LIVE NOW

How cryptocurrency is disrupting the arts and collectibles industry

Posted: 1 March 2018 6:09 pm
News

Someday people will wonder how anyone could ever deal in collectables without a blockchain.

Arts and collectables are the only major asset class that lacks a title registry. This might come as a surprise because the importance of provenance and proof of ownership in this area is immediately apparent.

Provenance refers to an item's history of ownership. It's one of the factors that gives collectables, antiques and artworks their value. The most legitimate and therefore valuable items tend to be those with an unbroken and verifiable history of ownership, stretching back as far as possible and being as thoroughly documented as possible. Demonstrable proof of ownership, both present and past, is essential.

Unfortunately, it's common for buyers to remain anonymous and go through intermediaries instead, which raises a lot of new trust and provenance issues and might contribute to the almost unstoppable flow of fakes and forgeries. This potentially makes up as much as 40% of items currently in circulation and costs an estimated $6 billion a year, according to the Codex whitepaper.

These problems aren't unique to the arts and collectables industry. Fake watches, counterfeit jeans and even incorrectly-labelled food are all serious problems that other cryptocurrencies such as VeChain are aiming to resolve.

So why isn't there a title registry for arts and collectibles? How is it you can get the full ownership and service history of a junkyard car but not a priceless antique? It's mostly a matter of trust. Neither collectors nor their intermediaries will trust a central registry to safely handle their data, and as it stands there's no actual reason for people in the area to compromise their privacy by passing data to a registry. This has resulted in an ad hoc approach to title verification in the industry. Collectors and experts simply do it one item at a time, as best they can with what's available.

The same lack of trust also causes problems in the auction house, where some endemic issues have been almost impossible to solve until now.

Non performing bidders, or NBPs in the industry lingo, are those who bid and win but never pay. If an NBP wins, it means an item ends up not being sold, directly costing revenue. By some measures, this problem costs billions of dollars a year.

To prevent this, auction houses require bidders to register in advance. This means disclosing their identity, proving that they're good for it by showing financial information like bank statements, or even wiring funds to a pre-escrow auction in advance. This leads to a lot of friction and inefficiency, as well as lost customers.

International buyers are often turned away because their documentation is not sufficiently comprehensive or translatable by an auction house, while some buyers will turn themselves away because they don't want to give away private details or fall victim to "shill bidding" when a dishonest auctioneer or seller submits false bids to artificially drive prices up.

Enter the blockchain.

The solution

At its heart, Codex Protocol is a blockchain-based registry for the $2 trillion arts and collectables asset class. It lets people put titles on the blockchain to create records consisting of:

  • The ownership and transmission history of an item
  • Hashes of related documentation such as photographs, past appraisals, receipts, restoration records, etc.

This brings the dual benefits of anonymity and verification. A potential buyer can see how many previous owners an item has had, the circumstances of previous sales and other important details, but no one has to divulge their identity if they don't want to.

For example, if there's a collector who's interested in a certain item they might search for it on the codex, and then approach the auction house at which it was last sold. The auction house might then contact the item's buyer and ask whether they're interested in selling.

By bringing more trust(lessness) and efficiency to the system, buyers can better find the items they want and sellers can get a better price. And auction houses and other intermediaries can also reap the benefits of increased business.

"The ability to prove ownership, without compromising the privacy demanded by fine art collectors, will result in a better, fairer, and bigger market for all participants," said Codex CEO Mark Lurie.

The Codex Protocol also offers a range of blockchain dapps, designed to soothe other industry pain points. Its Biddable system, for example, is just a blockchain-based escrow system for prospective buyers to securely deposit funds (in Ethereum only initially) without providing confidential information. Simple but effective.

The token

The Codex Protocol comes with a token called Codex. This is designed to align the incentives of auction houses, dealers, experts, lenders and other industry stakeholders and promote the Codex Protocol as standard across the system.

It's also intended to prevent abuse of the system. Taking actions on items requires fees being payable in Codex, with the exact fee depending on the action. For example, placing a lien on an item might cost more than simply registering a transfer of ownership.

The fees are designed to be just enough to be effective, but too low to cause any real friction in the system itself. Occasional users will pay occasional small fees, while serious institutional users like auction houses will be able to reduce their fees by holding larger amounts of Codex tokens.

The challenges

One of the main challenges might be getting items onto the Codex in the first place. An item's blockchain history only begins once it gets on the Codex, and the network needs to catalogue a lot of items to grow.

To this end, Codex has partnered with auction houses and related providers to build a consortium, with the goal of registering items on the Codex as they pass through the auction houses. As items pass through auction houses, their provenance will start growing. The intention is to turn Codex into a new industry standard, used by everyone. And it's to this end that Codex has partnered with over 5,000 auction houses that sell over 10 million items worth over $6 billion annually.

The other main challenges might be those faced by any other business in the highly speculative and rapidly evolving cryptocurrency space. Competition, a lack of funding and skill shortages. The usual.

These are also being resolved in the usual way. Blockchain venture capital group Pantera Capital has dropped a $5 million investment into Codex, and it's also brought in a bunch of expert advisers.

"As blockchain technology and digital currencies establish their role in the global economy over the next several years, our mission is to act as the catalyst for widespread blockchain adoption and innovation. We believe in Codex’s vision and its ability to radically transform how business is done in the fine arts and collectibles industry," said Joey Krug, co-chief investment officer of Pantera Capital.

"We have also seen first hand the amount of new cryptowealthy investors looking to diversify and store value. Through Codex, cryptoinvestors will have the ability to leverage the art and collectables asset class for this purpose."


Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, SALT, BTC, XRB

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Latest cryptocurrency news

Picture: Shutterstock

Latest crypto guides

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms of Use, Disclaimer & Privacy Policy and Privacy & Cookies Policy.
Ask a question
Go to site