The Hammer Falls on the First Major Blockchain-based Art Auction
Christie’s made history again last night during its evening sale, An American Place: The Barney A. Ebsworth Collection, at 20 Rockefeller Center in New York. This time, the history was not in the form of a record-setting sale (though the sale brought in $317.8 million), but as the first major art auction to be recorded by distributed ledger technology. Christie’s teamed with Artory, a company that operates an art-focused, blockchain-based registry, to securely register and track the provenance of over 90 artworks that were offered in the sale.
It is no secret that forgeries and fake (or the lack of) provenance have plagued the art market. Experts in the art industry estimate that up to 50% of the artworks in circulation are fake. An expert at the Fine Arts Expert Institute in Geneva believes that “if anything, [that figure is] an underestimate.” Artnet referred to 2016 as “The Year of the Fake” due to scandals involving sales of 25 Old Master paintings totaling an estimated $225 million and the Knoedler forgery trial. Sotheby’s went as far as purchasing Orion Analytical, a company that investigates art and other cultural property to help identify fakes and verify authenticity. With these public stories at the forefront of everyone’s minds, the art industry is looking for different ways to combat fraud and properly record sales and transfers of title. Relying on a decentralized, distributed ledger technology may be the answer.
Artory attempts to address some of these issues by offering a blockchain-based immutable registry of verified transactions. The Artory recordation process works as follows: (1) a major event in the lifecycle of a work occurs (e.g., creation or sale of the work; (2) a record-issuing party, like an auction house, gallery or insurance company, who was previously vetted and verified, provides Artory with a permanent record related to the applicable work; (3) Artory records the event to its registry; (4) Artory provides the record-issuing party with both the physical and digital certificates evidencing such record; and then (5) the record-issuing party provides the certificates to the owner of the work. Owners of the works may elect to remain anonymous to both the public and Artory. Other organizations like Verisart, a company that certifies and verifies art and collectibles through its timestamped records database, and Monegraph, a public platform that allows artists to register and sell their works, are making plays in the space.
While the creation of a decentralized database to manage the provenance of works of art may address some issues, important legal considerations with regard to legal title, provenance and liability should be considered. First, the distinction between legal title and physical possession needs to be made. A person’s possession of a work of art does not mean that he or she has full and clear title to the work and if you do not have clear title to the work (e.g., if another person has a security interest in the work), you cannot transfer legal title. To have legal title and the right to “enjoy” the property, one must have the full and absolute legal and equitable ownership of the whole of the property without any encumbrances from any other person in the world. Clear title allows the holder to sell, pledge, donate, display or use the property without restriction.
The provenance of a particular work, or the history of the work’s whereabouts from creation to present day, can assist in determining the authenticity of the work. It can also provide valuable information to resolve disputes in ownership and disputes related to price. Catalogue raisonnés (scholarly records of an artist’s works) often prove to be valuable tools in tracking possession of a work and confirming provenance and attribution, but they cannot prove that the provenance of a work is complete. Adequate due diligence should be conducted by the buyer and any agent offering a work for sale prior to completing a sale to mitigate the risks of selling an inauthentic work.
Like the information contained in the catalogue raisonnés, blockchain technology can enable the transfer of title of property, track possession, history and the whereabouts of art and record encumbrances on works, but the information contained in the ledger is only as accurate as the information recorded to the blockchain. Failing to verify legal title or to conduct due diligence related to the authenticity or provenance of a work prior to the sale of a work can lead to economic and reputational costs.