Will blockchain transform the art market?

In 2016, one of the world’s oldest auction houses, Britain’s Sotheby’s, found itself embroiled in a scandal – it turned out that An Unknown Man, a painting by the Dutch artist Frans Hals, sold in 2011 for almost $11 mln, was a forgery. In 2017, the history repeated itself: and also qualified as a forgery several years later. The buyers themselves had no idea what they acquired until the special technical appraisal established this unfortunate fact. To make the judgement, the experts analyzed, among other things, the art supplies that were used to make the painting.

It shouldn’t be surprising then that traditional investors are wary of the art market despite its overall high rate of returns. For example, the ARTIMX index has shown that those who invested in graphic art and paintings between 2008 and 2014 enjoyed the returns of 350%. Knight Frank gives a similar evaluation, saying that over the last decade investments in the works of art had yielded over 200% in profits. One way to change the situation on the art market would be to use blockchain, which would make this niche market more transparent and investments better protected. But will this be possible – and how much are the market players themselves interested in making it more transparent and open?

Blockchain provenance

The blockchain technology can be used to create a distributed database of art objects. This would primarily involve blockchain registration of the object’s provenance. The technology of distributed registers is designed to guarantee authenticity of information about any object, be that a painting, a photograph or an antique.

“Such database may combine information about the author, his works, their digital representation, characteristics, details, descriptions, and the history of transactions involving this piece of art”, – explains the founder of the Russian Art Patrons Foundation Yulia Verbitskaya.

By acquiring a painting, whose information has been entered into blockchain, the customer will learn both about its provenance and all the deals and transactions that involved this piece of art.

“Everything will be documented, and nobody will be able to lie”, – says the assistant professor of the Department of Business and Management Strategy of the Institute of Business and Business Administration of the Russian Presidential Academy of National Economy and Public Administration Teymuraz Vashakmadze.

The president of the Moscow Zimin School of Art Management Sergei Voitkovsky forecasts that in the next 12-15 years blockchain will become a reference point for the deals on the legal art market and a certain guarantee of the works’ authenticity.

Taking everything into account

The blockchain platform for works of art is already under development in Russia, where it’s championed by the startup called Artex. Among the project’s founders are the owner of the Russian Photo magazine Vladimir Povshenko and the creator of professional social network called 35photo.ru Vladimir Kochergin (the aggregate audience of these  photo projects exceeds 1 mln visitors a month). The project’s another cofounder is Evgeniy Galiakhmetov, the head of the Zenith Bank’s retail business and investor in blockchain assets.

The startup seeks to create a multifunctional blockchain ecosystem. The company wants to combine information about the works of art (from their authorship to the current owner and managing gallery) with records about all the transactions involving a particular piece, as well as as the information on all the exhibits it was included in and all the publications where it was mentioned, along with the work’s photographs and the index of its value.

“We want to record the history of all transactions and all objects of art. It will be a single register, and mobile application will allow anyone to check who owns the rights to the work of art”, – says the project’s cofounder Vladimir Povshenko.

Right now the project is going through acceleration at Alexei Voronin’s ICO Lab. In October, Artex plans to hold an ICO, issuing ArtCoin cryptocurrency. The latter will become a unit of payment within the Artex ecosystem: the owners will be able to use it to pay for the expert evaluation of their work of art, and the galleries – for their accreditation with the platform. That being said, the owners will be able to issue tokens for a specific work of art within the ecosystem itself. For the art photography, for example, this will provide a unique opportunity to exercise control over the number of copies and photograph’s authenticity.

“Traditional art community discriminates against photography, advancing the idea that photography in itself is not a work of art, because it can be copied without control”, – says Vladimir Povshenko.

As envisioned by Artex, the photographer will be able to upload the digital photo into the blockchain platform and then issue tokens that will give the buyer a unique license to print the picture.

“For the digital and multicopied works of art, blockchain may become an excellent instrument to secure their niche of the market. With a photograph, for example, you will always be able to see how many copies were already made, what will be the total run, who produced and sold them”, – believes art historian and director of the Russian Abstract Art Foundation Anna Karganova.

The startup entrepreneurs have some grandiose plans: by the end of 2019, the company plans to control up to 50% of the global photography market ($750 mln), and by the end of 2021, they plan to secure a 15% share of the art market ($7.5 bln).

Helping the novices

The founders of Artex are convinced that blockchain is a great way to change situation on the art market and attract new investors into this niche.

“Today, young investors don’t want to invest in the art market, because it is opaque, obscure and closed, it was always used to diversify the risks. To enter the market, you need to find somebody you know, some experts who will advise you on what to invest in, and you have to trust them – all of this is absolutely unacceptable for the young generation”, – says Vladimir Povshenko.

He points out that today an unprepared investor can pay hundreds of thousands of dollars for a painting that will turn out to be a fake several years down the road. And it may not even be a fake – one can significantly overpay even for an authentic painting. Russian billionaire Dmitry Rybolovlev, for example, found himself in such situation, when it was discovered that he overpaid hundreds of millions of dollars for the collection compiled for him by the Swiss art dealer Yves Bouvier.

“Blockchain will make the art market transparent and user-friendly, and will attract a new generation of investors, starting a new period of active growth”, – Povshenko believes.

In particular, the investors won’t have to spend money on expert evaluation of the works of art, which may amount to 1-2% of the deal’s value. Morover, Margo Gorsheneva, CBDO of QBF, points out that the full-out expert evaluation may cost as much as 5% of the transaction’s value. But most importantly, blockchain can bring new investors to the market on account on the so-called de-centralized investments or distributed ownership, which is made possible by using this technology.

“With the help of blockchain, the property rights to a work of art can be divided into many tokens, and so a person can acquire 1/100 or 1/1000 of a painting or a sculpture. In this way, investments in the art market can become more accessible”, – thinks Ekaterina Tarasova, representative of Jincor blockchain project.

The art historian and director of the Russian Abstract Art Foundation Anna Karganova expresses a similar view:

“This mainly becomes interesting when it comes to very expensive works of art. The idea is that each work can have several owners”.

With all the seemingly obvious advantages that blockchain can offer the art market, the active use of this technology may be hindered by the market participants themselves. This has less to do with the key players’ conservatism than with the fact that private collectors have no interest in the transparency that blockchain can offer.

“The private art collectors are not big fans of transparency. Yes, blockchain can be used, but the big question is whether the owners – or the buyers – will actually want to make it their transactions so transparent”, – wonders Teymuraz Vashakmadze.

Secretive private collectors aside, blockchain would be a real help when it comes to museums or state institutions that handle the works of art, as well as the private citizens who are interested in the protection of their rights, including copyright.

Written by Olga Blinova