By Denis Belkevich (@dbelkevich)
The rise in the bitcoin rate at the end of last year significantly influenced the increase and capitalization of cryptocurrencies: as of February 9, 2021, it is $ 1.39 trillion — a record amount in history. A similar market for digital assets already experienced at the end of 2017: however, four years ago, the mark of one trillion in dollar terms was not crossed. Nevertheless, looking back, it is possible to predict how the holders of cryptocurrencies will behave, whose virtual capital has seriously increased in a short time and practically without the participation of the owners.
Then, in the first year of the crypto rush, the majority of bitcoin owners, realizing the volatility of the digital market, chose to diversify their assets: leave part in cryptocurrency, withdraw part in fiat money, and invest a third in various tokens (virtual analogs of shares in the digital world).
However, in the summer of 2017, the US Securities and Exchange Commission (SEC) imposed serious restrictions, equating most of the existing tokens with securities on several grounds, the main of which is the acquisition of tokens in order to possibly obtain benefits. The legislative paradox consisted of two dimensions at once. First: at that time, only the companies that issued tokens thought about the benefits — and digital investors, we repeat, first of all wanted to preserve their assets. And the second: by proposing in return the need to register tokens according to the rules of securities (that is, in the physical world), the SEC did not properly ensure the procedure itself — in particular, it was not clearly defined whether a collection of paintings could be released as a single token (one license), or for each individual work, you need to conduct your own mini-IPO (and this is additional time and financial costs that increase the cost of future tokens).
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The digital market orientated itself surprisingly quickly — and through the efforts of lawyers, many of whom were learning the necessary skills literally on the go, they began to elegantly circumvent these prohibitions. This is how the division of tokens into:
- Securities (securities; many companies could not change their business model and began a long game with the SEC according to their rules),
- Utilities (service tokens; most lawyers undertook to prove that their token was not an asset, but a service — for example , financial advice or mediation in transactions),
- Non-Fungible Token, or NFT (non-fungible token; this legal wording bound assets, the essence of which is in their uniqueness, single execution).
Today we will focus on the third class of tokens — especially since NFTs have found their application specifically in relation to art objects that have crossed the boundaries of the physical and digital world.
First, let’s define the terms: if there are “non-fungible” tokens, then which ones are interchangeable? We answer: everyone else is both Securities and Utilities. By analogy with the stock market, any share of an individual company is indistinguishable from any other share of the same company: whichever of them the owner acquires, he will not gain or lose anything in addition. The world of services is built in a similar way: coupons for a visit to a doctor or bonus cards for dry cleaning are completely the same (within the same hospital or dry cleaning, of course). The money supply works the same way: regardless of the wear and the serial numbers of the bills, $100 in your pocket will equal $100 in the pocket of any other person.
Art objects are another matter. Their unique nature as a non-fungible asset was noted by economists long before the advent of cryptocurrencies. Each piece of art is unique in its essence — from the moment of creative inspiration to its embodiment in the material. Thus, one painting by Picasso is in no way equal to another of his paintings — even if they were created in the same workshop, the same size and united by the general cycle of the
artist’s work.
Even printed products — graphics or photography — have no signs of interchangeability: their cost is influenced by the volume of the created circulation, the order of release, exhibition history, country of sale, the name of the intermediary in the transaction, and other factors. It should be recognized that the unique nature of art objects does not always find positive recognition by the investor. Accustomed to analyzing the prospects of investments in stocks based on the general exchange rate, the financier at first does not understand how the pricing of each individual work is built, because the market indicators of the “average” Picasso poorly reflect the present and future of a particular work.
Delving deeper into the material, the investor realizes that the artist is characterized by strong and weak periods of creativity, and the cost of work is significantly influenced by the review of an influential art critic, the presence in catalogs on the shelves of museum stores or the history of the change of owners. In the world of familiar assets, there is nothing like this: if you acquire shares that Elon Musk owned before you, a soulless exchange server will destroy this priceless information, and your shares will not become more expensive compared to others. But having bought a sculpture that previously belonged to David Bowie, you gain additional value — in the form of provenance (ownership history), which will increase the capitalization of your asset. And now three names will work at once to increase the value of an art object: an artist, a musician and your own.
Faced with such a variety of additional knowledge and additional operations with art, investors are divided into two categories: the first return to boring, but familiar, stock market fluctuations, the second — plunge into a new sphere of investments with their heads, getting an unprecedented adrenaline rush, a market close to game, and opportunities for social growth in the closed art community of wealthy and simply interesting people. But, only having crossed the threshold of the art market, an experienced investor instantly meets his competitors on it — a young generation of gamers, traders, adherents of technology and conscious consumption.
Armed with smartphones, they count art indices, rank collectors and share successes on social media, make social investments in artist careers, acquire art through fractional ownership, and often rent indivisible items instead of purchase. And more and more often, along with a work of art, they buy it along with a digital certificate. A certificate that is issued in the form of … correctly, an NFT token.
Objects of art and NFT seem to have been created for each other on opposite sides of two worlds — physical and virtual. A unique essence, a unique single copy of each of them allows you to legally link non-fungible tokens and art objects for subsequent operations in the digital market. However, you should not think that NFT is just a document confirming the ownership of the owner. In practice, when you purchase a piece of work, you can get both pleasant bonuses and certain obligations along with the canvas. As for bonuses — in the form of the owner’s name or a beautiful exhibition history of the work — we have already mentioned that obligations can be attributed to the right of succession — deductions to the author, which must be observed with each subsequent resale.
The NFT token contains such information, and can perform all the necessary actions for the owner by launching the smart contract mechanism (an algorithm that responds to certain prescribed circumstances). In other words, NFT is as much a living organism as the work of art itself: it grows with it, can collect and store information about the achievements of the work and its owner, art market indices and the artist himself, contain several contracts that ensure safety and compliance with legal regulations, and much more. One of the main features of this “other” is that the token is able to increase the liquidity of a job, that is, its ability to sell faster.
How? For example, due to the fact that, in parallel with the sale of the work itself in the physical market, the token is constantly rotating in the digital asset market — and this opens up access to a different class of buyers and other sales volumes.
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How do physical jobs and the accompanying them tokens get along betweenthe two worlds? What pitfalls await a collector and a crypto investor whencrossing this border? Are NFTs recognized by the world’s leading auctions? And, most importantly, what is the size of the market for non-fungible tokens? Wewill talk about this in the next part. See you later!
Written by Denis Belkevich (@dbelkevich)
