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Cryptocurrencies, Explained: How Blockchain Technology Could Solve 3 Big Problems Plaguing the Art Industry

Great Article in Artnet News by Tim Schneider

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Here is what Tim Schneider has to say about Blockchain and Cryptocurrenices in the artworld in his article in Artnews.com

Tim Schneider

“This piece is the third in a three-part series that explores the potential art-world impact of cryptocurrency. It proceeds as if the reader is already familiar with the core concepts and related terminology covered in Part I and Part II. If cryptocurrencies and blockchain technology are new to you, we highly recommend starting from the beginning.

To hear any true believer tell it, blockchain technology will quite literally change everything about how we as a society do business, and the art industry will be transformed as a part of this wholesale reformation. The questions are only how and when it will do so.

Timing is the hobgoblin of every revolution. The right idea pursued at the wrong moment tends to be no more effective than the wrong idea at, well, any moment. To have the most fruitful discussion about the blockchain’s possible effects on our business of choice, then, let’s burn the calendar and shine the light on the three most promising use cases being pursued today, so that we can evaluate their solutions on the merits.

PROBLEM 1: THE LINGERING MYSTERIES OF PROVENANCE & AUTHENTICITY

Relatively few artworks today offer the air-tight security of a certificate of authenticity backed by an unbroken chain of title. Gaps in the provenance paper trail undermine both sides of the market, with collectors often left to wonder if they’re being presented looted works or outright fakes, and sellers sometimes forced to accept lower offers due to buyers’ hesitance over the uncertainties.

BLOCKCHAIN SOLUTION: DECENTRALIZED TITLE REGISTRY

Most readers know that hundreds of databases for provenance information already exist in the industry. Every responsible gallery, auction house, institution, and major collector runs software to systemize their inventory and its history. So why would a blockchain-powered update be transformative?

Rather than siloing analog provenance data with individual players, blockchain technology provides an opportunity to build a publicly searchable, fully collaborative, tamper-proof title registry for artworks. This database would securely track more than just ownership changes. It would also verify and aggregate every other event that affects an artwork’s value, such as professional appraisals, conservation treatments, inclusion in museum or gallery exhibitions, and much more.

Just as with cryptocurrencies, the blockchain’s decentralized nature prevents provenance data from being either falsified or lost. If a bad actor tries to manipulate the ledger on one computer, the rest of the network hosting and verifying the blockchain would detect the deviance. And since the ledger exists in the cloud (i.e. the data is distributed across multiple servers in multiple places), it can’t be lost or accidentally destroyed by a single record-holder. This makes a proper blockchain title registry more trustworthy and more durable than any centralized database tracking the same information, let alone physical archives or other analog records.

Furthermore, a blockchain provenance ledger could also be both far more robust than and, paradoxically, just as private as traditional alternatives. In an optimal structure, anyone who knew anything of value about any registered artwork could help fill out the database. At the same time, the information flow could also be designed so that the identities of participating informants remained anonymous to the public—as long as they are known and approved by the registry’s creator.

Think of it like a book recommendation: If the end-user trusts the judgment of the go-between, they can be comfortable with the content even without knowing anything about its original source.

The outcome of this process would be two-pronged: a vast collection of blockchains, each one verifying, time-stamping, and digitally preserving every provenance event in the life of an artwork; and a publicly searchable database containing the data from those same blockchains, anonymized to protect privacy and incentivize participation within a frustratingly secretive industry.

In theory, then, a blockchain title registry would dramatically amplify the amount of confidence in the art market. Since the provenance for any registered piece would be thoroughly vetted by a neutral third-party and legible to anyone interested, this innovation should lead to more buyers willing to pay more money for the added layer of security.

As Nanne Dekking, co-founder of blockchain title-registry startup Artory, explained to artnet News, “The product is data integrity.” With Artory and other players, including Codex and Verisart, actively building out decentralized provenance networks, developers seem convinced that the product could be lucrative.

HOWEVER…

There are still significant challenges ahead of any blockchain title registry.

First, collecting and digitizing thousands of years worth of analog data on existing artworks is a gargantuan task, even if everyone in the market desperately wants to participate. If many people resist, though, the task could quickly slide into the realm of the impossible. So this solution may be best for newly created works, particularly those born digital.

Second, even if an artwork boasts a flawless provenance on the blockchain, it needs an equally secure mechanism for keeping the blockchain connected to the artwork itself in the physical world. Otherwise, a fraudster could detach one from the other and “verify” a fake by tying the forgery to a legitimate (block)chain of title.

Third, the viability of the project depends on buyers demonstrating that they are willing to pay a premium for data integrity. If the industry produces a robust title registry for artworks, but existing collectors refuse to pay more for the pieces it tracks than those it doesn’t—and/or if the database’s existence fails to motivate a significant number of new buyers to enter the market—then the value proposition of a blockchain title registry withers and dies.

PROBLEM 2: THE WEIGHT OF THE TRADITIONAL FINANCE SYSTEM

No matter how much old-fashioned money you have, a slew of transactional problems still clings to it like a musty thrift-store scent to a great vintage dress. These annoyances mostly take the form of fees and regulations. Banks generally charge their customers for everything from sending wire transfers to converting between currencies, while some federal governments apply internal restrictions to their own citizens (see: China) and/or provoke external sanctions from abroad (see: Russia). All of the above discourages, or outright precludes, some participation in the art market.

“When I came out as a gallery that accepts cryptocurrencies, that move was to open borders,” London gallerist Eleesa Dadiani, who has heavily promoted her own use of Bitcoin, told the Cultural Frontline podcast, boasting about her ability to circumvent centralized law. “That way we struck a dialogue with Russia, with China, with many countries that find internal money transport difficult due to internal sanctions or any other thing that restricts the ebb and flow of money.”

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