Can Blockchain Fix the Art Market?

 What unites Vincent van Gogh and Otto Wacker? Both created van Gogh paintings and died penniless. It is a well-known problem in the art world that many artists cannot participate with the monetary success of their works and some people want to free ride on the creativity of artists by creating fake objects.

To first understand how blockchain can be useful to the art market, it is important to look at some of the problems that prevail in the market. The art market is very intransparent. Middlemen, such as auction houses or art dealers, provide trust to the markets based on their heritage and expertise. In this ecosystem, artists traditionally have been at the edge, with only a small portion of the profits distributed to them.

The high intransparency is the source of many of the scandals that happen in this sector. The Economist estimates that the worldwide value of sales of counterfeit objects, which also includes fraudulent paintings, is $ 1.8 trillion every year. Regularly the market is shaken by news about paintings that turn out to be fake. Behind every scandal there is a forger who crafted a convincing story about the paintings’ history. Due to the intransparent conditions in the market, with paintings being traded at a very low-frequency and often in undisclosed private deals, it is possible to introduce fakes by claiming they are long-lost paintings that reappeared.

The blockchain technology could provide three kinds of solutions to the arts’ sector. Firstly, it can act as a digital ledger where all transactions are registered. Inventing a different history of the painting will not be possible. The owner history could act as a reliable proof of the authenticity of the object and by this means reduce fraud and substitute the middleman. Secondly, the blockchain features the possibility to link smart contracts to an object. The smart contract could feature an equity stake of the artist in the artwork. Comparable to an investment in a start-up the artist could then profit from an increased value of the object when it is resold in the secondary market.

Thirdly, the concept of smart contracts could make the sector less exclusive. People could commonly invest into artworks that they cannot afford to buy as a single investor. Even though, people will still not be able to acquire the object physically, this application of a smart contract provides an opportunity for people to participate as an investor.

The underlying technology that makes these developments possible was invented for the cryptocurrency Bitcoin. Blockchain is a digital ledger or record of transactions that is distributed across, and verified by, thousands of computers in a network. Since the blocks of data are stored on multiple places, the information is publicly available and cannot be altered once it is approved.

Several artists and collectors believe that the technology will benefit the industry. However, there is a discussion if the impact of blockchain will be revolutionary to the art sector.

Installation view of Blockchain Visionaries, 2016. Courtesy Simon Denny. Galerie Buchholz, Cologne/Berlin/New York. Photo: Timo Ohler

The art market is very conservative and slow in adopting new technologies. In the “Online Focus” by The European Fine Art Fair (TEFAF) it was found that even though 39 online art sales platforms, including the market leaders Christie’s and Sotheby’s, are planning to introduce blockchain within the next five years, 80% of the responding galleries are not even considering using it. To have the mentioned effect of preventing fraud and dubious transactions the blockchain must be a common standard in the industry to prevent loopholes.

One reason for the conservative reaction might be that more transparency might fire back on the industry. Customers in the art market love to have discrete transactions, not only for the purpose to cover up opaque money trails. As a consequence, disclosing the ownerships of high worth paintings may prevent transactions to happen.

Secondly, even though the concept of smart contracts may sound as a game changer, the concept is not new. A standardized contract which lets the artists participate in the increased value of objects was first developed by the art collector Seth Siegelaub in 1971 and provisions that mandates royalties to the artists exist in various jurisdictions, including the European Union. Yet, profit-sharing with the artist in the secondary market is rare, so what the industry really needs is enforcement; a problem which the smart contracts can only addresses in terms of automatic payments and not in the design of the contract itself.

Lastly, the data is only as good as the person entering it. Blockchain can provide reliable information, but only if the information entered is true. Especially for objects that were created before the use of blockchain it faces a threat to the reliability of information. For reappearing objects, the owner history could still be fraudulent, codified via blockchain.

Beyond all those unsolved issues, some start-ups already provide services based on the technology and give an indication on how it will be used in the future. At Artlery artists or galleries can sell artworks featuring a smart contract with resell royalties. Ascribe in Berlin, Verisart in Los Angeles or Tagsmart in London provide digital certificates of authenticity and provenance records so that artists and collectors can verify the authenticity of an artwork.

There is still a lot of uncertainty about how blockchain specifically will affect the industry or even stimulate a new culture of the perception of art and its value. However, the start-ups and art galleries that already adopt the technology, demonstrate that out of blockchain can emerge a creative destruction that, according to the theory of Joseph Schumpeter, has the potential to reshape the structures of the current art industry.