Last Friday, Antwerp World Diamond Centre and the Government of Flanders hosted a seminar on innovation in diamond financing at the Royal Academy of Arts in London. A standing-room only crowd packed the stately Reynolds Room in Burlington House, surrounded by a series of 20th-century British impressionist paintings appropriately titled "Reinventing Landscape", and reinventing the diamond financing landscape is precisely what AWDC has in mind: "Innovation is driving the financial industry forward at an unprecedented pace. New developments present tremendous opportunities to banks and the diamond industry." The Diamond Talks featured four experts who shared their views on the latest trends and emerging innovations in the world of finance, ranging from diamond banking to state-of-the-art technologies such as the blockchain and trade finance instruments.
Costs of Compliance
Kicking off the evening's discussion was Sabine Smets, Head of Belgium - Diamond & Jewellery Clients at ABN AMRO Bank, who took stock of the current banking landscape and the challenges facing diamond industry banks in particular. Ms. Smets spoke about the effects of the most recent economic crisis that sparked a wide range of regulations, creating masses of additional and complicated yet necessary paperwork for the banks. Compliance is the keyword of the day, with a major task of the banks being transaction monitoring. She questions whether smaller banks can handle the sheer workload of regulations, and wonders if small diamond companies even have the means to comply and corratively survive. She said that the credit crunch, with banks leaving the industry, calls for thinking outside the box. Alternatives such as shadow banking - conspicuously absent from the diamond industry - are needed. She even wonders whether we shouldn't try to put a new label on the diamond industry to free it of negative associations and change its image, bringing more respectability.
Next up, Howard Davies, Vice President of Commercial Development at De Beers took a look at diamond industry funding from a miners perspective. De Beers has taken a leadership position to get sightholders to modernize their business and prepare for alternatives. He appropriately illustrated the necessity of compliance rigor to obtain financing by referring first to Ad Reinhardt's Abstract Painting No. 5, a painted black square revealing vague shapes and structures if stared at long enough, to show how bankers look at the diamond industry. Not a clear picture. De Beers attempt, on the other hand, is to steer the midstream toward a movement illustrated by a recent exhibition at the Tate called "Structure and Clarity". He then explained their sightholder contractual requirements, including among others: Evidence of an IFRS-compliant corporate structure for the Sightholder Group, an annual consolidated financial statement for the entire Sightholder Group, and an audit signoff on the annual financial statement, emphasizing that the audit opinion must be unqualified.
Oliver Lambert of AIG Trade Finance addressed Innovative Financing solutions for the diamond industry, addressing the 4Cs (challenges) of: Credit Crunch (withdrawal of banking institutions); Commitment (how secure are existing financing relationships?); Compliance (industry is typically seen from the outside as secretive); and Cost (the lack of financing is driving up costs). Lambert explained that liquidity issues in the diamond industry are known, particularly with the withdrawal of Antwerp Diamond Bank and Standard Chartered exiting its $2bn diamond financing business in 2016 amid increasing compliance reporting and regulatory capital costs He explained that financing models currently in use are outdated, and there is a need for long term and stable initiatives. In short, the industry needs to become more transparent. It needs to promote itself as financially compliant to attract new forms of capital. Solutions are required to maximise the level of funding and lower the in costs. Lambert's solution to these challenges came in the form of insurance-backed trade receivables funding: technology should be applied to do data mining about customers, with insurance credit coverage de-risking trade receivables. Risk reduction would free up liquidity and technology to lower the cost of compliance.
Technology and Trust
Finally, Omar Mohout, Professor of Entrepreneurship at Antwerp Management School, talked about tech companies and radical innovation. The key concept here is "Hyper-scalability": the ability of a small local company go global, serve 24x7 millions of users located all over the world and have a gigantic market impact, with just a small team (think Instagram, Snapchat and Airbnb, to name only a few). Using technology as a lever, intangible assets are reliable and easy to replicate on a mass scale. He spoke about blockchain enabling the potential to "scale the trust". Blockchain tech creates transparency, generating trust and enabling easier compliance. The most applicable example for the diamond industry is Bitcoin, and Mohout explained the process of encrypting files with an unalterable fingerprint providing proving the file exists - an important element of financial transactions, of course.
In this regard, he said, "The plans of the diamond industry in Antwerp are huge." He explained that the plan combines the best of both worlds: a "hybrid system" of a mature industry and emerging technology. The engine, he said, is blockchain, while everything else is mature. The result is encrypted, immutable and signed transactions. AWDC CEO Ari Epstein closed by saying that AWDC will continue leading the development of new ideas, technologies and instruments that will benefit their diamond companies. In the short term, they are working on developing a Proof Of Concept to apply the blockchain technology in diamond banking. He hopes that they will eventually arrive at a platform that can be used by banks and that will radically change diamond banking in the direction of more transparency, more certainty and more profitability.