The Intersection of Art and NFTs: A Comprehensive Analysis
In the rapidly evolving digital landscape, the art world has seen a significant shift towards embracing technical innovation, particularly Non-Fungible Tokens (NFTs) and blockchain technology. The "THE ART MARKET 2023 A report by Art Basel & UBS" provides a comprehensive analysis of these trends and their implications. We have sourced information from this report to give a breakdown of NFT’s in art for the year 2022 and ahead, as well as the impacts of technical innovation on the art world.
Table of Contents
- Art and NFTs in 2022
- Embracing technical innovation in the art world
- Legal elements of NFT's
Art and NFTs in 2022
A New Frontier in the Digital Age
The art world is no stranger to evolution and innovation. In recent years, it has seen a significant shift towards embracing digital technologies, particularly Non-Fungible Tokens (NFTs) and blockchain technology. This shift has not only reshaped the art market but also opened up new possibilities for artists, collectors, and enthusiasts alike.
Disintermediation and the Role of Intermediaries
The potential reduction in the role and importance of intermediaries such as dealers and auction house experts in making sales has been a widely discussed topic. Online platforms have increasingly allowed more direct communication and exchanges between artists and collectors. However, the impact of disintermediation within the art market has been relatively weak to date. In fact, just 10% of the value of collectors’ spending in 2022 was from purchases made directly from artist studios or direct commissions, and a further 4% from transactions with other collectors or private parties. Most spending was still through dealers and galleries, with 17% via auctions.
Rise and Fall of NFT Platforms
The rise of platforms selling art-related NFTs outside the traditional art market has been an important development over the last three years. The surge in interest in NFTs was one of the biggest trends of 2021, with most of the impact outside traditional galleries and auction houses on external platforms. However, after peaking in August 2021, sales cooled substantially in 2022 as the price of Ethereum slumped and the volume of trade also slowed as the market became more saturated. This substantial drop in the value and volume of trade helped to dampen the media frenzy around NFTs and shook out some of the most speculative traders.
Auction Houses and NFTs
Auction houses, notably Sotheby’s and Christie’s, have built teams around their digital asset divisions. As NFTs have changed the landscape for artists’ relationships to dealers, digitally native creators often consign directly to the auctions. While a buyer may absorb higher fees acquiring an NFT from a brick-and-mortar auction rather than from a marketplace such as OpenSea, the auction houses generally receive the highest-quality works.
NFT Valuation, Insurance, and Security
NFT valuation is a complex matter, as different sectors continue to overlap in their classification of this burgeoning asset. However, what remains a constant is the need for compliance and regulation in the approach to reporting. Valuation is a vital element to insurance policies, including the nascent field of digital asset coverage, which has grown significantly over the past few years. The largest policy limits sit in the Specie market – a niche insurance market covering high-value assets such as art, diamonds, bullion and, now, digital assets.
Embracing Technical Innovation in the Art world
Non-Fungible Tokens (NFTs) are unique digital identifiers recorded on a blockchain that point to a digital file. They can be a Digital Twin of a physical item, a standalone artwork, or an interoperable in-game item. NFTs are the proof of concept of ‘Web3,’ the next generation of the internet which relies on decentralized networks. Web3 allows unique ownership of digital identity and assets, marking a transition to owning assets rather than renting them.
The Creator Economy and Community Engagement
The advent of NFTs has created the ‘Creator Economy,’ an ecosystem in which artists and creators are perpetually compensated through royalties and are in direct contact with their audience. Community engagement is crucial for the success and survival of this new movement. As the dust settles, there is a need for regulation and standards, especially when the assets in question are physical and we must reconcile with real-world institutions and authorities.
Institutional Adoption and Blockweave Technology
Non-Transferable Tokens (NTTs) have clear use cases in the art market – a non-transferable identity associated with an asset solves numerous issues including money laundering through identity verification and ownership tracking. Blockweave is a cousin of the blockchain in which blocks of data are linked to multiple blocks. The blockweave relies on the environmentally friendly Proof of Access (PoA), incentivizing long-term storage, which has led to the ‘permaweb’. This structure promises extremely cost-effective digital storage centuries into the future, making it particularly relevant to museums and galleries.
Legal Elements of NFT's
Ownership and Rights in NFT's
When an NFT is sold, the buyer acquires the right to claim ownership of the NFT itself, but not necessarily the associated digital art, which typically remains with the original creator. Buyers need to check the license or Terms of Use for the NFT to understand the scope of the license rights.
Regulatory Challenges
Creators, galleries, and dealers collaborating on NFT projects need to ensure that an NFT would not be construed as a ‘value that substitutes for currency’. If that risk is present, they should consider any potential Bank Secrecy Act/Anti-Money Laundering (BSA/AML) responsibilities. Furthermore, certain digital assets have been sold as ‘investment contracts’, a type of security that state and federal laws require to be registered for offering unless exempt. Galleries and dealers may therefore need to work with sophisticated counsel to avoid these pitfalls that may classify their NFTs as securities.
Infringing NFTs – An Evolving Frontier
NFTs are ripe for copyright and trademark infringement claims under US law. Sellers of the NFTs should be aware of marketplaces which have obligations to comply with applicable copyright laws, including takedown requests from copyright owners. A handful of high-profile IP infringement issues as they relate to the sale of NFTs have recently been and are continuing to be argued and ruled on in the court system. IP holders do not have to only rely on copyright law, but are often bringing claims in the US under trademark principles which rely on the likelihood of confusion standard or bringing false advertising or association claims.
Conclusion
The intersection of art and NFTs is a dynamic and evolving landscape. As the art world continues to embrace technical innovation, it's crucial to understand the implications of these trends. The "THE ART MARKET 2023 A report by Art Basel & UBS" provides a comprehensive analysis of these developments, offering valuable insights for artists, collectors, and anyone interested in the future of art and technology. The report underscores the importance of community engagement, the need for regulation and standards, and the potential for new and intelligent projects to emerge in the future. As the dust settles, there is a need for regulation and standards. Although counterintuitive to the purist nature of blockchain, it is necessary (to a degree) when the assets in question are physical and we must reconcile with real-world institutions and authorities. Best practices, security, and regulation are a major theme of Web3 in 2023.
Sources
Art Basel & UBS (2023), THE ART MARKET 2023 A report by Art Basel & UBS. https://theartmarket.artbasel.com/download/The-Art-Basel-and-UBS-Art-Market-Report-2023.pdf
