Diamond Standard Co. has introduced a unique blockchain payment system called CARATS in order to bypass the regulatory obstacles faced by centralized exchanges and payment services. CARATS distinguishes itself from traditional systems by utilizing tokenized diamonds, which are backed by real-world commodities, to facilitate payments, remittances, and wealth transfers among users.
Individuals have the option to purchase either full or partial amounts of these tokenized diamonds. They can trade, transfer, or cash them out for local fiat currencies, or choose to exchange the token for physical diamonds. To accomplish this, Standard Diamond Co. mints physical coins and bars embedded with actual diamonds, along with an integrated chip that can audit the diamonds and broadcast the tokenized version of the asset on the blockchain.
A diagram illustrating the functioning of Diamond Standard’s physical diamond coins and bars. Source: Diamond Standard CARATS white paper.
One of the standout features of CARATS is the ability for users to send these tokens through SMS or via social media platforms, which provides an avenue for the unbanked to make electronic payments. Since CARATS is not technically a cryptocurrency, but rather a method of transferring receipts for a physical commodity, the platform is exempt from the typical regulatory obstacles surrounding money transmission services.
This distinct characteristic allows CARATS to operate as a payment hub without the burden of obtaining a money transmitter license in every jurisdiction where the service is active. Elon Musk’s X social media platform is currently grappling with these same regulatory hurdles as it seeks to establish itself as a social media network with an integrated payments system.
In 2023, X managed to secure money transmitter licenses in several U.S. states, including Missouri, Michigan, Arizona, Georgia, Maryland, New Hampshire, Pennsylvania, South Dakota, Kansas, Wyoming, and Rhode Island. However, the platform still needs to obtain a money transmitter license in all 50 U.S. states, as well as in every country where its money transmitter service will be operational.
This means that hundreds of individual licenses must be acquired before X can fully function as a money transmission service. Cormac Kinney, CEO of Diamond Standard, acknowledged this challenge and remarked, “This is a difficult obstacle to overcome, even for forward-thinking payment innovators like Elon Musk, whose X platform is unable to operate as a money transmitter in 34 U.S. states and 200 other global jurisdictions.”
Similarly, centralized cryptocurrency exchanges face similar hurdles in obtaining money transmitter licenses and other permits to operate in each jurisdiction where they offer their services. Despite these rigorous regulations, several centralized exchanges that held money transmitter licenses still engaged in questionable practices, resulting in their downfall and the loss of customer assets, most notably FTX in 2022.
The process of acquiring these regulatory permits is often arduous and time-consuming. Recently, IBTCEX, Huobi HK, QuanXLab, and four other exchanges withdrew their applications for operational permits in the Hong Kong market.