Analysis & Opinions - Belfer Center for Science and International Affairs, Harvard Kennedy School

The Art World Has Legitimized Digital Currencies

| May 18, 2021

As central banks around the world compete to develop their own digital currency pilot programs, art auction houses have embarked on a similar race to adapt to consumer trends and the modernization of the international financial regime. Following the Non-Fungible Token (NFT) craze in the beginning of 2021, there has been the gradual acceptance and incorporation of cryptocurrencies across a variety of respected institutions from investment to retail e-commerce. Although Bitcoin has garnered plenty of attention over the last 4-5 years, it has not yet received this amount of general acceptance from incumbent players across economic sectors. This most recent inclusion of cryptocurrencies in the art market signals a larger scale transformation of consumer preferences and economic developments. With more transactions occurring digitally and more art sales occurring over the Internet due to social distancing measures from the coronavirus pandemic, art showcases and major players in the industry have developed online viewing rooms for their pieces, signaling their digital agility and growing favor for innovative sales processes. As private ownership of artwork becomes far more prevalent and public ownership (museums, galleries, public organizations) inherently decreases, there is increasing need for this appeal to the general public and the growing body of participants in the art industry.

Getting Up to Speed

Alongside the transition of physical auction processes, are the forms of payment that Christie’s, Sotheby’s, and Phillips are beginning to accept from their clients. Starting with the Christie’s sale of Beeple’s $69 million piece “Everydays: The First 5000 Days” in March 2021, it seems there has been a constant jockeying among incumbent players to modernize their own processes. Christie’s has continued to build upon the momentum of this first sale by hosting more NFT auctions in the past month, further legitimizing their existence amongst traditional art. Seemingly in reaction to this disruptive strategy, Sotheby’s conducted their own auctions of NFT digital art in April, even announcing their newest auction “Natively Digital: A Curated NFT Sale,” in the past few weeks. The collection will be sold between June 3-10 and will “represent the first time a major auction house will bring together a group survey of the leading NFT artists to auction. Hosted directly through Sotheby’s online auction platform, Natively Digital will feature some of the most sought after works made throughout the seven-year history of the medium.”

Two weeks ago, Sotheby’s also announced that it would accept a crypto payment for the upcoming auction of a physical Banksy piece. Simultaneously, Phillips auction house responded quickly in its own way by saying that it would also accept crypto payments for its upcoming auction of their own Banksy piece. Both Sotheby’s and Phillips have stated that they will use a Coinbase wallet to complete the transaction.

Jean-Paul Engelen, Deputy Chairman and Worldwide Co-Head of 20th Century & Contemporary Art at Phillips noted that “this marks the first time a major auction house in Asia will accept Bitcoin or Ether as a payment option for a physical work of art. This follows our success of Phillips’ inaugural NFT sale of Mad Dog Jones. It’s the natural progression in testing the constant changes in our market. Whether we like it or not is irrelevant we have to test the waters.” The CEO of Pace Gallery, Marc Glimcher, is another leader in the art space, and has also noted about NFTs that “Just as the invention of the art gallery empowered the impressionists who had been rejected by the establishment for nearly a decade, similarly the NFT marketplace empowers the digital art revolution which has been underway since the turn of the 21st century.”

So, in the past month, we have seen all three major auction houses announce that they will accept payments for art in the form of cryptocurrency – specifically, Bitcoin or Ethereum. These announcements come at the same time as these best-known cryptocurrencies skyrocket in value, reaching levels 6x and 18x of their value just one year ago. Each auction house taken on its own type of digital innovation, from the adoption of NFT’s to the use of cryptocurrencies for legitimate payment in auctions. Though much of digital strategy for modern businesses is forced to be reactive and flexible with market trends, this process has appeared to be especially competitive amongst the key players. Each has taken its own step to be disruptive in the industry and signal to the outside world that they are not “old guard,” but rather are prepared to shift with rapid technological innovations, trends, and consumer preferences.

Diana Wierbicki, Partner and Global Head of Art Law at Withersworldwide said that “auction houses are competing for interest from this new audience.  They all want to be perceived as relevant to a potential new class of collectors,” in reference to the sale of NFTs and the use of digital currencies.

What does this mean for buyers, sellers, and intermediaries in the art market? Does this trend have broader implications even for those who have not been involved in art ownership or sales? Where do we go from here? Though many who are not closely associated with the art market may adamantly say that this has nothing to do with them, the widescale adoption of digital currencies implicates everyone in modern society. New acceptance in the art market simply signals another large regulatory body that has recognized the importance of digital currencies and thus accelerated their push to relevance across the world. Wider access to this asset class may also end up including a much larger body of participants in art auctions for years to come.

Wendy Cromwell, founder of boutique advisory Cromwell Art said “the fact that both Sotheby’s and Phillips are accepting payment in crypto-currency for a painting by one artist, Bansky, says it all. Just like the anonymous Banksy, the buyer who pays with crypto can hide his or her identity. This is a perfect storm for the auction houses, where art has often been a vehicle for money laundering. Dark money + dark buyer equals regulatory nightmare. It will be interesting to see what kind of legal protections are in place for the seller, who may even be Banksy himself!”

Historical Basis

The art market, which has traditionally tracked the performance of the economy and provided a key store of wealth in times of pullback or recession, can offer us valuable tools for anticipating the trends of the broader economy. A historical view of the art market and global economic trends shows us that in the past, private citizens have viewed artwork as a safe, lower risk investment. As recently as the financial crisis of 2009, there is data supporting the idea that artwork provides a safer store of wealth in volatile economic times. As noted by the Ugo Scalia Art Advisory, “…while sales volume at auction (shrunk) by 27.2% that year (2009), the S&P fell twice as much with a 57% loss; and it took only 2 more years for the art market to exceed its 2007 level, while the stock exchange had to wait until 2013 to do so.” This shows that much of the liquidity that was created during the economic drawback was reinvested into artwork – hence, art as a reliable store of wealth for difficult times.

From a quick glance at the chart below, we can see the different features of the stock, property, and artwork markets, gaining an understanding for why art has been seen as a strong store of wealth and why we have seen such an inclination for digital innovation in this sector. Traditionally, the liquidity, divisibility, regulation, and transparency of the art market have all been low. Low transparency in transactions is largely due to the lack of regulation and the insistence of larger players to remain anonymous. Divisibility remains low due to the uniqueness of each piece of art and beneficial ownership, while liquidity remains comparatively low as a result of fewer players being actively involved than in the stock market. High polarization in the art market necessarily refers to the contrast between low frequency, high value transactions, and low value, higher frequency transactions. Historically, the bulk of the value that is transacted in the art market occurs through relatively few pieces due to consolidation of wealth and increasing private ownership.

Concepts Defining the Art Market

Liquidity: Ability for an individual or firm to quickly purchase or sell an asset without causing a drastic change in the asset’s price

Divisibility: Ability to be divided into pieces, shares

Polarization: polarized market in which the bulk of the number of transactions (volume) is concentrated at the lower end of the market, while the bulk of sales value (prices times quantities sold) is concentrated at the higher end of the market

Regulation: Standards, policies, procedures, and governing bodies that determine interaction of buyers and sellers in a market

Transparency: Anonymity or beneficial ownership of a piece of art; the ability of a participant in a transaction to know their counterpart

Transaction Costs: Finding buyers, potential forgery, significant fees for auction house intermediation services, including the verification of authenticity and provenance of the artwork

Modernization and the Digital Dollar

As one begins to think about the transition of the art market to match modern day trends and consumer preferences, it is clear that some of the above features are subject to change. The introduction of NFTs, “stock-like” ownership in artwork (see: masterworks.io), transactions in the form of digital currencies, and increased access to a previously small group of art owners all have strong influence on the shape of the modern art market. With an uncertain economic climate ahead, this shift to cryptocurrencies, democratization of the previously “reserved” art market, and lower barriers to entry may signal a larger shift in the global economy. The transition of traditional auction houses in the art market to a digital model for physical processes and financial transactions is the clear result of rapidly shifting consumer preferences and new opportunities in technological innovation. 

Though Bitcoin and Ethereum have been the digital currencies of choice out of the gate for art auction houses, there is reason to believe that central bank digital currencies (CBDCs) could soon rise to be the preferred medium of value transfer. Considering recent calls from national governments for more transparency in art transactions, including beneficial ownership and “clean”, verifiable financial flows, it is reasonable to think that a CBDC may be able to offer better compliance and ultimately greater integration with governmental policy. As more individuals become involved in the art market and digital transactions grow in popularity, the desire of the federal government to maintain oversight of money laundering and terrorist financing will grow. In the United States, the Digital Dollar could provide a digital currency solution that reduces transaction costs, increases compliance, and effectively adapts to the modern economy.

Diana Wierbicki, Partner and Global Head of Art Law at Withersworldwide, noted that “the willingness of auction houses to accept Bitcoin and Ether demonstrates their desire to broaden their collector base and reach a new audience. If you Google the news about this, you will note that the story was not only picked up by art news outlets but also by news outlets focused on cryptocurrency and finance generally.  This is a great public relations move for the auction houses. Hopefully the audience that is interested in reading about payment of cryptocurrency for art will also take an interest in other aspects of art sales.”      

Large Scale Transitions

The art market is becoming more accessible to a wider range of people, new forms of art are beginning to emerge (NFTs) and participating in auctions is easier than ever before. Digital currencies are removing many former barriers to entry, liquidity and divisibility in art are increasing, and rising inflation in the economy could trigger a shift to greater investment in the art market. All of these trends, along with modernization of the global consumer, are leading to greater adoption of previously “taboo” and “illegitimate” digital currencies. These localized shifts in the art market could provide a useful lens from which to view greater market trends and the viability of digital currencies as a whole. This could ultimately pave the way for central banks to increase development of CBDCs to compete with – and remain relevant in – emerging markets as popular decentralized cryptocurrencies gain popularity.  

At the same time, the evolution of the art market and digital currencies will likely collect substantial attention from regulatory authorities. Former Senior US Treasury Official Chip Poncy has noted, “Protecting the integrity of the art market and of virtual currencies has become more important as both sectors have grown in popularity while remaining vulnerable to demonstrated abuse by illicit actors. The long-term growth and stability of both sectors will depend in part on implementing effective counter-illicit financing controls, which can become mutually reinforcing if designed and implemented in a coordinated and strategic fashion.”

With all of this in mind going forward, investors, consumers, and policymakers would benefit from tracking auction house actions as they continue to jockey for position in the digital innovation race.

Statements and views expressed in this commentary are solely those of the author and do not imply endorsement by Harvard University, Harvard Kennedy School, or the Belfer Center for Science and International Affairs.

Michael B. Greenwald is Director at Tiedemann Advisors. He is a fellow at Harvard Kennedy School’s Belfer Center for Science and International Affairs and a Senior Fellow at the Atlantic Council Geoeconomics Center and the Financial Crimes Task Force at the Antiquities Coalition. From 2015-2017, Greenwald served as the first US Treasury attaché to Qatar and Kuwait. 

This article is supported by research advisor Logan Weber. Weber is a graduate of Harvard University and graduate student at Texas A&M University studying International Affairs.

For more information on this publication: Belfer Communications Office
For Academic Citation: Greenwald, Michael.“The Art World Has Legitimized Digital Currencies.” Belfer Center for Science and International Affairs, Harvard Kennedy School, May 18, 2021.