Blockchain and the World of art

My wife manages art collections for wealthy clients. When I mention this, people are always impressed and want to know more. Truth be told, the bulk of her job is assembling correspondence related to insurance, bills of sale, appraisals, loans, restoration work, etcetera. All of these items are used to establish “provenance”. This word refers not only to the record of ownership that proves that a piece of art is authentic; it’s also the work’s life-story.

A bullet-proof provenance shows where the work has been exhibited, auction records, pages from a catalog and possibly even family photographs. If a work is purported to be from 1930, but records only go back to 1987, there may be reason to worry and my wife gets cracking. She tells our children that she’s an “art detective”.

Very few collectors bother to hire someone to manage their collection. It’s costly and the collector must also actively participate and that can be time-consuming for a busy industrialist. But just like a last testament, it’s something that should be done so that the heirs are not burdened.

Indeed, at some point someone will decide to sell the work and all of these bits of paper become crucial breadcrumbs in establishing the work’s authenticity. This is especially true if it’s a small collector with only a few important pieces. If it is a large collector, all of this will be sorted out by the hordes of auctioneers asking to “estimate the value of the collection at no charge.” But someone with just a few paintings from a dead artist whose entire body of work has not been collected in a catalogue raisonné will have problems. The collector will need to phone and hope the gallery where the painting was bought 30 years ago is still in business and has a trace of the invoice. If the gallery is well-organised, they may even be able to say how they acquired the piece. This takes time and freelance collection managers charge rates similar to those of lawyers. And this method isn’t failsafe. It relies on trust and credibility; something that has been eroded in recent years by even reputable dealers and galleries.

Blockchain’s Solution

There are several start-ups currently competing to streamline the authentication process using blockchain. In a nutshell: living artists can use one of these platforms to certify the work they produce. The artist sends in a photograph with the work’s title, dimensions and date. The platform then provides the artist with a unique token which serves as a certification of authenticity and the work is added to a blockchain. When the work is sold, the token is transferred with the artwork and the transaction is added to the blockchain. In this way, every sale becomes part of a permanent record that remains immutable and impossible to destroy thanks to the decentralized nature of blockchain. If the artist is deceased, these platforms suggest using third-party certification boards to verify authenticity and then the blockchain begins from that point onward.

The Players

The two contenders vying for relevance are Verisart and Codex Protocol. Verisart got a head start by being the first to apply blockchain to physical art objects back in 2015. They’ve recruited Peter Todd (legendary Bitcoin coder) to their advisory board and superstar artists Shepard Fairey and Ai Weiwei are certifying their own pieces through the Verisart platform. The company has also just received 2.5 million in funding to expand their partnerships.

Still, the Codex Protocol is running a close second. They are nurturing their own network of relationships and they have ambitions beyond simply being another platform for authentifying art and collectibles. Codex Protocol is working to make cryptocurrency a new and important medium of exchange for art purchases, thereby helping auction houses avoid one of the taboo scourges of the industry.

When Buyers Welch

All retailers have to manage buyer’s remorse at some point. A merchant will likely refund a purchase on some hastily bought earrings or a pair of shoes if the client shows up with a receipt and and an apologetic smile. It’s good business. Vendors should not alienate their customers.

Things become more complicated when the purchase is a ￡3,000,000 painting at Sotheby’s. Perhaps the buyer doesn’t have the liquidity at that precise moment or balks at the fees and delivery charges. Whatever the reason, Sotheby’s is likely to lose out. Initiating litigation against a wealthy client will be costly, the process will be long, the judgement uncertain, the press will be bad for business and and an otherwise good client will be antagonised. For these reasons, auction houses rarely pursue buyers who default.

The large auction houses insist that high bidders rarely renege, but in those unfortunate instances when they do ? Well, they say it’s just the cost of doing business. But the cost is significant. Auction houses spend vast sums promoting consignments to potential bidders, so when a work is ballyhooed, won at auction and then subsequently rejected, it’s as if a giant circus came to town and performed for free. To make things worse, the work of art will likely never again reach its peak. There’s a blemish that can’t be undone and the consignor will likely blame the auction house for incompetence.

Although European and American auction houses assure us that buyer’s remorse and default are rare, a 2017 Art Market report done by Art Basel and UBS quietly acknowledge that there has been an upward trend on the rate of non-payment. The Chinese, however, are very open about the problem:

According to a Chinese Art Market report, the percentage of total sales value paid as of May 15, 2018 dropped to 49% for all lots sold in 2017…”

Even when all goes as it should, there is still considerable haggling behind the scenes concerning fees, transport costs and the insurance. Some commentators insist that there is no way to correct the problem short of forcing bidders to attend live auctions in person with suitcases of cash.

Solution: Cryptocurrency and Smart Contracts

Enter Codex Protocol. Like Verisart, the company was founded in hopes of streamlining all of the bureaucratic issues involving the provenance of fine art and collectables using blockchain. Since then Codex has teamed up with LiveAuctioneers, the largest online auction platform for art and collectibles with over 5,000 auction houses around the world.

Christie’s and Sotheby’s may have their own online bidding platforms, but the collaboration between Codex and LiveAuctioneers is different because it attempts to solve the problem of buyer’s remorse by using the Codex API, Biddable. Once registered with Biddable, cryptocurrency holders from around the world can bid on items by depositing assets into an escrow account which will then be managed by a smart contract making sure both sides are protected until the transaction is complete.

And so When do we Start ?

Although these platforms are up and running, the vast majority of collectors and buyers have never considered acquiring blockchain provenance, or a smart contract to assure delivery. Most are lucky to have everything together in one filing cabinet. Change is slow and it will only really start when the existing institutions (auction houses, galleries, museums) incorporate and insist on using the tools of change.

VisiCalc, the first electronic spreadsheet was introduced 40 years ago last month. Of course, VisiCalc and then Excel revolutionized the way and speed in which we do business. Blockchain solutions would seem to offer something similar: they facilitate and expedite the drudgery of searching and compiling documents. Smart contracts and crypto-currency open up the market and protect everyone.

Blockchain platforms would seem to be as inevitable and as transforming as spreadsheets, yet there hasn’t been a rush to make use of these tools in spite of all the marketing and partnerships of the start-ups. Could it be because the technology appears to threaten certain critical beams of the art economy’s scaffolding ?

There would seem to be little reason to increase efficiency when 67 billion dollars were spent last year. Cutting costs will not necessarily increase profits. If blockchain were widely used in the ways discussed, there would be less need for galleries, experts, advisors, lawyers and auction houses. Blockchain will gain a foothold and expand only when the gatekeepers understand that they cannot do without it, or see it as helpful in creating new streams of revenue. Until then, my wife can feel safe knowing that the filing cabinets lining the walls of her office are not likely to be replaced any time soon.