updated on 17 July 2018
QuestionWhat is blockchain technology and what is its relevance to both the legal profession and the mining industry?
Blockchain is a decentralised cryptographic technology which allows the safe recording of transactions with Bitcoin and other cryptocurrencies.
Virtual currencies and blockchain technology have come a long way since the release of Bitcoin in 2009 to more than 1,500 cryptocurrencies that now exist. In 2017 alone, over 800 initial coin offerings (ICOs) raised more than $6 billion, which although significant doesn’t match the revenues being generated elsewhere – for example, the initial public offering of Snapchat alone raised $3.4 billion.
Equity and debt finance are still alive and dominating the markets today, but they aren’t the only options a lawyer can suggest to a client.
The mining of gold and diamonds has prospered throughout humanity’s history. Would it be able to do so in the age of blockchain?
Both diamonds and gold could use blockchain’s most obvious advantage – the ability to securely record the ownership chains. Blockchain was designed to serve as a public ledger for Bitcoin and other cryptocurrencies. This will be useful in any industry, including mining. Each transfer of gold, diamonds or any other precious stones or metals can be safely recorded in the blockchain, which will promptly reflect any changes in the ownership and protect the owners from fraud.
The same feature, however, provides the mining industry with some unique advantages, giving solutions to multiple challenges that are specific to the industry.
One of the major problems with gold and, especially, diamonds is the lack of transparency – it is often difficult to determine their origin with any certainty. This creates the risk of fraud or concealment of various other criminal activities.
The international community has tried to solve this problem by adopting the Kimberley Process Certification Scheme. This scheme establishes a set of principles for the market players, under which they commit to remove the diamonds from conflict zones within their supply chains. However, the problem has not entirely gone away. There are still multiple reports of diamonds from conflict zones reappearing on the market.
The use of blockchain technology allows for diamonds to be traced as they move through the supply chain; from the actual place of extraction to the final point of sale. In fact, some projects, like the blockchain-based Mimosi platform (and multiple others), are already starting to do this. Such projects could greatly complement and simplify compliance with the existing Kimberley principles.
For a compliance or a mining lawyer – whether in-house or in private practice - it would be advantageous to know that such an option exists, particularly as it could save a client millions of dollars on due diligence or regulatory fines.
Like other commodities, metals and precious stones markets live by cycles and super cycles. After the most recent super cycle ended in the 2010s, metal prices fell. It has become increasingly hard to raise money through the standard equity or debt finance for new mine developments or mine expansion projects. Mining companies are struggling to get access to funds to deal with their financial problems.
The blockchain and cryptocurrencies may be in a unique position to step into this gap. Tokens sold on an ICO can be linked to the undeveloped gold and diamond resources while they are still in the ground, thus creating a sort of a ‘golden standard’. Money raised through such an ICO can finance the development and expansion of the mines.
In fact, this is not new: multiple projects have already started to use this mechanism to raise money. For example, the Canadian GOLDUSA token, raised in May 2018 by a Canadian listed company, is a regulated offering that was officially announced on the exchange’s website. Others, like the UK and Belarus Jinbi (and many others), are offered purely through internet and cryptocurrencies exchanges. What unites those tokens is the potential to raise millions in funds.
As the mining industry is already known for its readiness to use new and elaborate ways of financing (like the use of the stream financing), it may be ideally placed to embrace the use of blockchain technology. Having the ability to advise clients about the use of blockchain in structuring transactions puts lawyers at a distinct advantage compared to their competitors who may not be as innovative.
While it is possible to argue about the risks of investing in Bitcoin or other cryptocurrencies, it is impossible to deny the potential of the underlying blockchain technology, which has the potential to influence all spheres of the economy.
Any forward-looking professional, especially lawyers who already work in a constantly changing regulatory environment, needs to be aware of blockchain’s existence in order to provide their clients with advice on its application.
Ivan Philippov is a second-year trainee at White & Case LLP.