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Blockchain impact in fine art market

According to The Art Market 2017 annual global art market analysis authored by Dr Clare McAndrew, founder of Art Economics, for Art Basel and UBS (global firm providing financial services to private, corporate and institutional clients), total sales in the market of arts reached $ 56.6 billion, dealer sales rose to 57% while online sales kept growing but made just 9% of the aggregate amount, i.e. $ 4.9 billion. That is the background for the blockchain technologies development promising a sweeping expansion of the internet market of fine arts.

Drawing by Yuri Aratovsky

Deals in cryptocurrencies and their prospects

Most of the reputed analytical reports – The Art Market 2017 (Art Basel & UBS), Finance Report (Deloitte & Arttactic), Online Art Trade Report (Hiscox & Arttactic), Tefaf Art Market Report 2017, Tefaf Art Market Report Online Focus 2017 – are based on the public data on the results of auctions, international art fairs and online trades. Still, according to Marc Spiegler, Global Director at Art Basel, most of the sales are accomplished as private deals.

That is one of the market foundations”, he explains. “The market is at the same time expanding and is becoming more and more globalized. Therefore, it is important to establish reliable sources for shaping new view of the world or arts and its prospect futures”.

Among such futures are the Bitcoin futures which gained 25% in value on the first day of the trade initiated by Cboe Global Markets.

As Marc Spiegler rightfully noted, the market of arts, unlike other sectors of economy, is hard to appraise. As private deals, there already are transactions of exchanging cryptocurrency futures for works of art, and works of art for digital currencies. Such deals are not recorded in reports. In April 2015 MAK, an Austrian art museum, became the first to pay Bitcoins for a piece of art. In July 2017 cryptocurrencies as means of payment were already accepted by a Mayfair art gallery in London. Eleesa Dadiani, owner of the Dadiani Fine Art gallery, later announced that she is ready to perform transactions involving Ethereum, Ethereum Classic, Dash, Litecoin and Monero. Marcelo Garcia Casil, financial innovations expert, announced launching Maecenas, a virtual marketplace where profitable deals of sale and purchase of expensive works of art (worth $ 1 million or more) could be performed. It is expected the fee of Maecenas will not accede banking charges for a money transfer while the collectors’ losses will decrease. In December 2017, beta version of ico4.art portal launched the first cryptoauction of the modern art. For the auction, Bitcoin, Ethereum and Waves were used along with the new tokens specifically created for the fine art market at the Waves platform. On its first day, the cryptoauction operated in a test mode and raised two Bitcoins for selling a piece of graphics by a Russian artist. In Russia, the value of that piece of art would be RUR 12,000 ($ 210). After the launch of the cryptoauction, Moscow-based Le Corbusier Gallery announced that it starts accepting cryptocurrencies as payments for the works of art, including Da Vinci, Malevich, Kubrick, Bitcoin, Ethereum, Waves, Bitcoin Cash, Bitcoin Gold, Litecoin, Bitcoin Diamond, Bitcoin Silver (starting on December 25), Super Bitcoin, Bitcoin Lightning (starting on December 23), Bitcoin Uranium (starting on December 31). The gallery is not setting its own platform and uses Waves for the transactions. The goal of the innovation is expanding into the international markets.

Developers of blockchain platforms intended for deals of selling works of arts for digital currencies, forward their proposals to the biggest auction houses such as Sotheby’s, Christie’s, Phillips, MacDougall’s, Bonhams. The details of the negotiation process are not disclosed. Nevertheless, MacDougall’s Fine Art Auctions’ co-founder and director William MacDougall confirms that the company has been actively studying options of employing blockchain technologies in arts, and is also considering arranging an ICO for its arts project. Explicit information on every piece of art put on sale has always been verified and digitalized, he adds.

As Andy Foster, CIO of Phillips, notes, the auction house is aware of and to some degree involved with the blockchain development process. As for the intentions of Phillips to establish its own platform in the future, he points out that the auction house does not initiate such projects but is following their development elsewhere. In his view, blockchain development in the market of arts will accelerate when blockchain technologies are widely used outside auction houses.

Cryptocurrencies and arts investments, a double payoff

The opportunities offered by blockchain platforms developers to auction houses and art dealers include a sale of a title to a work of art to a group of individuals, not just a single person. Let’s imagine that Salvator Mundi by Leonardo da Vinci was sold not for $ 450.4 million but for $ 700 million in a digital currency equivalent, and not to a single owner but to seven individuals of which each would own 1/7 of the painting which would be kept on some neutral ground while any co-owner could sell his or her share to another person for quite a different amount. An assumption  that such transactions may be in demand has not been tested, but developers of blockchain platforms promise greater revenues to the auction houses. The idea as such is not totally new, since years ago it materialized in foundations where property title was shared among foundation participants in line with the charter. Such a foundation can keep on its balance sheet a single work of fine art, for the ownership of which the foundation was specifically set.

According to Art Collecting agency which analyzed over 500 deals which took place in the fine art markets between 2015 and 2017 with involvement of digital currencies, 100% of all deals were about selling property title not to a group of persons, but to a single individual or entity. 95% of them were sales for Bitcoins whereas the remaining 5% were for other cryptocurrencies, Ethereum first of all. The participants of the deals included cryptocurrency investors aiming to get profits in two ways, first, by investing in Bitcoins and then, by investing Bitcoins in works of art with a price growth potential.

Provenance protection and risks reduction

One of the major problems with verifying genuineness of a work of art is obtaining reliable information about it and retrieving an uninterrupted chain of transfers of the property title since the commencement of ownership. Blockchain investors expect to resolve the problem. Provenance, i.e. a record of ownership of a work of art or an antique, is usually printed in auction catalogues. From there, information on most essential works of fine art comes to Wikipedia supplemented by references to other public sources meeting the criteria of the portal. Still, it is often the case that information on relatively inexpensive works of art, such as, for example, Leon Bakst’s and Natalia Goncharova’s theatrical set designs, can only be obtained from art dealers who put such artworks for sale. That results in distrust of buyers and legal risks of sellers who under a contract undertake to repay the entire amount of the deal in case of a subsequent complaint regarding the artwork’s provenance.

By using a secure blockchain system, art dealers and art collectors will be able to safely register information on the deals. The blocks will record the publicly available information along with the personal details of the owners. The information reliability will be supported by the documents. At most of the platforms, such information may not be amended, but just supplemented if a respective right to do that is granted. Such a method of dealing with the information will protect the fine art market from possible counterfeiting. This coin has the other side too, though. Blockchain is a relatively new technology, therefore the databases that will subsequently be loaded to the blockchain platforms are now being manually created from scratch.

Apart from Maecenas, the problem of provenance is being addressed by ArteQuesta investment company (one of the main functions of its platform is provenance monitoring) and by ARTEX platform founders who offer a blockchain-based service which is a decentralized system of keeping information on the history of deals in fine art market, allowing to make entries on artworks in a blockchain register. Moscow-based Sferiq takes a different approach to provenance registration and offers domain names in .art. It is suggested that once a domain name is registered with .art extension, the user will obtain not merely a domain name, but an email address, a regular mail address, a telephone number and the right to add details of the provenance in respect of the artwork which is his or her property. Another company, Verisart, is arranging its own certification based on the blockchain technology in order to simplify authentication process.

Authentication is meanwhile one of the most acute challenges in online sales which lag far behind dealer sales. Let’s imagine a situation when a photography artist has created a new work and displayed it in an online gallery for sale, having limited the number of copies by three pieces only. The online gallery would quote its price for the buyers, whereas the artist could in turn engage in negotiations with prospect buyers in social media, offering to sell few copies directly at lower price. If such copies are sold, the fact of sale would not be registered while the art gallery would be still displaying three copies of the artwork at the very same initially set price. If the artworks are finally bought, the gallery may get complaints from the buyers if they find out the number of the sold copies is greater. A system of registering deals and certifying works of art on the basis of blockchain technologies would reduce such risks to the very minimum. Let’s assume the artist sells additional copies which are not registered at the blockchain platform, at lower price. The artist will make his profit, but since the deal is not registered, the new owner will have no right to authenticate the artwork or, alternatively, the artist will have to pay some indemnity to the gallery for not observing the limitation on the number of copies printed, if such indemnity if envisaged by the contract with the gallery.

Legal protection of the deals may be a result of the growing online sales of photography and digital artworks. The blockchain technology will reduce risks for the artists themselves since they are interested in being paid royalties for each copy of their artwork sold, and for the dealers.

ICO, gamification, digital assets and crowdfunding

DeviantArt online community was launched in Los Angeles in 2000. It specializes in printed and digital artworks. By spring of 2017 daily submissions of the artworks averaged 160,000 while the registered members numbered 40 million. By now, the total number of the artworks submissions by registered artists reached some 325 million.

Blockchain investors review prospects of introducing downloadable artworks to the digital assets market. A user can acquire digital assets by paying with tokens, i.e. digital currency units. Digital assets are primarily used for ICO projects in the digital games market. The first digital assets marketplace for the contemporary fine art market will start its operations in February 2018 on the ico4.art platform. For the works of digital art, there are four anticipated product categories: limited number of copies and a file to get a printed version; limited number of copies and no file to get a printed version; unlimited number of copies and a file to get a printed version; unlimited number of copies and no file to get a printed version. The works of digital art and photography will be sold to Malevich, Da Vinci and Kubrick tokens holders. The cryptoinvestors will thus get a digital asset which could be sold at other marketplaces selling other digital assets for other digital currencies, as well as for regular fiat currencies be those euros, dollars or rubles. Nevertheless, the prospects of selling works of digital art at marketplaces of digital assets require additional assessment with the view of the plans of the Metropolitan Museum of Art to make over 375,000 high resolution images of artworks publicly available.

Besides digital art, blockchain investors consider possibilities of trading at digital marketplaces digital versions of books, e-tickets to theaters and museums, as well as launching crowdfunding projects aimed at generating profit.

By Marina Nadeeva

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