Annual Reports on the Art Market Evidence Excitement About Blockchain’s Potential

The art industry, rife with stories of forged paintings, museum heists, money laundering, and Nazi-looted art, is growing in value on an annual basis and is more global now than ever. The crazy twists and turns of the industry certainly are not quieted by the fact that it has been referred to as, “outside of drugs, the world’s most unregulated market.” While this is not necessarily true about the art market (although it may not be far off), what seems to be true is that laws generally applicable across nearly all industries have been less strictly enforced in the art market than other sectors.

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If all of those concerns were not enough to convince you that the art market is in the midst of a time of both great prosperity and wild chaos, then it should be mentioned that art is also in the process of emerging as a new asset class for investment purposes, potentially subjecting the art market to a wide range of laws and regulations from which it has previously been shielded; or, potentially, leading to an increase in enforcement techniques that should be applied more consistently within the art market under the applicable laws in existence today.

Many recent legal issues in the art world have stemmed from questions about the authenticity or chain of title of a work, with each being a factor that can make or break the value of an art work.

What makes makes authenticity especially interesting, although not for the most appealing of reasons for those looking for more certainty in the art market, is the party that is often left to decide the authenticity of a piece. In a number of recent cases, judges in New York have been tasked with answering questions of authenticity. Judges must make their rulings based only on the evidence presented and generally are applying “a preponderance of the evidence” standard (meaning that if the judge is 51% sure, in either direction, that is how he or she must rule). Forcing questions of authenticity to be made by judges of the court systems is a less-than-ideal way to resolve these disputes that have such great impact on the value of a work, and judges have said as much in some of their opinions.

In a 2009 case called Thome v Alexander & Louisa Calder Found., 70AD.3d 88 (1st Dep’t 2009), the Judge stated “courts are not equipped to deliver a meaningful declaration of authenticity. For such pronouncement to have any validity in the marketplace or art world, it would have to be supported by the level of justification sufficient to support a pronouncement by a recognized art expert with credentials in the relevant specialty.”

Clearly, the recent trends in the art world do not make it appear that this market is headed in the right direction. Although many will be extremely skeptical about this claim—due to its claimed magical powers to solve any issue and its inclusion as a solution to any problem—the art market seems like an area that can legitimately be improved by blockchain-related technologies. The art market has historically operated in an extremely opaque fashion, with no transparency of information, and a lack of standards for keeping records of title relating to a given work. What the art market appears to need are some standardized procedures, or in other words, protocols, such as those employed by blockchains, blockchain-deployed smart contracts, and additional blockchain-based applications.

Blockchains offer a variety of potential benefits to the art industry. Proof of the confidence in the potential for blockchain to disrupt the art industry can be found throughout annual reports on the art market published by large companies involved in the art world, such as Deloitte and UBS.

For example, the 2017 Art & Finance Report by Deloitte and ArtTactic stated Blockchain could “revolutionize the art industry.” Naming the art industry as one of the most opaque of all business sectors, blockchain is mentioned as a potential source of improvement for a number of aspects of the art world, including provenance as well as transparency, copyright, and ownership issues.

The Report also features a number of case studies concerning art and the blockchain, beginning on page 232. The case studies are presented by Dr. Shermin Voshmigir, the founder of a, which according to Dr. Voshmigir is “an informative hub and think tank advocating blockchain, smart contracts, and the decentralized web.” A section of that focuses specifically on blockchain use cases involving art can be accessed using this link.

2017 was not the first time blockchain’s potential in the art world was mentioned in Deloitte’s annual Art & Finance Report. The 2016 edition noted blockchain’s potential as a platform for improving provenance and combatting fraud. The 2016 Report also went on to state, “with fakes and forgeries threatening reputation and trust in the global art market, blockchain technology has clear potential to create a global immutable ledger of objects with immutable IDs.”

The Art Market 2.0, a report created by the United Kingdom’s leading visual artists rights management organization (DACS) in conjunction with the University of Oxford and the Alan Turing Institute, is another source that mentions the potential benefits of blockchain applied to the art market. Much like the Deloitte Report, the DACS Report, which was presented to the House of Commons in May of 2018, declared that the application of blockchain-related technology to the art would could be beneficial on a large scale. The DACS Report mentioned many of the same areas as being ripe for potential improvement as the Deloitte Report, but also touched on some additional aspects that could be improved, including the methods for selling art and transparency of ownership.

The 2018 Hiscox Online Trade Art Report, also produced in conjunction with ArtTactic, states that blockchains plus connected applications and the rapid growth of related companies provide the potential to reduce some of the current friction in art market in the areas of quality assurance, price transparency, and fulfillment, but only if the blockchain-based methods are embraced by existing players in the art market.

The Hiscox Report goes on to state that there are many attractive features of blockchain uses within the art world. The features that the Report lists as being attractive are its functions as a global title registry for an asset class that currently lacks any such widely adopted registry, high security supplied through cryptography, anonymity, the ability to combine both open data and secure data, and blockchain’s ability to function as a decentralized international register rather than a centralized institution.

The Report goes on to state that applications or features could be built on top of a blockchain system that would allow for a number of additional data points and documents to be added, including transaction prices, valuations, provenance, shipping reports, etc. The Report once again questions if there would be enough adoption soon enough to provide a network of participants that could make a blockchain-backed registry work, but the ultimate conclusion seems to be that, although there is a long way to go, exponential growth in technologies and applications built on blockchain are likely to occur.

The survey data from the Hiscox Report provides some interesting information about how blockchain is being used and how its adoption may be likely to continue expanding. According to the polled online platforms, 64% of respondents stated they “felt that using blockchain as a title/ownership registry for the art and collectibles market was going to be the most successful use of blockchain technology in the future.” 8% of surveyed online platforms already had implemented blockchain into their businesses and 38% stated they were thinking about doing so. 7% of participants stated they were accepting cryptocurrencies as payment for art and another 22% said that they planned to do so within the next 12 months.

One area of concern raised by the Hiscox Report is the need to establish a link between physical works and their corresponding blockchain records through the use of a unique identifier. The Report acknowledges that several companies are already working on various ways of creating such links.

The Art Market 2018, issued by Art Basel + UBS, is another industry report that devotes some of its coverage to blockchain technology. The Art Market comes across as being a bit more skeptical about the potential impact of blockchain technology than the other reports analyzed in this article. The conclusion of the Art Market is that it is “likely that, rather than producing revolutionary short-term changes, there will be a slower adaption to the technological improvements [blockchain] provides, with the benefits ultimately being absorbed into existing systems.”

In addition to its overall conclusion that there will be slow adoption of blockchains in the art world, it also implies that its benefits may be limited, regardless, as the Report states that any blockchain system for tracking the provenance of a physical work is likely to fail because it requires the seller of a work to voluntarily participate in a sale on the blockchain platform in question, which would require disclosure of the sale price and such a disclosure is something an owner would not likely give willingly due to a desire for discretion and security.

The Report mentions the potential use case of the sale of fractional ownership of an art piece, using Maecenas as an example, but it then goes on to point out, correctly, that this is not a novel concept. The last sentence on the subject simply states that a past problem with this type of funding model has been a lack of demand for ownership shares of a fractionalized portion of a work of art.

Despite the overall skepticism of the Art Market, it did provide some positive statements about possible uses of blockchain in the art world. The Art Market states that the “main benefits of blockchain technology in relation to art center on its potential to improve authentication and provenance.” Although the report does not express confidence in people using blockchain platforms for physical goods, it does note that there seem to be interesting applications when applied to digital art. When it comes to digital art, the report points out that scarcity of a digital asset can be artificially created, which helps protect against one of the largest issues for digital content creators today: online piracy and/or copyright infringement. The provenance tracking that could occur when tracking digital art transfers using a blockchain-based register is noted as also allowing for “tracking future sales and commissions due back to artists in resale royalties and copyright.”

Wrap Up

After reviewing the most recent editions of a number of comprehensive reports on the art market and compiling the conclusions of each in regard to blockchain’s impact on the art world, it seems that there is a lot of optimism that blockchain will help to improve some of the issues in the current art industry, such as the lack of transparency and difficulties in authenticating art works.

According to the industry reports mentioned in this post, the aspects of the art industry that blockchain is now or will soon be disrupting are restated in the compiled list below:

  1. Acting as a decentralized register for the entire emerging asset class of art works;
  2. Reducing uncertainty about authenticity as a result of improving provenance by converting information previously stored in a stack of old documents or some other likely informal location into an immutable, tamper-resistant ledger;
  3. Reducing uncertainty about chain of title issues due to the increased security of the way that provenance information is stored;
  4. Increasing the transparency of both the market as whole and in relation to specific points of market data, all without necessarily revealing the parties, so that, without sacrificing the privacy that so many current art market patrons are accustomed to, prices, tends, etc. can be used to better manage related service businesses like insurers and lenders using art works as collateral for loans;
  5. Improving artists’ rights, including copyright rights, moral rights, and royalty resale rights; and
  6. Creating increased liquidity in works through tokenization and fractionalization of art works.

While the reports did contain a lot of encouraging information regarding blockchain’s potential application to the arts, they also did also mention some potentially negative or yet to be solved aspects of art-related blockchain use cases.

The only potential issue that seemed to be mentioned more than once was the concern about how to link a physical object to a blockchain record. Other than that, the other two concerns were the potentially slow adoption of the necessary technology and the potential lack of demand for fractionalized shares of a work of art.

In my next post, I will elaborate on the strengths and weaknesses of the use of blockchains within the art world.

By: Ford W. Harmon

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Let’s build a safer more secure art market. #artforeveryone

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