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The Opportunities and Challenges of Blockchain Technology in the Art Industry

Introduction

The art market is continuously reshaped by internal and external shifts in the environment such as economic, demographic, and cultural changes. The transformation that appears most pertinent today pertains to technological shifts and, specifically, the arrival of blockchain technology. Art managers do recognize that digital innovation helped boost audience diversity and made art an increasingly people-centered experience. Artists have also been able to leverage social networks to promote themselves and contact potential buyers directly without passing by a middle-man. Nevertheless, the practical benefits of blockchain technology have yet to be fully integrated into the sector. Indeed, although the blockchain industry is growing exponentially, only 5% of its activity is related to the arts. Despite a set of challenges related to its adoption, blockchain technology can certainly be used as a transformative tool to create a system where artists are agents of change.

Opportunities of blockchain technology in the art sector

Facilitating the artwork due diligence process

The most recognizable use of blockchain technology is in the artwork due diligence mechanism. The art sector heavily relies on origin and transaction history, and the technology is fit to address the frequent struggles affiliated with the provenance, authenticity, and validity of an artwork. It is safe to say that the art market is overloaded with counterfeit art and there thus exists an arduous set of mechanisms to verify an artwork. For example, in 2014, the Fine Art Expert Institute (FAEI) in Geneva substantiated that 50% of the artworks it had checked were either forged or credited to the wrong artist. Given that the lack of transparency and the information asymmetry are among the main issues impacting trades on the market, blockchain technology could instill trust into the system, thus boosting the sales volume. Conceivably, since the attribution risk would not be deducted from the acquisition price, the use of blockchain could increase sale prices. Among the many start-ups focusing on blockchain, there are two in particular that are set to change the artwork due diligence process: Verisart and ArtChain. Verisart, a platform launched in 2015, allows artists to list their work on the blockchain by providing them with free and permanent certificates of authenticity for their artworks. ArtChain, launched in 2017 by a group of art investors, uses the Bitcoin Blockchain to validate artworks by certifying the chain of ownership and protecting digital certificates of authenticity from forgery. Such a blockchain database will not only thoroughly track ownership changes but will also validate and assemble any event that impacts an artwork’s value, such as conservation treatments or professional appraisals.

Decentralization and disintermediation

Disintermediation is another key asset of blockchain technology. Rather than using conventional distribution channels and middlemen such as wholesalers or agents, artists and

institutions can instantaneously deal with clients via the internet. This new ecosystem would not only encourage new forms of dialogue between the artist and the public but also ease interactions between customers, producers, and intermediaries. This transition to contemporary art-tech intermediation, through online galleries and art fair platforms, might be seen as a threat to actors benefiting from traditional business models. Yet, art managers should remember that blockchain provides an invaluable opportunity to refashion relationships with the industry and make trust the pillar of the market. Addressing the “illiquidity” of the art market Blockchain technology can deal with the so-called “illiquidity” of the art market (Goetzmann, 1995). The structure of collectors, dealers, and auction houses slows down the mechanisms by which information is processed, and the traditional focus on expensive objects means that selling and buying art is not accessible to a wide public. In this regard, the adoption of blockchain technology could lead to the democratization of art investment and thus boost the speed and volume of art sales. The sale of Andy Warhol artworks as non-fungible tokens (NFTs) during the Art Basel Miami Beach Fair in 2021 illustrates how fractional ownership allows middle-income earners to own a piece of art history. Overall, blockchain is bound to spur art market value if art-based lending and management of intellectual property rights are successfully adopted.

Challenges of blockchain technology in the art sector

Lack of interoperability and lack of regulation

Evidently, as most technologies benefit from the network effect, blockchain technology will only prove beneficial if it is widely interconnected and distributed. The advantages of the technology will only be fulfilled through shared and coordinated efforts to reshape the role of the digital in the art sector. For example, if auction houses accept blockchain as a proof of authenticity, this will create incentives for the entire sector to have this information and thus, make blockchain increasingly mainstream. Lack of interoperability goes hand in hand with another issue - that is, the lack of standardization. Institutions will only incorporate blockchain within their business model if there is a set of open rules and common digital infrastructures. Similarly, a shared legal framework will spawn the trust infrastructure necessary to make blockchain mainstream. As in other industries, regulation often fails to keep up with innovation and this greatly prevents managers from analyzing the effects of technology on their governance and efficiency model. All major players in the industry, namely auction houses, and galleries should take part in the discussions associated with blockchain regulation to make sure that it is safely integrated into the art ecosystem.

Reluctance


We cannot deny that some major market players benefit from information asymmetry and are thus unwilling to adopt technologies that resolve them. To a certain degree, the art market depends on a lack of information on which both supply and demand speculate. Faced with uncertainty, inadequately informed customers commonly follow the judgment of art trendsetters who are reputed to know best about the value of artworks. Thus, price and demand are greatly influenced by the point of view of notorious critics and the purchasing choices of key investors and museums. If some of the information asymmetries are resolved, price configuration and sale fluctuations will be altered and this could lead several operators to exit the market. Given that some of the functions of blockchain technology would entail a restructuring of operations, this could generate unpredictable results.

Conclusion

Most importantly, blockchain technology would entail a new trust infrastructure. The typical actors of the art industry offer a relational trust that relies on normative preferences and the reputation of the actor within its institutional context. This trust is thus detailed and centralized in terms of order and control. If blockchain technology were to be adopted, this would introduce an anonymous and decentralized form of trust, that we can characterize as cognitive. Overall, we would be shifting from a human-centric approach to trust to a technology-centric approach that can take a greater amount of information into account. Blockchain technology is progressively affecting the way art is consumed and traded, hence requiring art organizations to reshape their business models as well as their relationships with stakeholders. Hopefully, the technology will continue being applied through an aligned and coordinated approach encouraging cooperation between cultural organizations, artists, and investors.

Sources

https://www.jstor.org/stable/41064863?seq=1#metadata_info_tab_contents https://www.mckinsey.com/~/media/McKinsey/Industries/Technology%20Media%20and%2 0Telecommunications/Media%20and%20Entertainment/Our%20Insights/How%20can%20cr eative%20industries%20benefit%20from%20blockchain/How-can-creative-industries-benefit -from-blockchain.pdf. https://artbasel.com/news/blockchain-artworld-cryptocurrency-cryptokitties. https://www.finextra.com/blogposting/18496/remaining-challenges-of-blockchain-adoption -and-possible-solutions. https://www.jstor.org/stable/2599144?seq=1#metadata_info_tab_contents

https://www.dacs.org.uk/DACSO/media/DACSDocs/Press%20releases/The-Art-Market-2-0-B lockchain-and-Financialisation-in-Visual-Arts-2018.pdf. https://www.theseus.fi/handle/10024/341840 https://www.businessinsider.com/blockchain-technology-applications-use-cases?r=US&IR=. https://www.gov.uk/government/publications/use-of-distributed-ledger-technologies-to-ver ify-the-provenance-of-goods https://www.jstor.org/stable/41615233?seq=3#metadata_info_tab_contents https://www.artnome.com/news/2017/12/22/the-blockchain-art-market-is-here

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