Digital art: Playing by the rules

Over the next five years, the NFT market could grow to $3.4 billion, doubling in size compared to 2023. Despite declining sales volumes, the market approached the $0.6 billion mark in May. What could emerge as the new driver of the digital art market, and what does the future hold? These questions, along with the investment prospects and barriers for Russian investors in NFTs, were discussed at the international technology forum The Trends 2.0 in Moscow.

Waiting for a boom

Although the digital art market still faces challenges in attracting investment, Russia has made significant efforts to foster its growth, as noted by discussion participants. A major driver and incentive for investing in the digital art and NFT market is its legalization and transition from the shadows. Just a few years ago, there was no legislative regulation for investments in this sector. However, with the implementation of the law on digital financial assets over the past two years, the situation has improved considerably, says Artem Genkin, Doctor of Economics, Professor, President of the NPO Center for Protection of Bank Clients and Investors.

“The rules of the game have been established. The legal framework governing participants in the digital financial assets and digital rights market, including investors in NFTs and digital art, has become much clearer,” Artem Genkin says.

Of course, some restrictions remain, but they are primarily technical and will inevitably be addressed in the future. Currently, operations with digital rights involving intermediaries, such as brokers or investment consultants, are still illegal.

“However, the situation is not dire and may even improve; we just need to be patient,” Artem Genkin believes.

Vladimir Shabason, strategic director of the IT company, agrees that the NFT experience demonstrates the market’s viability, with people willing to participate and adequate tools available. Importantly, individuals can enter this market within the framework of civil law and protect their rights effectively.

“I anticipate that the digital art market will experience significant growth in the near future,” Vladimir Shabason says.

However, it’s crucial to understand that tokenization does not imply the ability to purchase real masterpieces of world art “piece by piece.” Nevertheless, investors can legally become owners of digital art objects through NFTs, as clarified by Artem Genkin.

Investors are being cautious

Currently, investors often approach NFT purchases cautiously, basing their decisions primarily on personal preferences rather than comprehensive investment strategies.

“I have reservations about the digital world, including digital currency and objects. It’s challenging to assess their value and understand their relevance,” says Natalya Basmanova, investor, philanthropist, and trustee of the board of the Tretyakov Gallery.

Investors in traditional financial products may face challenges in grasping the profitability, price formation mechanisms, and demand dynamics of NFTs.

“Obviously, paintings by Rembrandt are only growing in price – while the future of a painting by an unknown NFT artist that you have purchased could be questionable. For now, this is rather like a fan investment, with a limited amount of money,” notes Olga Ivanova, head of the Leaders’ Club for Promoting Business Initiatives association and curator of the Metsenat (Patron) project.

Meanwhile, people are becoming increasingly aware that digital art is at least beautiful, and related investments can make the world a better and more harmonious place. In addition, even small investments in NFTs help create a new market for digital art, support artists, and essentially become a special cultural mission.

“When the space around you becomes more beautiful regardless of traditional or digital art, bringing joy and becoming attractive for investment, why not go for it?” Natalya Basmanova emphasizes.

The market needs a marketplace

Efforts to bring NFT artists and fund holders closer together could be the driver of investment activity.

“It would be great to see platforms that would allow for purchasing digital paintings. In the meantime, there is a large gap between artists and platforms for purchasing their artwork,” investor and NFT collector Yury Gavrilov notes.

For now, Russian investors have to seek digital artists and works for investment on their own. Yury Gavrilov, who started with making purchases on the Decentraland platform, has collected NFT art for several years. Additionally, the market currently lacks consultants to offer advice to artists on promoting or updating their artwork.

Altogether, the efforts would spur the development of the secondary market and expand the scope of consumers of digital art, including NFTs.

“There are those who made investments in NFTs a few years ago but so far things remain the same: they are still the owners of the paintings while it is not entirely clear what to do next,” Olga Ivanova explains.

Drivers of digital art

Efforts by government agencies, including major corporations, could additionally spur investments in digital art. The current task is to promote IT and science while improving digital literacy, and it is only reasonable to do it through digital art, according to Yekaterina Fominykh-Kapitsa, Development Director at Gefest Capital Group and Head of Neural Art Digital Academy.

“This is why the government starts making investments in this field,” Yekaterina Fominykh-Kapitsa notes.

Yet, the efforts from the digital community are equally important. Artists should more actively engage in the legal space, officially registering on platforms that democratize digital assets and tokenizing art objects to make them available to the vast user market.

“It is important to register transactions and pay taxes to avoid grey market deals. This will allow for showing sales history and profitability to investors,” Vladimir Shabason adds.

This will negate the risks of investments in this sector, making it more transparent and accessible for investors.

“For investors, there is no such thing as a masterpiece; they focus on assessing risks and seek profitability and liquidity,” Shabason concludes.

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