Art Is Becoming a Financial Product, and Blockchain Is Making It Happen
Last month in London, DACS, Britain’s leading artists’ rights management organization, unveiled “The Art Market 2.0” to lawmakers in the House of Commons. A report by academics at the Alan Turing Institute in London and Oxford University, it envisioned how blockchain technology might “change the balance of economic power in the art market” and “integrate art into the financial sector.” A financialized Art Market 2.0 would lead to an “explosion of liquidity and value,” according to the report.
A day later at the London Business School’s 10th Art Investment Conference, held at Phillips auction house, there were, as usual, sessions discussing the performance of art as a financial asset class. This year, however, the event focused on whether “new technologies can make art a better investment.”
“It’s not Wall Street,” Alain Servais, a Belgian collector, former investment banker and one of the speakers at the conference, said in an interview. “I don’t think art can be considered as an asset class.” He pointed to the art market’s lack of liquidity and regulation and to the ability of trade insiders to control the prices of certain highly collectible names. “These are wealthy people’s toys,” he said.
But to what extent has the art market been “financialized,” in the way that a Wall Street investor would recognize?
The lack of liquidity and regulation, together with opacity, volatility, high transaction costs, cyclical trading patterns and a relatively small scale, has long been among the reasons institutional investment houses have shied away from the art market.
But wealthy individuals from the world of finance are becoming increasingly enthusiastic about art as a way to increase their capital.
“Much of today’s most dynamic wealth creation comes from hedge funds, private equity and real estate,” said Evan Beard, a national art services executive at U.S. Trust, a wealth management unit of Bank of America. “None of our clients are buying art for investment. But they’re savvy with credit, and art is a capital asset.”
Mr. Beard said that Bank of America has about $6.5 billion of art-secured loans on its books and that clients have used much of this liquidity to capitalize their businesses.
Last year in the United States, the art-secured lending market grew 13.3 percent to an estimated $17 billion to $20 billion, according to the 2017 Deloitte Art & Finance Report. The market is dominated by the major investment banks, which charge lower interest rates for their loans than specialist lenders that securitize loans solely against art.
And then there is the money that savvy financier-collectors can make out of auction guarantees. Mr. Beard said that more than 10 of his wealthy clients routinely guarantee works at Sotheby’s, Christie’s and Phillips. They take the risk of being the only bidder and owning the artwork in return for a fee or a percentage of the “overage” if the bidding exceeds an agreed-upon price.
“They’ll guarantee three paintings in a season they’d like to buy and will be happy to own one of them if the overage on the others gives them a good discount,” Mr. Beard said.
At the latest biannual season of Impressionist, modern and contemporary art auctions in New York, Sotheby’s, Christie’s and Phillips took in about $2 billion, a 25 percent increase over the equivalent sales the previous May. Most of the more expensive lots had been certain to find buyers courtesy of these opaque arrangements with third-party guarantors, which blur the boundaries between private and public sales. Among the works sold were paintings by Amedeo Modigliani and Andy Warhol that fetched $157.2 million and $37 million, respectively.
Artnet News pointed out that Christie’s website published the price of Andy Warhol’s 1963 “Double Elvis [Ferus Type]” as $38 million with fees, rather than the $37 million that was announced to the media. That $1 million discrepancy reflected the fee earned by the undisclosed third party, who earned more from the transaction than the seller. That was the casino magnate Steve Wynn, who had bought the painting in 2012 for $37 million.
The rewards for saying “bid” into a telephone can be even more spectacular. Thomas Danziger, a New York attorney who represents clients active in the top end of the international art market, estimates that whoever guaranteed Leonardo’s $450.3 million “Salvator Mundi” could have earned between $80 million and $100 million. On the other hand, as Mr. Danziger points out, guarantors who end up buying a work are left wondering if the lot has been overvalued. The Modigliani nude that sold last month, for example, was knocked down to a single bid of $157.2 million from its guarantor.
“Guarantees used to be a gentlemen’s club, but now they’re greatly extended,” Mr. Danziger said. “Auctions have become a public forum for private transactions,” he added, referring to how it has become routine for at least a third of lots at evening contemporary sales to have been “presold” to external guarantors.
With plentiful liquidity available from the major banks, and millions to be made from auction guarantees, wealthy collectors can make art a lucrative asset without having to go anywhere near the art finance industry.
Yet companies continue to come up with ideas to financialize art. Later this month, the Singapore-based Maecenas, which gave a presentation at the Art Investment Conference in London, will unveil a “decentralized art gallery” (the works are scattered, but exhibited together online) that “democratizes” investment in art, according to its website.
One of several start-ups that have explored the idea of “fractionalizing” art, Maecenas will divide 49 percent of the value of an artwork into shares, which can then be bought and sold on the company’s blockchain trading platform. Shares will initially be priced at $10,000 each, according to Miguel Neumann, one of the company’s founding partners, who comes from an investment banking background.
The first artwork, Andy Warhol’s 1980 silk-screen painting “14 Small Electric Chairs Reversal Series,” will be supplied by Dadiani Fine Art, based in the Mayfair district of London. The gallery, which offers a commercial mix of contemporary and older British, American and Russian art, gained notoriety when it became the first in the city to accept payments in Bitcoin and other cryptocurrencies. (The Warhol will be valued at 4.2 million pounds, or about $5.6 million.)
It remains to be seen how many investors will want to speculate in shares derived from works owned by galleries and collectors. The art market, after all, despite its shortcomings, is still democratic enough that people can buy and actually own works for less than $10,000 that turn out to be good investments.
But there are also people, such as Duncan MacDonald-Korth, one of the co-authors of the DACS “Art Market 2.0” report, who remain convinced that the technological integrity of blockchain will eventually transform the art market.
“The stakes are getting so high,” Mr. MacDonald-Korth said in a telephone interview, referring to the skyrocketing amounts being paid for trophy works of art. “The higher the values get, the more incentive there will be for the market to be properly financialized.” He envisages a large-scale trading platform on which investment banks and hedge funds will be able to trade fractions of art in digital currency. “We’re in a special moment in the economics of the art market.”
What this moment will mean for art itself is anyone’s guess.