The work of art in the age of CRYPTography: the tokenisation of art on the blockchain
Tying in with recent work on the freeport institution a site of financialised art and b) the rise of art as a financial instrument, I want to explore a further expression of this in the development of blockchain technologies for the (physical) art market.
Much of the art collections of High net worth individuals (HNWIs) now reside in freeports, liminal tax-free spaces that bypass National sovereignty . These are large, high security, climate controlled spaces often located in the transit zones of airports or in tax free or tax friendly zones such as Switzerland and Singapore. They have a historical legacy is colonial trade but today they function as duty free storage spaces for accumulated wealth, or what Deloitte calls ‘passion assets’: fine wines, cars, and fine art that once purchased is shipped to and stored in the freeport for an indefinite amount of time. Here duty associated with a purchase can be endlessly deferred because, due to some strange legal heritage, goods housed within the freeport are deemed as permanently in transit from one space to another, even when they’re not going anywhere fast. The freeport has recently captured the interest of art criticism as it seems, as an institution, to exemplify the infrastructures and networked processes of the contemporary art market. In place of the public museum, vast collections are now housed in high security and climate controlled freeports. And the purpose of the artwork, it seems, is not to be possessed or traded as a commodity, but to function as an asset - a pure cypher or financial instrument that never sees the light of day and doesn’t need to. Because of the opaque nature of the freeport, it can be difficult to account for how many works of art are permanently housed in spaces such as Le Freeport in Geneva. a recent New York Times article, however, claims that the number is close to 1.2 million, with some 1,000 Picasso's in that bunch. More recent freeport spaces are more like museums than warehouses i.e. Singapore Freeport has commissioned a piece in the foyer un-ironically entitled ‘Cage sans Frontieres’ (Cage without borders). The Freeport creates a space of flows beyond state jurisdiction. It facilitates the circulation of material artworks as liquid assets in a supply chain. Borders or their absence are significant in this. Theorist Hito Steyerl has described this situation as ‘duty-free art’, while art critic Stefan Heidenreich coined the term ‘freeportism’ to describe the modes of production, circulation and distribution in the art market that accompanies these trends. The Freeport is a kind of blind spot in the supply chain, a place where regulators and states can turn a blind eye or, as Keller Easterling puts it 'selectively lose control'.
The freeport is emblematic of the broader financialisation of the art object. Of course, Art and the market have always been deeply imbricated, but, as Max Haiven points out in his brilliant forthcoming book, Art after Money, Money after art, we’re experiencing an intensification of these processes and conditions in which it is very difficult for artists to adequately critique, trouble, or work against this trend. I found Deloitte’s reports on 'Art and Finance' from the past few years enlightening in this regard. In particular, a shorter report entitled ‘should art be treated as an asset class?’ argues that while art has always functioned as a financial investment, this is growing in significance due to low interest rates, the need for new financial instruments and markets, and the sense that burgeoning technologies can solve extant issues regarding authenticity, risk, high transaction costs, market transparency and market regulation, as well as providing new mechanisms for making illiquid assets more readily liquid. These reports are a fascinating read for anyone who’s interested. They also highlight a number of new mechanisms for speculating on art, including art investment funds, art securitisation, and art-secured lending, which is particularly popular in the US. Players in the space include traditional banks, new boutique lenders such as Athena and Artemis and traditional auction houses like Christie’s and Sotheby’s.
Enter the blockchain.
Blockchain technologies are now being used with art in various different ways, as a provenance, traceability and authentication tool (see Deloitte’s POC Arttracktive, Verisart’s system and Everledger’s partnership with Vastari) as a visibility tool for artists, as a model for new payments models such as crowdfunding and as a form of asset exchange, where physical works of art are stored in freeports, represented by cryptographic digital tokens and traded as equity in a market, divided into shares or used to secure loans. It’s the latter condition that particularly interests me here. Art is being transformed from commodity to financial instrument, or ‘tokenised’, as the lingo describes it.
Art is just one example of the rise of asset exchanges on the blockchain: companies are tokenising real estate, natural assets, gold bullion, and just about any tangible or intangible asset imaginable. Cryptographic tokens are used to represent a specific object that exists in the real world. This coupling of the physical, material thing to a cryptographic hash is called ‘tokenisation’ and the broader shift of revenue streams towards utilising the latent equity in everyday things is called ‘tokenomics’.
Companies such as Maecenas are tokenising art that is held in freeports so that it can behave as a speculative financial instrument. It might be broken into shares for investors who wish to diversify their portfolios, used as equity in a loan application or various different future selling prices might be hedged and sold as a derivatives. While the co-construction of art and finance isn’t a new phenomenon, this is a further step in the financialisation of the art object.
These tokens are subsequently traded on blockchain platforms. Digix Global have tokenised gold bullion, so that each token represents one gram of gold housed in a Singapore freeport, while a company called Maecenas is tokenising fine art with the token ART, a clearing and settlement token for art auctions. So too, Maecenas is in the process of developing alliances with the Geneva freeport. Works of art listed on the Maecenas blockchain would be housed in the Geneva freeport, a historical Swiss tax free zone close to the airport. What’s significant here is that works would not need to be seen or possessed or move around as ownership or fractions of ownership change hands. All that circulates is the physical token. Tokens representing physical works or portions thereof could be traded in the market without the work ever physically changing hands or moving locations. In this sense, while the work of art remains static in liminal condition of always ‘in transit’ it continues to circulate as a cryptographic token - as a hash within the blockchain ledger. And this is what is particularly interesting to me – the circulation or dematerialisation of the physical object, not as a way of shirking off commodification, but as a way of maintaining market value while surpassing the lumpy granularity of everyday things and conditions.
The Maecenas whitepaper provides a description of this process:
Maecenas uses blockchain technology to create tamper-proof digital certificates linked to pieces of art. These certificates are highly secure and impossible to forge thanks to the cryptographic properties of blockchains. A single artwork is broken down into thousands of certificates, similar to how a public company issues shares, Investors can then purchase these certificates to own a percentage of a given artwork, and they can sell them back to other investors at any time via the Maecenas exchange. Artworks can be listed in any fiat currency (e.g. USD, EUR) or cryptocurrency (e.g. BTC, ETH). [Maecenas also issue their own native token called ART]
I think one particularly significant aspect of the tokenisation of the art object in this sense is the relationship between the fixed financialised object and its concurrent position in two different spaces of circulation at once, both the ‘calculated geography’ of the freeport, where the artwork is static, sitting sealed up in a crypt somewhere while fiscally the work is recorded as being continuously ‘in transit’ between one Westphalian zone and another, evading the specific duties and regulations of any particular nation state. At the same time, when it is tokenised and stored on the blockchain, the work continuously circulates as code in a digital ledger, endlessly deferred. Just as the blockchain seems to allow physical objects to behave like code, therefore, it is part of a growing process in which physical architectures and geographies and the logistical arrangements of broader supply chains increasingly conform to network topologies and stacks. The concurrency of the digital token that can be moved around and transferred in new ways and the fixed object which makes use of extralegal and territorial exploits and which is juridically/fiscally ‘in transit’ is an interesting one.
There are lots of classical economic theories of what money is and is not (a store of value, a means of exchange, a unit of account etc.) and within that histories of the token as a money-like thing that includes not only publicly mandated currencies but promissory notes, vouchers, loyalty points, phone credit and cryptographic tokens like bitcoin. But a definition that has always intrigued me comes from the German media theorist Sybille Kramer. Kramer theorises money as a kind of desubstantiated property, a form of media that facilitates the dematerialisation of physical goods and their circulation within broader networks of exchange. The development of physical asset exchanges on the blockchain seems to be an extreme example of this, where tokenisation becomes a process for overcoming the liquidity of physical things so that everything can circulate as money or somehow be liquid and illiquid at the same time. I’m reminded of a Money 2020 panel on blockchain economics in 2016 where a panellist described a scenario where one could trade equity in an umbrella whenever it rained. The expressions as something like 'We can trade equity in any ‘thing’ for any ‘thing’ else'. So is ART the new currency? And what kind of money is art? What are the conditions for transfer and redemption?
Furthermore, what are the ontological implications of this shift for art more generally? I’ve been lucky to read an advanced copy of Max Haiven’s Forthcoming Art as Money, Money as Art in which he argues in a later chapter that the creation of new forms of financial instruments from contemporary art relies on dematerialisation, but, unlike the dematerialisation of the 1960s, where the rise of conceptual and performance art was a strategy to decouple art processes from the market, this form of financial dematerialisation specifically aims to make arts circulation in the market more frictionless and fluid. Instead of taking the work out of economic circulation by undermining its commodity status it makes it streamlined for a market regardless of its position in time and place. In that vein, it’s tempting to think about the ontological implications of cryptographic encryption and tokenisation in the trend of mechanical and digital reproduction. Where Benjamin argued that mechanical reproduction damaged the aura of the artwork because its unique position in time and place cannot be reproduced, and others have pointed to the tendencies of digital reproduction to further this trend, as a technology that reintroduces the notion of scarcity, uniqueness and originality into the digital , that, in other words, allows a specific coupling of token to THE one and only ORIGINAL, the cryptographic token invites a new relationship to the auratic. The consensus mechanism that allows for this coupling of object to token was initially developed as a cryptographic protocol to limit email spam (putting a nominal cost on the free reproducibility of digital objects) and later to counter the double spend problem in digital currencies. Now it’s being used to couple original works of art to original digital identifiers or tokens. A work of art cannot be coupled to more than one token, although theoretically the work could be broken down into different shares. In this sense, the encryption and tokenisation of art on the blockchain reintroduces the notion of the aura, but because the work is immaterial, deferred and further/doubly ‘encrypted’ (in the sense that it’s housed in a vast crypt-like vault where nobody has access to it anymore and where it merely functions as a financial instrument), this aura is reincorporated as an intangible asset, as an externality, or as a derivative.
These are just a few ideas I’m trying to tease out…
some influential work (links to follow):
Keller Easterling on Freeports
Hito Steyerl on duty free art
Stefan Heidenreich on Freeportism
Max Haiven on Art, Money and financialisation
The work of Furtherfield, such as the edited collection Artists: Rethinking the blockchain and the Institute of Network Cultures' Moneylab Readers
January 13th 2018
Tokenization and the Art of Rent: Part One
I’ve long been fascinated by what Bill Maurer and Lana Swartz call ‘money-like things’, describing the explosion of alt currencies, cryptocurrencies and new payment solutions driven by the Internet and social media. Some examples of the kinds of things that can be used to store value or to move it around are cryptocurrencies, loyalty points, airmiles, phone credit, FitBit Units and personal data. These things can’t always said to be money proper, in that you can’t use them to pay your taxes or as a universal equivalent for all goods and services. A better explanation is to say that they are tokens of a sort.
Tokens are a larger set of which money proper is a subset. As well as publicly mandated currency it includes things like vouchers, bonds, casino chips, Amazon API keys, promissory notes, coupons, food stamps and the new networked forms of payment listed above. Tokens have narrower and more specific conditions for their creation, redemption and transfer than money. Let’s look, for example, at the difference between a €50 note and a €50 book voucher. The European Central Bank issues and guarantees the €50 banknote. It can be put towards goods and services in Europe or exchanged for other publicly mandated currencies like dollars and Sterling. A €50 book voucher, on the other hand, can only be redeemed for books and only in participating bookstores. These participating stores guarantee it. Unlike the banknote, which is redeemable in all participating European countries and which I can transfer to anyone, the book voucher has specific conditions of redemption and transfer.
Tokens can represent a share in something; a membership certificate; or they can be a codified representation of an object that exists in the real world. Take, for example, the gold standard, where paper money, prior to 1971, was a representation of bullion stored by a central bank such as the Bank of England or the United States Federal Reserve. With Bretton Woods and the abolition of the gold standard, these monetary tokens were decoupled from any real world referent
In the case of Bitcoin, the coin is a cryptographic token that is mined and issued on the Bitcoin blockchain. With Bitcoin the ‘valuable thing’ that is turned into a token or ‘tokenized’, is the computational work and as such the electricity involved in the verification of bitcoin transactions taking place and recorded on the blockchain ledger. But more recently, a number of start-ups are moving from minting cryptographic coins to tokenizing real world assets on the blockchain. This means that they are storing details about the ownership, authenticity and provenance of assets on a distributed ledger (Ethereum, Hyperledger, permissioned blockchains) and issuing tokens that represent shares of these.
As well as encoding transactional data in a hash on the blockchain, you can also encode details of the provenance, ownership and transfer of digital and physical assets. Tokenizing involves digitizing an asset and appending a digital representation of it to a distributed ledger by transferring a discrete piece of data from one person to another. A token is created and linked with an asset such as an art work or gold stored in a warehouse. Once the token is issued, its owner can store it or transfer it to anyone else with a digital wallet. The physical asset remains in the same place, while the ownership of the token can circulate from owner to owner in the network.
The tradeshow Money 2020 in 2016 placed a lot of emphasis on how the Internet of Things might facilitate markets in the latent capacities of material things, a trend already well under way in the sharing economy, where owners transact in spare rooms, car rides and CPU. With many networked devices, the imaginary goes, ‘a thing might trade equity in just about any other thing’. Imagine, for example, a raincoat or an umbrella that traded shares in itself when it rained, or an Airbnb style property with fluctuating rental prices that in turn speculated on and invested in the outputs of nearby artists and cultural practitioners. Tokenization, in sum, means turning things or shares of things into assets, derivatives, securities and other financial instruments.
Tokens are a representation of a particular asset or utility that resides on top of a blockchain. They can be any asset that is fungible and tradable, from commodities to loyalty points to other cryptocurrencies. Let’s look at a few examples of this. Since 2015 companies have been exploring the tokenization of digital files. By harnessing the same process that prevents double spending in Bitcoin, creative and cultural industries are looking at ways of reintroducing the notion of artificial scarcity into digital culture (art, images, music). Other processes include the creation of tokens for environmental externalities such as natural capital tokens and carbon tokens; and the licensing of portions of the electromagnetic spectrum on the blockchain. IBM recently introduced a proof of concept for trading loyalty points between different platforms at the ‘Using Blockchain to Secure the Supply Chain’ conference in UC Irvine in November 2017. Still other companies have explored how fungible exchanges might be established between various forms of data produced by the Internet of Things.
But what about the tokenization of real stuff, where objects that exist in the world are associated with or represented by a digital token? There are, for example, proposals to tokenize gold bullion, diamonds, real estate and precious works of art. In the face of Bitcoin and Ether’s volatility, Singapore-based company Digix Global are returning to the principles of the gold standard and tokenizing gold bullion stored in the Singapore Safehouse. 1 DGX token is equivalent to 1 gram of stored gold. There is no fractional reserve and Digix make use of an auditing system to ensure that they have the gold they say they do at any time. Their next project involves doing the same thing with silver. Maecenas, a company I met with and interviewed this weekend, are attempting to create an art securitization service by listing works of fine art (of values greater than £1 million) on the Ethereum blockchain. Maecenas allows dealers to list up to 49% of the value of a painting on the blockchain, opening up a dealers’ collection to new streams of finance, while allowing investors to diversify their portfolios by investing in fine art. Everledger, though mostly associated with provenance and authenticity is also tokenizing diamonds. Land registries on the blockchain too are a kind of tokenization.
From here many of these works would be physically secured and stored in ‘freeports’. These are duty free, extra-territorial spaces that offer a range of tax advantages. Due to the historical legacy of these spaces as ports and bonded zones, goods housed in the Freeport, though physically stationary and not going anywhere fast, are fiscally ‘in transit’ and therefore avoid duty fees. Buy a painting in London for £500,000, and ship it to Le Freeport in Geneva and the associated tax bill disappears. Freeports are now vast repositories for the asset investments of the world’s super rich or HNWIs investing in what Deloitte has termed ‘passion assets’ to describe fine wines, fine art and vintage motorcars. With many tokenization schemes, therefore, the Freeport warehouse becomes a kind of ‘bank’ for the physical assets in question, a place where they can be stored securely and indefinitely while its virtual twin circulates as code in the network, endlessly deferred. Like data in a ledger, ownership of a painting might change many times over without the physical work ever changing location. Like fiat currency, the persistence of a material from which to abstract starts to seem less important than the mechanics of the abstraction itself. Assets on the blockchain are continuously encrypted, both in the sense that they are cryptographically secured and buried deep in the crypt of the Freeport, and continuously in transit, both in the sense of their liminal status between one judicial zone and another and their continuous circulation as code in the network.
Tokenization works to overcome a lot of the frictions and difficulties associated with securing, storing and transferring physical assets. Instead of buying the thing itself, you can buy a token that represents a claim to a portion of that thing and store it in a digital wallet. The advantages are that you don’t have to store and secure the thing yourself; that you might also take advantage of tax or regulatory advantages based on the jurisdiction of the physical good and that you can trade in fractions or shares of things that you couldn’t otherwise afford to buy. Similarly to the concepts of ‘lumpiness’ and ‘granularity’ that Yochai Benkler put forward in his argument for sharing as a modality of economic production in 2004, tokenization works to overcome and bypass the material and lumpy qualities of physical real world goods. It works to make illiquid assets more liquid and conducive to a market. It tries to break down the distinctions between commodity, asset and currency so that a thing can behave as a commodity in one moment and a means of exchange or a financial instrument in the next.
Arguably tokenization is part of a broader trend that begins with Bretton Woods. It describes an economic rationale in which the token – an economic tool that stands in for the relation between real things – comes to be operative in and of itself. A solution to the dearth of investment opportunities and falling profit margins from the 1970s onwards was to utilize financial products as a means of maintaining and expanding monetary assets, placing these resources in financial activities remote from the production of material goods and services. In turn, financial institutions came to the fore with an array of new instruments: futures, options, derivatives, hedge funds and so on. This shift from production to finance has materialized in every aspect of the economy, including an increase in financial profits relative to real profits; the growth of so-called FIRE economies (Finance, Insurance, Real Estate) as a share of national income; rising debt relative to GDP; the proliferation of increasingly exotic financial instruments; and the expanding role of rapid financial bubbles.
A number of autonomist Marxist critics have theorized this shift in terms of transformation from an economy centered on ‘profit’ towards one centered on ‘rent’. David Harvey describes rent as income that comes from 'exclusive control over some directly or indirectly tradable item which is in some crucial respects unique and non-replicable'. Where classical economics views rent as a pre-capitalist hangover, theorists such as Harvey, Carlo Vercellone and Christian Marazzi have argued that the growth of finance requires a reconsideration of the category of rent. Today rent takes precedence over profit. Instead of investing in the production of material commodities and labour production, in other words, you invest in monetary streams that can accrue simply by owning assets. The landlord or art dealer is largely external to production. She or he doesn’t make art or houses or necessarily pay others to do so; they speculate on the value of what they own and acquire and find new ways of making money from the act of ownership, through hedging and speculation, accessing credit to purchase new works or the securitization of their existing collections. A common example of how 'rent' is now central is the business model of Internet platforms. These aren't based on organising and paying people so much as the free work of Internet users, responding to posts and sharing content that can be harnessed simply by virtue of owning and controlling the platform (I'm being reductive here: take a look at Tiziana Terranova's work on free labour or Matteo Pasquinelli on rent and cognitive capitalism). Arguably the tokenization of physical assets is another example.
January 23rd 2018.