The Metaverse is changing how and where we can create value. As with electricity and other technological revolutions, innovation will come in waves. In the case of electricity, Edison first created power stations and incandescent light bulbs for individual homes. It took 30+ years for the power of electricity to be interconnected with other critical innovations and for Henry Ford to create the first moving assembly line -- reducing the time to produce an automobile by a factor of 8.
Now, we are seeing a second wave of innovations associated with the Metaverse happening in the art world. In the art space, we are witnessing new kinds of creations and new ideas emerging. For example, one of our NYU SPS students, Rayme Silverberg, is designing an investment vehicle using blockchain technology to allow ordinary people to own shares of great art. The application could allow ordinary people to invest in art, weaken black-market transactions, and allow museums to use the value sitting on their walls for more significant community benefit.
Background: Art and The Metaverse
Art has been active in the Metaverse, primarily through NFTs and NFT galleries. The advent of the NFT has fundamentally changed the art world – more than doubling the scale of purchases, creating vehicles for artists to reach customers, and putting in place “smart contracts” that follow a piece of art through its life and compensate the creator at each transaction. This world has made it easier for artists to monetize their work. The NFT revolution has been embraced by well-known institutions like Sotheby's and Christie's and new institutions like Open Sea and Draft King.
Perhaps the most significant indicator of the change is that it takes 25 years on average for a great piece of art to be sold and only 33 days for an NFT to be traded.
Pushing the Bounds — Thinking Beyond What We Know
The fact that art often is an investment limited to the very wealthy or a passive object sitting on the walls of museums represents an opportunity for disruption. Here are a few highlights of what’s already being done:
- As Forbes documented, Sygnum (headquartered in Switzerland and Singapore) teleported Picasso’s 1964 masterpiece Fillette au béret – or, at least, its legal ownership rights – onto the blockchain. It then chopped up the digital asset into 4,000 tokens sold to more than 50 investors at 1,000 Swiss francs ($1,040) apiece. In doing so, Sygnum gave birth to a new genre of investments dubbed Art Security Tokens (ASTs), which combine the technological wizardry of blockchain with the legal certainty afforded by Switzerland’s progressive new approach to digital securities - five decades after the artist's death.
- Buzzmint sold a Renoir and its digital twin on a blockchain, bringing traditional art into the new trading world.
- Masterworks has set up a mechanism where investors can invest in a painting or portfolio of paintings that Masterworks will securitize and hold for 3 to 7 years and then provide the return to the painting’s shareholders. To date, they have attracted over 400,000 investors.
- MOMA today announced that they might sell some classic paintings to fund the purchase of NFTs - art they want to invest in.
The crypto ecosystem has built amazing tools for trading, but without a connection to the physical world, those tools’ impact remains constrained. In the real estate market, there are already attempts to link the physical world with the digital world by fractionalizing or tokenizing property ownership on-chain. Rayme Silverberg is bringing this market to the art world. She has identified three benefits from this pursuit:
- “This could become a strategy for combating illicit financial crime by relinquishing luxury assets as tax havens and permanently turning artifacts into public-owned assets. . . The flow of illicit finance helps sustain criminal activity, destabilizes nations, and is a key driver of global economic inequality. However, the extent to which the problem exists is unknown, and the mechanisms needed to produce aggregate data are weak due to the complexity and opacity of the offshore system. The IMF (International Monetary Fund) estimates that approximately $7 trillion (8% of global GDP) of private wealth is hidden offshore and likely from illicit activities1. This coalescence will bring unprecedented financial transparency, trust, and regulation to otherwise opaque industries.
- Institutions that depend on philanthropy as their primary source of revenue could be the most significant benefactors from this model, providing a path to economic autonomy. They have billions of dollars of art there, but they can't do anything with it. They have no liquidity to reassemble or expand their collections and the universe of what they can exhibit. It's all locked up in the artworks they're exhibiting.
- The art market has outperformed the S&P 500 for over 25 years and yet is inaccessible to the broader investment community and the general public due to the high costs of purchasing blue-chip art. None of the art collectibles would typically make it into the investment portfolio of an average person. Even a wealthy person with a net worth of $10 million is unlikely to sink 40% of that into a single painting that may be difficult to move when they want to liquidate it.
Digitizing and dividing ownership on a platform with instant settlements allows investors to gain exposure to assets they couldn’t afford to buy outright. It also makes it easier to sell when the time is right.
We should not, in 2022, live in a world where only things like the public stocks of big companies and US dollars are liquid and tradeable. The blockchain may prove instrumental in making physical assets easier to hold and trade. It will be fascinating to watch how this plays out. Will estates that donated art object to the change? Will artists object? Will laws and copyright delay this transition? And perhaps most importantly, what will museums do with the cash they generate? Those are questions that stakeholders themselves will have to answer as a new market emerges.