Background – What the art industry looks like, and what is the process high level
The arts and collectibles market is estimated at 50B to 70B USD globally, and is growing steadily given that a bigger and bigger population is showing interest in the market. Current transactions in the market take place through different avenues:
- Auctions and gallery sales: Items can be offered for sale by current owners, artists or art traders. For valuable pieces, sales are often preceded by an authentication process that is both costly and prone to human error.
- Black market trades: Sales on the black market happen through unofficial channels, usually and involve stolen pieces or counterfeits. Such pieces are rarely authenticated as buyers don’t want to admit recourse to black market channels.
As such, the overall market is inefficient and unstructured: no single ownership and authenticity database exists.
Opportunity – Where are there pain points in the current process?
The art and collectibles market has always been the subject of frauds and forgeries, it is the second-largest unregulated market after illicit drugs. According to the FBI’s art crime unit, art frauds and forgeries represent $6 billion in annual losses – 2016 was labeled the “year of the fake” due to the great amount of art forgery scandals.
There are 3 main pain points in the art and collectibles market:
- Authentication: The lack of a central title agency makes it difficult to determine past ownership which leads to increased difficulty in establishing authenticity and price. Since we cannot trace it, we cannot know if it is authentic and establish a fair price.
- Proof of ownership: Ownership is a key element in establishing a work’s authenticity. Transaction records today are still paper-based most of the time, which makes it easy to get lost, destroyed, altered or stolen.
- Provenance: Provenance is the history of ownership of a work. It includes information about who owned it in the past, where has it been exhibited, the process the art went through from the former owner (seller) to the buyer, etc. The lack of proper provenance opens the door to forgeries, stolen art, or illegal acquisition.
Proposed Solution – How can a blockchain address those pain-points
A blockchain network can be used by art dealers and owners to preserve the evidence of ownership of a piece of art. Specifically, the blockchain would record the following:
- The ownership and transmission history of the particular art piece
- Hashes of related documentation, for example photographs, past appraisals, receipts, restoration records, etc
The blockchain provides a way for everyone to verify and validate an ownership through tracking the ownership and transmissions in an open and immutable history. For illustration purposes, below is a sample user case:
A person owns an art piece by Picasso. She gets it authenticated by an art professional and appraised by an art appraiser. Using a proprietary photography app which utilizes convolutional neural network technology, she takes a few photos of the art piece and uploads the documents and photos onto the blockchain. Now, she wants to sell the art piece to a new buyer. The new buyer will be able to view through the blockchain not only the record of ownership, but also the authentication record and the photos, which makes it unnecessary for the new buyer to spend the resources to authenticate the piece again by an independent art professional. This also gives the buyer the piece of mind that she is buying an item of good provenance which supports the value of the piece.
In 2016, the fine art market recorded $45bn worth of sales. Each of these art pieces sold required appraisals and validations at least once, requiring extensive time, effort, and money to sell the pieces. In addition to the cost of appraisal, these sales are also exposed to under/over valuations by appraisers and even forgeries which add to the overall cost of owning and selling art. Since art sales continue to grow, particularly as an offering within wealth management, we see a great value of using blockchain in this industry now and in the future.
In 2017, according to a study by Deloitte 88% of wealth managers said that art and collectibles should be included as a part of wealth management offering. In 2016, $1.6 trillion USD of ultra-high net worth wealth was allocated to arts and collectibles, and this is expected to grow to 2.7 trillion in 2026. Although wealth managers see the fine art industry as a growing field, there are still some major hurdles that must be overcome such as lack of regulation, expertise, authentication, forgeries, etc.
In addition to high cost of appraisal, under/over valuation of the pieces due to these appraisals could cost art collectors a great deal in the future. From 2011-2015, the Art Advisory Panel of the Commissioner of Internal Revenue reported that 58% of the works they reviewed were valued improperly. In general, overvaluation occurs when works of are sold or given as a charitable donation and undervaluation occurs in estate planning when tax implication can be high.
Given the potential size of the industry (1.7 trillion with 40-50bn sales), saving even a small percentage on each sale due to improved standards/guidelines from blockchain would save millions each year and alleviate many reputational concerns currently associated with the industry.
The main benefits of using this new process to validate art using machine learning and blockchain are that there would be standardized way of validating art, also that costs will start to decrease after the process becomes massively used and finally that through blockchain the property registration will remain over time and will help to track owners and also serve as a source of validity for each piece of art
In terms of challenges, the first one will be to convince specialists and collectors that this process is as effective as an expert eye to validate art. Second I would think there would be some resistance from brokers that now win commissions based on transactions related to selling or buying art. Also, another challenge will be that the first registration of property in blockchain would have to be done by a person. That person should have to be controlled in order to ensure he is entering the right information in the system and not colluding with other people to generate false property data. Finally an important challenge will be funding because this company will require investment to develop and buy the machines that will perform the machine learning analysis and also investment to develop the blockchain system to keep the information of property.
Firstly, the commoditization of machine learning tools via the APIs provided by large Tech firms such as Google, Amazon, and Microsoft pose a computational challenge to the sustainability of this venture. Counterbalancing this is the dataset we would seek to acquire in image capture, which would represent some form of barrier to entry in terms of time, effort, and categorical knowledge on the Arts, i.e. knowing which galleries to visit and what art collections to prioritize. Secondly, there are direct competitors in this space such as The Codex Protocol, who are a series-A funded venture focused on creating a blockchain network supporting auctions and the exchange of ownership certificates. There are also smaller ventures which focus on using recently developed machine learning techniques to verify art or identify forgeries, though accuracy is currently limited to ~80% in better cases. Additionally, existing brokerages such as Sotheby’s or Christie’s could acquire or develop internally a similar system of augmented authentication and transaction processing via blockchain, though such projects may reside outside their core competencies.