Tokenization of art
At auctions, individual works of art sometimes fetch prices in the millions, which can leave one, as an outside observer, speechless. The world-famous Mona Lisa alone has an estimated value of over 2.6 billion dollars. When dealing with such sums, one would expect transactions to rely on an efficient and secure standard in the background. Yet the industry continues to rely on outdated processes. And not just for paintings that are offered on the market, such as Da Vinci’s Salvatore Mundi. This particular work of art sold for more than $450 million to Saudi Arabia’s Crown Prince Mohammed bin Salman in 2017. This reveals another problem with the art industry: its centralization. Only a few, very wealthy individuals are able to pay the sometimes astronomical sums for art objects. As a result, this world remains closed to the majority of people, and the question of cultural value for society arises. Art has to be financed and not every work of art can be exhibited in a museum and made accessible to everyone. But shouldn’t it be possible to lower the access barriers to this very exclusive market and allow more people to invest in art objects of their choice? After all, up to now the majority has not been able to profit from the sometimes large increases in the value of individual objects. However, if one could acquire partial ownership of a work of art, this would open up interesting opportunities not only for private investors. It could also be a way for investors to achieve more diversification in their portfolios. For this and for the optimization of transaction processes mentioned at the beginning, blockchain, and especially the tokenization of assets that it enables, offers an elegant solution. Pioneers such as Amazing Blocks already offer their customers matching solutions. This article details how blockchain technology can be used to sustainably improve the way we trade pieces of art for the better. — Author: Nicolas Weber
Introduction to the art industry
There has always been trade in objects made by people for purely aesthetic purposes. Since art has existed, its products have also been traded. It is difficult to make statements about the total market value of today’s art industry, because this market is quite intransparent on the one hand and on the other because there is a high degree of regional fragmentation. In addition, there is the question of what is defined as a work of art. Anyone can be an artist and create a work of art. Admittedly, some can do it better and some worse, but as we know, that always depends on the perspective. Even bananas on walls at Art Basel sold for hundreds of thousands of dollars. Therefore, one cannot really make a definitive statement about the value of the industry. According to estimates, the value varies between $ 70 and $ 800 billion.
There is a diverse spectrum of applied arts and fine arts, which range from traditional sculptures and paintings to film, photography, graphic designs, performance (though it will be quite hard to tokenize this), animation and even video games. The average sales of art by sector worldwide from 2017 to 2019 are illustrated in Figure 1 below. The history of mankind is depicted as a chronology through masterpieces. Each period of civilization had its own specific trends. While it used to be a story of “high culture”, more recent developments change this paradigm toward a far greater exposure to the masses.
Problems of the contemporary art industry
First of all, this very illiquid market can be described as highly localized. Not only from the perspective of artists following their respective cultural traditions, but also in terms of access to certain objects that are sold exclusively in elite circles and for investment purposes. In addition, much bureaucracy is required to acquire and distribute artworks.
Also, physical storage and transportation represent additional expenses. The enormous storage and insurance costs are other aspects of why the industry is still far from being a true asset class. As a result, art galleries, auction houses, and art dealers are seeking to resolve these issues by implementing improved structures.
Another well-known problem area in the art world is that of the forgery of works of art. In 2011, for example, a painting purporting to be from the 17th century was sold at auction by the renowned auction house Sotheby’s for around $11 million. It was not until 2016 that it turned out that the painting had been synthetically altered and was thus, instead of a valuable historical representation, a fake.
As mentioned above, this unique market is dominated primarily by high net worth individuals. Small investors are therefore often denied access.
Blockchain and art
The following part will explain the benefits from the perspective of each market player: Artists can take advantage of verifying art thanks to the timestamping capability of blockchain. They also benefit from the inclusion of historical art ownership and sales data by applying blockchain technology to their business. Online auction houses enabled by authentication through a blockchain will lead to higher exposure to the marketplace for artists and to receiving the appropriate price for their product. From a collector’s point of view, blockchain features such as transparency and traceability will significantly reduce or even fully eliminate fraud, a major issue within the industry. Investors especially benefit from instant transfers of ownership, when art is tokenized and can be traded 24/7. Auctioneers will also benefit from the widespread use of blockchain. All necessary data on artworks as well as historical records must be compiled, stored and maintained. The security of this data and the complete tracking of transport and storage of precious works of art must be guaranteed. Here, too, blockchain technology provides the appropriate solution; for example, smart contracts on the Ethereum blockchain can independently execute delivery and automated payment receipts and securely store the corresponding data.
2018 was a successful year for the art industry as several auction records were broken: a painting by the british artist David Hockney was sold for a record sum of over $ 10 million and over 40 million transactions were conducted. For an illiquid industry, this large figure indicates the overall significance and perfect fit for tokenization and the peer to peer oriented blockchain technology. Also in 2018, a substantial landmark in the tokenization of art occurred: The first-ever tokenization of an artwork by the art investment platform Maecenas. They partnered with London based gallery Dadiani Fine Art to mint and issue fractional stakes in Andy Warhole’s “14 Small Electric Chairs”. Here, 31,5 % of the overall value was tokenized and the respective tokens issued. Even purchasing these tokens with crypto assets such as Bitcoin and Ethereum was possible, pushing the total crypto share in the work close to an impressive $ 6 million. While we are at it: On October 11th, 2018 Christie’s New York partnered with blockchain secured registry Artory to conclude the sale of a $ 318 million Barney A. Ebsworth collection, entirely on a blockchain based system.
Future outlook: Tokenizing art with Amazing Blocks
Amazing Blocks merges tech, law and finance enabling the establishment of a digital legal entity in Liechtenstein. With the Liechtenstein Token Act, Liechtenstein offers the best in class legal framework for tokenization in Europe. In January 2020, Liechtenstein approved a legislative package that ensures the security of ownership as well as the power of disposal over the tokenized units in the form of ERC20 tokens (native Ethereum-compatible tokens). As a member Liechtenstein of the EEA, EU passporting is also possible with this solution. This allows Liechtenstein to act as a gateway to Europe.
Once selected for tokenization, an accredited curator can appraise the art and determine the value. Now the tokenization process can begin. This can be executed with the lowest degree of work possible through the unique Tokenpad of Amazing Blocks, a customer oriented software serving its clients. The Tokenpad delivers a delightful user experience and outshines competitors with its highly secure and reliable token management features. This leads to a completely automated and digitized process. The compliant Know Your Customer (KYC) solution meets all regulatory requirements and supports the automation of business processes. Further it is designed with a modular software architecture shooting for maximum flexibility and implementation speed to allow updates and new features. It is also a form to collect relevant tokenholder’ data and receive legally mandatory consents. Lastly, APIs to comply with Anti-Money-Laundering (AML) regulations if needed are integrated. Additional attributes of Amazing Blocks’ software can be seen in Figure 3 below.
After successful tokenization, a potential buyer now can purchase tokens for multiple artworks and create a diversified portfolio. This can be conducted through the Investor Suite which Amazing Blocks offers its clients. In overall, this will lead to a larger network of investors in this space. Moreover a democratization of the art industry will follow suit by breaking up the single ownership principle thus far present.
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Amazing Blocks offers a tokenization solution that enables its clients to tokenize various assets according to the Liechtenstein Token Act (software-as-a-service). The software covers both the issuance of tokens and investing in tokens. It suits the needs for tokenizing all kinds of assets (e.g. machines, cash flow generating contracts, trademarks, real estate, cars). Imagine that some asset should be tokenized. For this asset various tokens would make sense: Equity tokens, debt tokens, participation rights as tokens, ownership tokens, or any mixture of these tokens. The software of Amazing Blocks helps issuers to handle multiple assets and to issue multiple tokens for these assets. This is possible by integrating blockchain technology with the law (that is, the Liechtenstein Token Act). At the core, there is the “digital legal entity in Liechtenstein” based on “tokenized shares” which allows a very efficient foundation, a very efficient operation of the company and, thus, an efficient and flexible possibility to tokenize assets. This should now make a wide variety of tokenization projects possible, because the costs for tokenization are significantly reduced.
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