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Blockchain, Cryptocurrency, and the Art Market

by The GenX Joint 2 months ago in future
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What about the Artist?

Image: Pedro Rebeiro Simoes, Campbell Soup (Warhol, 1965) CC Attribution 2.0 Generic (CC BY 2.0)

Blockchain and the Art Market

Blockchain has great potential to increase transparency in the provenance and pricing of artwork. In 2014, the Fine Arts Expert Institute (Geneva) estimated that over fifty percent of the artworks it examined were either forged or misattributed.[1] Navigating the art market is difficult even for experts due to several factors: 1) the lack of transparency; 2) intricate and old-fashioned insider networks; 3) information asymmetries between buyers and sellers; 4) the speed and volatility of trading; 5) the desire among some major purchasers to hide art assets from taxation; and 6) the emotional and status factors that often distort prices and reputations within the art world.

Blockchain is also a tool to ensure digital scarcity. Because it is so easy to reproduce images taken from online sites, intellectual property rights and copyright are extremely difficult to regulate in digital art. Yet an artist who chooses to sell digital work on the blockchain can monitor who has bought the work, control access to it (by certifying each image as an original) and be alerted to resales that may have implications for royalties and professional reputation.

Blockchain (and cryptocurrency) for beginners

Blockchain is a distributed peer-to-peer electronic ledger. A transaction (“block”) can only be performed by authenticated members of that specific blockchain, who each hold an encrypted key that can unlock and verify transactions. Blockchain enthusiasts emphasize that the system is extremely secure and decentralized and that it reduces friction in the market by cutting out middlemen and their associated fees. As each block is added to the ledger, the system produces what proponents refer to as an indelible and transparent record. According to Wealth Management, “transaction information isn’t stored on server, but rather is embedded in digital code that’s dispersed throughout shared databases and protected from tampering, revision or deletion.”[2] Each previous block, once completed and certified by the network, is unchangeable.

Cryptocurrencies such as BitCoin are to date the most publicized example of a service that can be hosted via the blockchain and they also have extraordinary implications for the buying and selling of art. The emblematic entry-level product is CryptoKitties (https://www.cryptokitties.co/), an online game that lets you purchase, collect, and trade electronic cats. The website promises that each cryptokitty is “one-of-a-kind and 100% owned by you; it cannot be replicated, taken away, or destroyed.” Participating in the game requires a player to open a cryptocurrency account and to become familiar with the notions of electronic ownership and brokerage.

Digital technologies and the art market

Both blockchain and cryptocurrency dovetail seamlessly with the ongoing financialization of every corner of the art market. Evan Beard, National Art Services Executive at US Trust (a wealth management unit of Bank of America), notes that “much of today’s most dynamic wealth creation comes from hedge funds, private equity and real estate. None of our clients are buying art for investment. But they’re savvy with credit, and art is a capital asset.”[3] A few of Beard’s top-end clients play the art market by guaranteeing works at the major auction houses. These savvy investors assume the risk of either ending up with the artwork should it not meet its reserve price or taking a percentage of the overage if the auction nets a higher than estimated price for the work.

In June 2018, the company Maecenas put the weight of the art establishment behind an experiment with fractionalized digital ownership in what it billed as the world’s first blockchain art sale. In cooperation with Dadiani Fine Art, Maecenas set up a digital auction of forty-nine percent of Andy Warhol’s “14 Small Electric Chairs Reversal Series” (estimated value of $5.6 million USD in 2019). Not only did Maecenas accept payment in cryptocurrencies such as Bitcoin and Ethereum (as well as its own cryptocurrency, ART), it allowed buyers to purchase digital certificates representing fractional ownership of the piece. Just as binary code can reduce the complexity of information to an efficient and universal system of 0s and 1s, blockchain and cryptocurrency enable the virtual slicing of artworks such that owning ten, five, or even one percent of a painting is not only imaginable, but feasible.

Democratizing or financializing art?

The large-scale uptake of fractional ownership remains uncertain, but the idea makes perfect sense if the ultimate goal to reduce all barriers to the seamless flow of capital, labor, and digitalized intellectual property. Imagine owning, say, 4.62 percent of an Andy Warhol Marilyn or Elvis, or another of those mid-1960s masterpieces that now routinely command millions of dollars at auction. You could show your digital certificate to neighbors and friends, and maybe even display a framed print-out of your digital square of the piece.

For some of us, this is the long-sought democratization of the art market, as fractional ownership enables people outside the tiny billionaire art establishment to own at least a part of iconic masterpieces. For others, the notion that anyone could feel meaningfully attached to a fractional piece of art is absurd. Instead, what is really happening –underneath the rhetoric of “democratizing art” — is entry into the art market, and for this access one must, of course, pay. It is also a means to bring new capital from previously excluded clients into the mix and to spread the risk around a much larger cohort of players. These are propositions altogether different from ensuring that diverse people from different economic and social classes have an equitable opportunity to experience and live with high-end art in their daily lives.

One can also imagine a worst-case scenario akin to the Great Recession of 2008, which began with the fractionalization and re-packaging of mortgage-backed securities. The scale of such a crisis would likely never match the housing crash. However, the financial incentive to create ever more esoteric, high-risk but high-fee fractionalized art securities could ironically undermine the chain of provenance, ownership, and trust. Just as, in the end, almost no one knew who owned what mortgage liability at what interest rate, one can envision thousands of fractionalized pieces of an Andy Warhol floating in the ether like those silver balloons he released in 1966. For this and multiple other reasons, including equity and access, good old-fashioned museums and galleries remain essential in our post-materialist era.

References

[1] Botz, Anneli, 2018. Is Blockchain the Future of Art? Four Experts Weigh In. Art Basel. Available at: https://www.artbasel.com/news/blockchain-artworld-cryptocurrency-cryptokitties

[2] Rottermund, Amanda, 2019. The Newest Technological Trend in the Art Market. Wealth Management, 10 April.

[3] Reyburn, Scott, 2018. Art is Becoming a Financial Product, and Blockchain is Making It Happen.” The New York Times, 8 June. Available at: https://www.nytimes.com/2018/06/08/arts/art-financialization-blockchain.html

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About the author

The GenX Joint

My name is Amy Fletcher. My writing focuses on movies, art, photography, pop culture, and tech. I am fascinated by the 1960s/70s and all things tech-futuristic.

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