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Art market: tokenization improves trust and transparency

Why should I invest in art? This question is probably asked by many small investors in America, England and worldwide. Art is still rather rare in the investment portfolio. Tokenization with art NFTs could provide a boost. After all, investors want more transparency in the art market – this increases trust.

As an investor, one has various options to invest in tokenized art. As an art investor, you can purchase real or digitized paintings or sculptures on trading platforms in America, England or worldwide. Depending on the investment, one is then the sole owner or one owns the artwork proportionally together with other investors.

Artists offer NFT art tokens themselves

Artists have recently started offering tokenized art themselves. They bypass galleries or auction houses, saving commissions and fees. They do this by turning their artwork into a so-called “NFT” – a Non Fungible Token. It’s generated via the blockchain and is not exchangeable.

Deloitte predicts weaker growth

But why should I support tokenization and acquire art NFTs – what are the reasons to invest? It is true that the art market has been spoiled by steady to rising demand over the years. Historically, the investment horizon is at least seven years. Illiquidity supports stability in value.

But the 6th edition of the“Deloitte Art & Finance Report,” published every few years, predicts weaker growth in the art market. Deloitte is a global accounting and risk consulting firm based in Switzerland. According to the Deloitte report, recent results from major auction houses show the following:

  • Auction sales have slowed by 20 percent in the first six months of 2019.
  • This trend is based on results from Sotheby’s, Christie’s and Phillips.
  • The authors conclude, “This may suggest that the art market is headed for a period of weaker growth.”
  • They cite the uncertainty surrounding Brexit as well as the U.S. trade war with China as reasons. This, they say, is taking its toll on the global art market.
Art collectors want transparency when investing in crypto art.

What’s stopping people from investing in art?

Art market growth trends in recent years have not kept pace with global wealth growth. The correlation between wealth creation and art market growth is deep. The question is what is keeping high net worth individuals from investing more of their wealth in crypto art as an asset class? Is it possible that there is a lack of confidence in the art market?

Tokenization of art may pave the way for a more transparent market.

Shermin Voshmgir, Founder of Token Kitchen in Berlin

Art trade lacks transparency

The report’s authors write that the attractiveness of the art market is hampered by a lack of transparency:

  • In the latest Deloitte report, 75 percent of art collectors said a lack of transparency was the biggest threat to the art market’s reputation.
  • In the previous reporting year, 62 percent of collectors still considered transparency a problem.

In other words, experienced and established art lovers criticize the lack of transparency in the art trade. This is probably one reason why potential new art buyers shy away from the market, which repeatedly draws attention to itself with corruption and forgery.

Trust in the art market through tokenization

  • Technology has the potential to transform the art market. ArtTech startups aim to increase transparency and trust. And they are doing so, for example, through the use of blockchain technology.
  • In addition, increased regulation could force the art market to be more transparent, he said. The EU’s fifth anti-money laundering directive could affect how the art market does business. The directive came into effect in January 2020.

Changes like this improve the reputation of the art trade. The art industry wants to favor the expansion of the market beyond its current boundaries. People want to expand beyond their existing customer base. “Perhaps a more regulated, professional and transparent art industry will inspire more confidence and interest among asset managers,” the Deloitte report states.

Art collectors want more transparency

Adriano Picinati di Torcello, Director and Global Art & Finance Coordinator at Deloitte says, “The findings show that lack of transparency is a constant concern for collectors. This leads to a persistent distrust of the market.” He adds that a new challenge arises from next-generation investors. “Their interest goes beyond financial return and extends to social impact.”

Blockchain is driving impact investing in the arts

Tokenization could become a catalyst for new arts and finance initiatives: The existence of digital tokens is not new. However, the rate at which these cryptographic tokens are being deployed and issued is high. And according to Deloitte, it’s an indicator that they could be “the killer blockchain application” that many people have been waiting for.

Blockchain technology is driving changes in impact investing: art tokenization could fuel the next generation of arts and culture impact investing models. Such models combine fractional ownership with social impact investing. An example of such fractional ownership is Andy Warhol’s painting “14 Small Electric Chairs.” It was tokenized and sold on the Maecenas platform in 2018.

Art sales can be tracked through tokenization

The following aspects speak for more transparency and trust:

  • The sale of art by means of tokenized certificates can be tracked through the use of blockchain technology.
  • The subsequent trade can also be tracked on the basis of the blockchain.
  • The owners of the tokenized and fractionalized artworks can sell their certificates to other buyers at any time through the Maecenas art marketplace.
  • The final price for an artwork is set by a smart contract via the Ethereum Blockchain – in a fair and transparent way.

Curbing corruption, counterfeiting and hacking

“Tokenization of art can pave the way for a more transparent market,” says Shermin Voshmgir, founder of BlockchainHub an Token Kitchen in Berlin. Small and larger investors could invest in diverse and verified artworks. Origin of an artwork and affiliation can be managed using tokens via a public blockchain. Traditional systems in the art trade are often overwhelmed with corruption, forgery and hacking, he said. “Blockchain and tokenization could solve these problems,” Voshmgir says.

Artworks can be publicly verified

Tokenized systems use hashes and cryptography to ensure documents are not tampered with. The blockchain infrastructure eliminates the need for many previously involved, insecure control entities. And it simultaneously guarantees the publicly verifiable provenance of artworks. Asset transfer management is transparently ensured via smart contracts, at lower cost.

Improved rights management for the artists

Tokens also enable built-in options for rights management and billing. Here's what that means, according to BlockchainHub founder Shermin Voshmgir: "Artists get better protection of their intellectual property rights. And there is more market transparency about who has used their art," she says. Indeed, tokenization allows for more transparent and brokerage-free management of intellectual property rights. And the subsequent settlement of royalties in real time. In this way, artworks can be rented to a gallery. The royalties, in turn, can be settled directly and sent to the artist in the form of tokens in real time. Based on the number of people viewing the artwork.

Thomas Grether

Journalist | Editor | Entrepreneur & Environmental Scientist.
Main focus: Tokenization | Digital Transformation Processes in Companies | Internet and Web Publishing | Environment

Thomas Grether

Journalist | Redakteur | Unternehmer & Umweltwissenschaftler
Schwerpunkte: Tokenisierung | Digitale Transformationsprozesse in Firmen | Internet und Webpublishing | Umwelt