In a recent auction, 49% of the ownership of an Andy Warhol piece was sold through crypto tokens on a platform for fractional art ownership. The deal will be done through Maecenas, a platform in its beta stage that wants to tokenise art pieces into tradable securities that are accessible by anyone globally using their ART token, as well as bitcoin or ether. Using tokens to trade these “shares” effectively lowers the barrier to entry of investors globally, as there are minimum investment requirements (unlike in a Fine Art Fund) and lower transaction costs (compared to management fees of up to 20-30%), as reported by Maecenas.
This is just one early example of how the tokenisation of physical assets is here to stay. The basic idea behind it is that by dividing the ownership of an asset (like a painting, a house or virtually anything) and selling it to a global market through tokens leads to greater liquidity and improved access for investors all around the world. There are three key pieces to these new crypto securities that come into focus through the Andy Warhol example: the fractional ownership, the value of the art piece and the volatility of the asset.
This Bloomberg article raises one of the most common critiques of asset tokenisation:
“If history’s a guide, the risk and cost of owning a tiny part of an illiquid, hard-to-value asset still outweighs the rewards. And all that without ever getting to hang the picture on your wall.”
Art is one of the few fields where it can be incredibly useful to own fractions of an art piece, instead of owning the whole thing, and the reason is that the value of the art piece is almost purely speculative.
An art piece, unlike a house, a boat, a company or another asset that needs to be operated, does not require any maintenance or management (besides eventual restoration work) and no end users of the asset (like in real estate) that might affect the value of the piece while it is held by the investor. Thus, increases in the price of an art piece are purely based on the expectation that someone else will pay more for the piece in the future, not on the way the asset is managed, operated or inhabited.
On the contrary, the operations and management of other assets such as a house or a boat can greatly influence their market value. One of the things that will be seen about these fractionally owned assets is incredibly complex governance dynamics; if one has a house that is owned by 20,000 fractional owners living all over the world, the maintenance and operational running of the house becomes much trickier. If these assets are not managed well, their price will decrease over time, so this could actually have an adverse effect on market value. If that is the case, the much-advertised “liquidity premium” (a premium of the asset market value based on the ability to trade fractions of the asset instantly), worshipped by tokenisation gurus all over could, in fact, turn into a “governance discount”. The solutions to this problem will likely involve different responsibilities for different token classes, but art pieces will not be in that conversation, given their value is purely speculative, to begin with.
Value of the Art Piece
There is another quote from the same article:
“Do punters know the difference between this ‘Electric chairs’ canvas, which the gallery says has been valued at £4.2m ($5.6m), and others by the same artist?”
Easy answer, nope! But this is by no means new to the space of traditional art investments. Can Mohammed bin Salman tell the difference between the original Salvatore Mundi and the copies by Leonardo’s students? He probably cannot, yet he paid 4,500 times the price for the piece a few years before, previous to the discovery that Leonardo was the real painter of the picture.
Beyond the ethics of all of this, does it matter at all? Clearly. The purchase of assets like art responds to a speculative expectation that its price will rise in the future (and it has, historically), and the “trophy asset” status that these have. So based on these dynamics, investors will continue to invest in art, even if they cannot tell the difference between one piece and another. It would be rather naive to believe that investors at some point did, even if it was a traditional auction.
Volatility has been a worry for the players in the tokenisation space for a while, and thus the increased use of stablecoins as a unit of account for these transactions. The reason is this: when one buys a token in the Andy Warhol piece, they usually do not buy it right away with their ETH or BTC. Most of these platforms want to become thriving platforms for investment opportunities, so they use a platform-specific stable coin to invest across the different opportunities in their platform, each of which has their own individual token. So one buys their platform token (which does not fluctuate in value), and then one buys the asset token. An example of this is TrustToken, who recently launched the TrueUSD token, at a 1:1 parity to the dollar.
Overall, there is a boom in the number of organisations that are exploring this space. This new application of blockchain technology has caught the attention of many traditional investors and large financial players, who were not interested in previous crypto opportunities. But many new challenges to maintain the stability of these securities will arise, such as with the “management discount” or the volatility issue. While it is clear which agencies and institutions will regulate these securities (such as the SEC in the US), which was not the case with previous utility tokens, there will soon be near ubiquitous tokenisation, of nearly everything that can be imagined. Tokenisation will work better with some of these assets than with others, and a big part of it will have to do with the operation of the underlying assets themselves.
Tokenise the World
This will bring about a number of new regulatory challenges. If nearly anything is tradable in public markets, the ability of the daily consumer to affect the price of the underlying tokenised asset could be very important, which should bring about new regulation to ensure that the prices are not distorted by parties with intrinsic interests in the asset prices. Imagine a “CoffeeCoin” token where Starbucks can dictate the asset price artificially at their will given their influence over the coffee value chains.
In the long term, the liquidity premium will not be of the magnitude that is thought of today. The nature of many of these assets makes them a very good fit for tokenisation, especially when in the short term there will be a lot of liquidity for the first assets to be sold in these platforms. Tokenisation might very well affect the way the world thinks about liquidity markets, so it is something to keep an eye on. 2018 may turn out to be very interesting indeed.
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