricity that I'm that I'm buying is locally produced and therefore green and therefore you know of lower costs and and and of less impact on the on the on the on the on the on the environment so you know given the fact that there are so many industries in which providence and applying traceability to the supply chain can be of enormous value what are some of the other industries in which ever ledger is looking at as potential markets to go into. So I guess there's two things that we're really purposed by.

And the first is that what the diamond industry did in the year 2000 and drove ethical supply chain with the Kimberley certification process has been largely successful and the industry should be applauded for the work that it did. And if you start to think about the disciplines and the protocols that have been put in place, these can be translated across into other layers of mothers earth assets. Now, whether that be rubies or sapphires, or even more importantly, whether it's elephant tusks or, you know, snake skins out of Colombia, I think that these are some of the most important parts of commodities that are being traded in the luxury goods space that should have an ethical

backbone and we should have some stringent reporting and transparency around it. And we're completely empowered by that. So that is something that I fearlessly and daily will continue to chant like a crazy person and become involved with. So that's the first part. The second part is that, you know, there are other items within inside of the luxury goods space that have been exploited in terms of counterfeit. And the ability to take the modules that we've built, which is really around blockchain and smart contracts and machine vision, you know, and really high-level algorithms in terms of risk. reduction or even counterfeit applicability, we can apply those into components of the luxury goods space.

And that's where we sit. So we, you know, firstly, we're empowered like a little bit of Mother Teresa on the blockchain. We really think that this stuff's important and we want to try and solve a problem that's not been able to be solved before today that actually is a global issue that needs and should be solved. And the second part is that, you know, we're in a space where we're extremely interested in. in appreciable items that could be recognised as a rising asset class that has some elemental overview of fraud and risk and that can actually give birth to entirely new financial

products and diamonds being the one to start with but just as amazon started with books ever ledger starts with diamonds and we know that the work that we're doing already is in the art space we made an investment in a company this year in february called vestari and they work in putting art into museums for collectors around the world. And secondly, our product comes to market on the 25th of November for fine wine. And we've come together with the largest name in industry. Her name is Maureen Downey. She is the Sherlock Holmes of Wine when it comes to fraud.

Was involved in Rudy, who, of course, was one of the largest fraudsters in wine, in fine wine. And we've bought the same disciplines that we've created inside of the Diamond industry with the digital thumbprint. We've enabled our technology to be applied and to fine wine. And so that gets released into the market on the 25th of November with some of the larger names in industry here in London and in France. That's really interesting. I'm somewhat surprised and shocked that the Sherlock Holmes of Wine Fraud is not French. Yeah, or British. All right. Well, Leanne, thank you so much for coming on the show. It's a really fascinating topic, whether I'm particularly very interested in as, you know, Stratum does, the company that I co-founded is,

is also addressing a lot of these issues. So we're building more of the technology side, not so much the product side. But yeah, traceability on all types of different types of supply chains is something that is very near and dear to me. So it was very fascinating to talk to you today about the work that you're doing with Everletcher. Yeah, I appreciate the chance. Thank you, everyone. And thank you to our listeners for tuning in. We are part of the Let's Talk Bitcoin Network. You can find lots of great shows about Bitcoin, blockchains, cryptocurrencies, decentralized technologies, et cetera, at let's stock bitcoin.com. You can find us at YouTube.com slash epicenter BTC, or you can download the show on your favorite podcasting app, so we're available

on iTunes, SoundCloud, or wherever you get your podcast. So thanks so much, and we look forward to being back next week. Thank you.