Art and Fintech: Fractional Investment
Before we start talking about fractional investments, it is essential to fully understand the concept of tokenisation;
In particular, this term refers to the use of a chain of blocks to emit a digital token: a unique string of numbers that acts as a digital representation of a physical asset. In this way, the economic value of the asset is conferred to the token and the property of the asset is represented by the property of the token on the blockchain.
Physical and normally indivisible assets such as fine art or real estate can therefore now be represented by multiple tokens, enabling fractional ownership. Another advantage of blockchain-based tokens is that they cannot be copied, forged or changed in any way. This is because when a token is issued on a blockchain, the blockchain records the issuance and maintains a distributed ledger of every single movement of that token, such that there is an immutable and permanent record of the transaction.
Asset tokenization provides transparency and security and ownership is indisputably recorded on the blockchain independently of where an asset is stored. This is important since the art world has had lots of issues with fraud and proving chains of custody.
The way this security is provided is that when the artwork is selected the process of tokenization only happens after a certified curator proves its authenticity and values it. The certificate of authenticity is stored on the blockchain, which therefore contains the artwork’s intrinsic value, and only at this point, the artwork is converted into digital tokens, which are then issued to potential buyers.
What is fractional ownership?
Fractional ownership, in simple words, is percentage ownership of a specific asset. The asset is “fractionalized” in ownership shares that are then sold to shareholders (Co-Owners). It is particularly useful when the particular asset too expensive such as luxury boats, private planes, real estate. Often, third parties manage the asset and assure that every co-owner’s rights are respected, as well as takes care of the logistics and maintenance of the asset.
Fractional ownership of Art
Most recently, the same concept of fractional ownership used with other assets was applied to Art. The logic is the same. Multiple people own one artwork and share the benefits and the costs of the asset. Galleries and Artists, instead of selling one artwork to one person, they can sell it to +1000 art lovers.
Even if fractional ownership always exists, it was barely used in the art market. Co-ownership of Art has just started to be popular in recent years, thanks to the birth of new art-tech startups such as Feral Horses.
New trends
Dated back n 2017, fractional investment in Art was the hottest topic around.
On panels in art market centers in New York, Basel, or London, speakers enthused about selling shares in works of Art could transform and democratize the art market. They said that even the small investor could own a stake in, say, a multi-million-dollar Picasso. Further, the idea was that the shares could be traded, like derivatives, on an exchange, without the underlying asset being sold. And the transactions would be recorded on a blockchain.
Companies such as Feral Horses, Maecenas, Masterwork, or Look Lateral were founded, later joined by startups such as ArtSquare (“the new art market, for everyone”) Malevich (“we make art accessible”) or Artopolie (“turns art into fractional shares”).
One of the best-funded of these firms is Maecenas, with more than $15m in investment. In 2018 it sold 31.5% of a tokenized work, Warhol’s 14 Small Electric Chairs (1980), for $1.7m, becoming the first company to do this.
The 2019 Deloitte Art and Finance report notes that only 19% of collectors and art professionals were interested in fractional ownership. However, younger and newer buyers were far more interested than older and more established ones. For Deloitte’s global Art and finance director Adriano Picinati di Torcello: “The future of fractional ownership could be bright, but a certain number of challenges need to be overcome to make it mainstream”.
Who are typical Investors?
This technology’s key result is the democratization of art investment since the average investor can now start with a modest investment instead of a multi-million dollar one. As a result, through this model, investors can further diversify their portfolios without the risks associated with full ownership, the high costs usually associated with art investing, and more certainty on the originality and authenticity of the piece itself.
Art investment, therefore, seems extremely attractive for people looking to diversify their portfolios further; however, there are certain drawbacks: for starters, when someone owns a fraction of an art piece, they can’t bring it home. Therefore they lose exclusivity, which is part of what drives collectors to buy artworks. Furthermore, this democratization may inflate the artwork’s prices, and buyers may have to pay higher prices for smaller pieces in the future. In addition to this, another drawback may be the inherent volatility associated with virtual currencies.
Nevertheless, according to Deloitte’s report in 2019, while the fractional investment model is currently only convincing a small number of all art collectors, according to Hiscox Art Online (2019), this percentage increase to around 49% of all millennial art buyers, indicating that this method of investment will likely become more mainstream in the future thanks to its ability to convince younger investors.
To Conclude
The way we experience art is constantly changing, thanks to all the new tools (VR, AR) and digital exhibitions, so why shouldn’t the way art is purchased and traded change too?
It is clear that fintech-related technologies, such as blockchain and tokenization, have shaped forever the art market. Blockchain has inexorably changed the importance and centrality of art experts regarding the process of provenance, except for already existing artworks, offering a secure and reliable authentication service. Tokenization, instead, lead to fractional ownership which changed and democratized the art market, since everybody can purchase a share of a specific artwork. “In effect, art is becoming more commoditized as the barriers to entry break down,” says Jacqueline O’Neil, founder of Blockchain Art Collective.
The next few years will be vital for this sector, the success or failure of the fractional investments in art will depend on the ability of current and future players to always involve a greater number of investors, which will allow both the market to grow but above all that bring large capital necessary for the purchase, by start-ups, of valuable works of art. Indeed, it is clear that part of the success of this type of investment depends on the tokenization of well-known works of art, of famous and highly sought-after painters within the art market. About this point, there are good examples to follow, such as the sale of Picasso’s Buste de mousquetaire; a US$2 million painting sold to 25,000 people who bought the shares (40,000) for US$51 each.
However, opinions are divided as to the future of this field. For Frédéric de Senarclens, the founder of ArtMarketGuru, there is the difficulty of creating liquidity in this field and the lack of a big enough client base. “The desire for fractional investment in art is not clear,” he says, noting that “most of these ventures have been created by people with no background in art”.
This is a sore point, as previously stated, for the success of fractional art the people managing the new art market must have the skills, in-depth artistic knowledge, and the ability to anticipate trends, to be able to offer interesting and valuable possibilities of investment.
Bocconi Students Fintech Society
Authors:
Carlo Mariani
References:
https://medium.com/coreledger/what-is-tokenization-everything-you-should-know-1b2403a50f0e
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