How a move to blockchain could clean up the market for diamonds, gold
and other potential conflict minerals.
By Jennifer Scholze and Ruediger Schroedter
Despite a concerted 15-year global effort to combat the trade of conflict minerals, the murky practices around these minerals – and the extensive collateral damage those practices inflict in countries where they are mined and traded for use in jewelry, technology and other applications – persist. That in turn has cast doubt on the adequacy of the Kimberley Process, an international certification protocol established in 2003 to monitor and curb the sale of blood diamonds to fund regimes, weapons acquisition and armed conflicts.
Support for the Kimberley Process lately has started to erode, with critics contending that it doesn’t adequately address broader human rights abuses, cases of state violence against diamond miners and substandard working conditions in the mines where diamonds are extracted. “The Kimberley Process – and its certificate – has lost its legitimacy,” Joanne Lebert, executive director of the Canada-based nonprofit IMPACT, said in 2017 in announcing the group is leaving the Kimberley Process compact. “The internal controls that governments conform to do not provide the evidence of traceability and due diligence needed to ensure a clean, conflict-free and legal diamond supply chain.”
Efforts to strengthen supply chain transparency around diamonds and other conflict minerals continue. A new conflict minerals regulation adopted by the European Union and modeled in part after the U.S. Dodd-Frank Act requires importers of certain high-value minerals to more thoroughly document and report on the origin of minerals involved in certain transactions.
Beyond compliance requirements, there’s also a strong business case for making the precious metals market more transparent. In a survey by McKinsey & Company, nearly two-thirds of metals and mining companies indicated they see significant value in bringing sustainability-related products – conflict-free minerals, for example – to new markets or customers. Yet only 7 percent said their organizations currently are doing so.
The technology to create a more transparent, clean and legal supply chain and to capitalize on new market opportunities not only exists, it’s being used to some extent today to document the journey that precious metals make from mine to end-use. It’s called blockchain, and it has the ability to close the loopholes through which conflict minerals, including diamonds, continue to find their way to market.
Originally developed as the accounting method for the virtual currency Bitcoin, a blockchain is a digitized, decentralized public ledger containing all transactions that occur on a specific network.
Every individual exchange of value, goods and/or services is recorded exactly as it occurs, using transaction data that is time-stamped to the second. This data, which includes not only the timing of the transaction but information about the entities participating in the transaction, is embedded in encrypted “blocks” that can never be modified. The blocks are disseminated across a network of distributed computers (known as nodes), creating a chain of decentralized yet interdependent records – what amounts to a distributed ledger containing a shared list of encrypted records.
The chain constantly grows as the most recently completed blocks (transactions) are recorded and added to it in chronological order. Each node gets a downloaded copy of the blockchain as it grows, until the final transaction is completed, allowing everyone in the community to see the shared ledger.
Because that ledger is decentralized, without a single authority to control it, there is no single point of failure from which records or digital assets can be hacked or corrupted. The authenticity of each block, of each transaction, can be verified independently by each and every participant in the community. If inconsistencies or fraudulent methods are identified in a block, a participant can reject the blockchain and avoid being involved in the transaction.
The ability to independently verify each block in the chain creates a decentralized trust across the network, making it a powerful means of preventing fraud – more powerful in most cases than the current paper-based certification system for verifying the origins of gold, diamonds and other high-value minerals with a potentially conflict-stained background.
Applied to a specific transaction or series of transactions involving a potential conflict mineral, parties to the sale of that mineral on a blockchain are required to show proof of origin, ownership and authenticity. Since the information about the product is public, users in the chain can verify that information by tracing previous trades involving the mineral. In doing so, they also identify stolen or fraudulently obtained products and the entities that are attempting to peddle them. To engage in a blockchain-based system, entities must meet specific standards, including requirements that they provide appropriate documentation to confirm ownership, country of origin and other details related to the mineral.
This peer-to-peer sharing, with open transparency and clear standards of documentation, limits the risk of conflict minerals reaching the market while exposing deceptive sellers. The public nature of a blockchain ledger allows individuals to clarify and verify information to purchase with confidence. By requiring a digital signature, the blockchain ledger also limits the security risks when making or receiving a payment in a blockchain transaction.
There’s little disputing, at least theoretically, that moving transactions along the mineral supply chain to a blockchain environment would make for a much cleaner global market for gold, diamonds, platinum, silver and other precious metals that are in high demand.
Doing so also would help ensure that companies involved in the business comply with federal laws requiring parties that engage in precious minerals transactions to provide documentation that proves legitimacy and authenticity. It also gives additional assurance that the materials being bought and sold are up to a certain quality standard, an important consideration whether the product is a piece of jewelry or a quantity of silver being sourced for an electronics product.
Above all, an embrace of blockchain would give companies involved in the supply chain an important public role in eliminating conflict minerals – and all the unsavory elements associated with them – from their business. Playing such a role can help companies live up to their own corporate governance standards and provide an extra, positive dimension to their brand.
The minerals and mining industry apparently sees wisdom in such an approach. Mining companies are showing increased interest in digital platforms that have the data capabilities and the digital capacity to leverage blockchain, not only to help banish conflict minerals from the market, but to improve their competitive standing through optimization and innovation. For example, a mining company could use blockchain to quickly authenticate and source replacement parts for its mining operation, which is no easy task in today’s business.
That is all the more reason an investment in blockchain could be worth its weight in gold.
Jennifer Scholze is the global lead for industry marketing for mill products and mining industries at SAP. Ruediger Schroedter is responsible for solution management of SAP solutions for the mining industry worldwide.