Tokenization: Are Works of Art the New Stocks?

Tokenization: Are Works of Art the New Stocks?

Blockchain technology enables trading of digitized assets, a category that can also include non-bankable assets such as real estate and paintings. Technology-savvy conceptual artist Kevin Abosch and Juan Dominguez from the investment platform Maecenas discuss the impacts on the art market.

Kevin Abosch, you’re known as the artist who became a Bitcoin. What’s life like as a cryptocurrency?

Kevin Abosch I always chuckle when that comes up in conversation. The Forbes magazine headline that you’re referring to was cleverly chosen, of course, but is completely unfounded. I created a virtual work of art with IAMA Coin, or actually ten million virtual works of art.

To do that, I used blockchain technology like Bitcoin does, the Ethereum protocol to be precise. That, however, doesn’t make IAMA a cryptocurrency. What the token has in common with cryptocurrencies is that it’s divisible to 18 decimal places. I find it fascinating that although each tiny fraction of an IAMA Coin has the same intrinsic artistic value as one or multiple IAMA Coins, there are people who nonetheless want to buy 10,000 of them.

Juan Dominguez Perhaps they view it as an investment in the hope that your virtual work of art and their stake in it will increase in value. We at Maecenas are trying to enable such investments, also in physical works of art. For example, we use blockchain technology to “transform” an individual painting into numerous asset tokens that each represent a percentage share in the physical work of art, and that are also tradable.

Like a stock?

Dominguez Our asset tokens are in fact roughly comparable to equity securities, at least along general lines. But we’ve had to do some rethinking since our successful 2018 auction of the Andy Warhol painting “14 Small Electric Chairs.” We set up that auction – our first one ever – as a security token offering, which positioned us in the immediate vicinity of conventional securities from a regulatory standpoint.

But since legislation at the moment is not keeping pace with technological advancements in every point, today we speak of asset tokens. This means that we have adjusted the procedure to stay compliant.

Abosch The sensitivity with respect to the legislation of blockchain technology and initial coin offerings also affects me in a way. A former federal prosecutor has advised me never to utter the word “investment” in the same breath as “IAMA Coin.” But I have never suggested that the ten million tokens I created would be a good investment or security even.

They are virtual works of art and a reaction to a shift in the view of my work from artistic to financial value. It was my attempt to control this shift.

That’s a surprising statement for an artist who sold the photo of a potato in 2015 for a million US dollars.

Abosch Well, “Potato #345” hung for years in my home before one of my guests liked it so much that he wanted to buy it. We reached an agreement. The price was in line with the prices of some of my other works of art. I could go on to explain why the potato, to me, is a proxy for the shared human experience, and so on. But what’s far more interesting is the discussion around price discovery and how it ascribes value.

Dominguez And now we’re in the thick of the matter. Anyone who bought a token or a fraction of a token at our Warhol auction will find the symbol WRHL1 in his or her digital wallet. It represents his or her stake in the physical work of art. But if I have an IAMA Coin in my wallet, do I really own a share of you?

Abosch That’s the question, isn’t it? Viewed objectively, with IAMA Coin, the token in itself is the work of art. But it was important to me to create a connection to the real world.

Fortunately, my wife is a doctor. I had her draw blood from me that I used as ink to print the coin’s alphanumeric “contract” address on paper. This gave rise to a number of physical works of art that are connected to the virtual works of art. For this reason, I feel that each IAMA Coin is a piece of me.

We use blockchain technology to ‘transform’ an individual painting into numerous asset tokens.

Juan Dominguez, Maecenas

For us at Maecenas, of course, it’s exclusively all about creating a connection to the real world – to the actual work of art and its true value. That’s why we also take a lot of time to verify the authenticity of a work of art and to, of course, set a realistic price. For the Warhol, we estimated a value of USD 5.6 million, which equates to 1,000,000 tokens at USD 5.60 apiece.

Abosch But is a real intrinsic value so important? For a good cause, I once tokenized a photo of a rose and used blockchain technology to auction it without anyone ever having received the photo or any part of it.

Many people found it difficult to comprehend how a work of art you could not hang on a wall or even see could have value. Ironically, the same people trade cryptocurrencies, which are also immaterial and “mechanically” identical to my virtual art.

Will the Art Market Be Disrupted?

Conceptual artist Kevin Abosch and Juan Dominguez, Chief Strategy Officer at Maecenas, took part in a four-person panel discussion at the 2019 SIX Innovation Day event. Alban Fischer, Chief of Digital Platforms for Art Basel, concurred with Kevin Abosch: “As creative as the art world is on the artist side, it’s conservative when it comes to digitalizing processes in the industry. There are calculating investors who buy art with their heads, there are passionate collectors who buy art with their hearts, and then there are those who want to get close to the art scene for social motives. Technology arguably doesn’t have the same significance for each of those groups.”

The photo above of Kevin Abosch and Juan Dominguez was taken in the Migros Museum of Contemporary Art. Heike Munder, the director of the museum and the fourth panelist in the discussion, emphasized the “experienceability” of art: “People love the physical elements of an object. They want to touch it, smell it, possess it.”

Platforms like Maecenas, in contrast, view art as an investment opportunity. Blockchain technology turns an individual work of art into numerous asset  tokens that can be traded in the future, for instance on the SIX Digital Exchange (SDX). The SDX was one of the initiatives on display at stands, in workshops, and in presentations at the 2019 SIX Innovation Day event. Some 17 internal experts on subjects such as analytics, robotics, and design thinking explained to employees and guests how ideas originate and get put into action at SIX.

And the Warhol? Can someone hang it on his or her wall?

Dominguez It’s currently in a vault in Switzerland. From an investor’s perspective, it’s best to store works of art in a place with optimal humidity, temperature, and light conditions, where it’s protected from damage and theft. That also lowers insurance premiums.

Ongoing storage costs and insurance premiums, by the way, are not continually billed to the owners of the tokens. That wouldn’t be efficient. Those costs are already included in the sale price. If a single person were to acquire a majority of the tokens beyond a certain threshold, he or she would be allowed to take the work of art home. Similar to a shareholder squeeze-out with stocks, the majority token holder could first buy out the few remaining tokens outstanding by paying a premium.

Abosch Management of this type of shared or “fractionalized” ownership seems complicated, but of course it’s not a new idea. There have already been times collectors have come together to jointly purchase a physical work of art from me. In some cases, it gets shipped around and hangs in a different living room every six months. Perhaps this works best when the number of owners is small.

Sadly, there are instances of my work ending up in a vault somewhere as the buyers speculate that the value will go up over time. I always think it’s a pity when a work of art disappears from view.

Dominguez If museums or galleries meet our guidelines and are approved by our insurers, they definitely would be eligible storage sites. Nothing, then, would stand in the way of a public exposition, in my opinion.

Speaking of galleries, should they be worried about the blockchain technology disintermediating them?

Abosch Blockchain technology has the potential to shift power from governments and institutions to the people. For the art market, this could mean that artists would have tools at their disposal to be able to circumvent galleries and sell their works of art directly to their clientele. That said, I believe that galleries will always play an important role in discovering young artists and giving them visibility.

Dominguez We, in fact, do try to connect buyers with sellers directly, not least with the aim of reducing commission fees. However, our sellers to date aren’t the artists themselves – not yet. At the moment, our efforts are directed more toward enlarging the buyer side of the art market. Through its transparent processes, our platform lowers barriers for new entrants.

There is a human and real-world component to collecting art.

Kevin Abosch, Conceptual Artist

Other platforms that leverage blockchain technology also invoke the transparency argument, but I doubt that it will catch on in the art market. Regrettably or not, the art market isn’t exactly known for promoting transparency, and many actors in the art market are quite happy about that.

Dominguez But certainly not all of them. Alongside verifying the authenticity of works of art, transparency also includes price discovery, as I described before using the example of the Warhol painting. If I want to buy a share of Apple Inc., I can find the last traded stock price without much effort. It’s considerably more difficult to find the latest traded price for a work of art that was last up for sale decades ago.

Abosch I understand what you’re saying if we’re looking at art purely as an investment. But there are myriad reasons why someone buys art. There is a human and real-world component to collecting art. And this throttles the efficacy of platforms that seek to use technology to revolutionize the art market.

Social proof or validation can influence purchase decisions. They can also be driven through interacting in person with artists or their representatives. I think the art market is a difficult one to be disrupted by technology, although I think most everything can be disrupted.

Dominguez Beyond the investment aspect, we definitely aspire to instill enthusiasm for art in people who previously have had no connection to it. Take myself, for example. I didn’t know much about art before I joined Maecenas. Back then, it never would have occurred to me to buy a painting. Today, though, I would gladly invest in art if I had the money. It needn’t be a Warhol. I would also take young, unknown artists into consideration. Just like I wouldn’t invest solely in blue chips on the stock market.

Abosch I am not sure that we need blockchain technology for that. The best reason for buying art is because you want to experience a work of art – or at least share in the experience.