Picasso tokenised: how to invest in art via blockchain

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Picasso tokenised: how to invest in art via blockchain  

Digitalisation of the art market accelerates fast. Auction houses and galleries go online, while investors pool their resources using blockchain to buy paintings. Deloitte’s experts have had a look into the strengths and limitations of this technology.

Picasso tokenised: how to invest in art via blockchain

Digitalisation of the art market accelerates fast. Auction houses and galleries go online, while investors pool their resources using blockchain to buy paintings. Deloitte’s experts have had a look into the strengths and limitations of this technology.

How it works

Back in 2018, Maecenas blockchain platform, with the help of the London-based Dadiani gallery, sold a 31.5-percent ownership interest in Andy Warhol’s 14 Small Electric Chairs at a cryptocurrency art auction. The transaction’s value was USD 5.6 million, paid in bitcoins, ethereums, and Maecenas' proprietary tokens. Such platforms as Maecenas may help increase security and transparency of art investments and make them accessible to a multimillion audience.

Today, any artist can issue his/her own tokens, using a blockchain platform. The platform is used to record title to a work of art; rights to fractional interests in it are attached to tokens, which are traded on the platform (just like shares are traded on the traditional stock exchanges), generating profit for the owners, if the total value of the piece increases.

The number of new projects in this market increases. For example, one may invest in a Picasso’s painting, becoming its fractional owner, for as little as USD 50 at Artopol – a platform launched in 2019.

Meanwhile, Feral Horses, founded in 2017, enables individuals to purchase fractional interests in modern art works, starting from a 0.1 percent of their value. In 2020, Irina Bazhenova and Andrey Belyakov set up Art Exchange – a platform that issued art-based digital derivatives (futures and contracts for the price difference).

Why invest in art tokens?

Artists, sellers, and investors all benefit from tokenisation for a number of reasons.

  • Low cost of entry. Now it does not take a fortune to start investing in art.
  • For artists, tokens are an efficient fundraising mechanism; for investors – to generate profits.
  • (Relative) security. It is next to impossible to forge a digital certificate, which reduces the costs of authenticity checks and copyright verification.
  • Cost savings. The buyer does not have to incur additional expenses on storage, insurance, and transportation of art works.

When you buy a token, you do not get the emotional and aesthetic perks of owning a work of art – but what you do get is a unique opportunity to own a fraction of a masterpiece at an affordable price and feel connection with something big.

Is there money in it?

According to Deloitte’s Art & Finance 2019 report, in 2000–2018, the global art market was growing at 8 percent (compare that to S&P 500’s 3 percent). In 2019, art sales amounted to USD 64.1 billion globally, while the volume of art transactions reached a record high of USD 40.5 million. These statistics show that the growth potential is there to be tapped.

Tokens enable art collectors to profit from their knowledge and experience. For example, they can forecast prices of art works at trading sessions or help investors evaluate risks. Expert knowledge is highly demanded, as digital platforms do not provide financial advice to their users.

However, the art market remains highly volatile. The risk of losing investments is high, and success is absolutely not guaranteed. In most countries, platforms that issue tokens are controlled by the regulators, such as the United States Securities and Exchange Commission (US SEC), Monetary Authority of Singapore (Singapore MAS), or Swiss Financial Market Supervisory Authority (FINMA, Switzerland). However, none of art blockchain platforms has completed an ICO so far, which increases investment risks.

Blockchain regulation

Tokens are classified differently, depending on their economic functions and similarity to securities.

For example, the Swiss FINMA and US SEC classify tokens as follows:

  • payment tokens – cryptocurrencies used to pay for goods, works, or services (for example, bitcoins and ethereums)
  • investment tokens attest the rights of their holders to ownership interests, dividends, or interest payments
  • consumer tokens can be earned and spent within a crypto-platform only, e.g., to upgrade to a new functionality.

From the Russian legislation standpoint, tokens can be classified either as digital assets or as security tokens, depending on the rights attached to them. The issuance and circulation of tokens is regulated by a number of rules and limitations set forth in Federal Law No. 39-FZ, while tokens can be recognised as financial derivatives.

However, there are some regulatory gaps and open questions:

  • What is the legal status of ownership split, tokenisation, and subsequent sale of fractional interests in an artwork?
  • How is the status of the physical original changing after tokenisation?
  • What taxes should be paid on sale of fractional interests?
  • Do authors get any royalties for re-sale of their tokenised artworks?

One more aspect to be considered by Russian investors: art tokens purchased at foreign platforms are not recognised and are not subject to legal protection in Russia.

Things to check before transaction

As a rule, such platforms waive any liability for losses incurred by their users. Well, all investments involve some degree of risk. To minimise them, consult with experts or research the art market.

Art tokens are sold directly by owners of artworks, so if the platform is not checking users well enough, money-laundering risks might arise.

Also, when you buy into a tokenised artwork, you might have to negotiate terms with other owners. Sometimes, the contract requires that the token holder loan the part of the artwork he owns to other owners for a specified period. This is the downside of tokenisation one has to keep in mind.

Taxation of tokens

According to a bill submitted to the State Duma on 1 December 2020,

- digital currencies are recognised as assets rather than property rights;

- individuals must report acquisition of digital currencies and all transactions in them to the tax authorities, if the annual balance exceeds RUB 600,000.

If art tokens are recognised as a digital currency in Russia, investors may have to calculate and pay taxes on them according to the procedure the bill contains.

Authors: Daria Rusanova, Katerina Polyakova, Deloitte Art & Finance

See more details on RBC’s website: https://pro.rbc.ru/news/5fc75bed9a7947785f08ba9c

7 December 2020

RBC Pro

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