US Wealth Trends 2022
With financial analysts trying to predict what 2022 will look like globally, Citywealth placed a magnifying glass on the United States, talking about its wealth trends.
1 March 2022
Citywealth interviewed some of the Leaders List experts in the art sector to decipher how the global art market has responded to imposing digital assets.
It is no surprise that the art market has adapted to new and unprecedented needs, especially during the Covid-19 era. Many buyers and sellers have opted for online solutions, not only involving digital art, but also incorporating exhibitions of artwork that would have been physically contemplated.
How has the global art market responded to imposing digital assets? Citywealth interviewed some of the Leaders List experts in the art sector to better understand what the ever-changing future may hold for art.
The art market: trends and traditions
“The global art market has proved to be resilient in the wake of the Covid-19 pandemic; – says Andrew Bruce, Barrister at Serle Court – lockdowns around the world have led to the closure of galleries and the postponement of auctions, exhibitions, and art fairs but, like the Court system, the art market has found workarounds that have accelerated its entry into a more digital age.”
“Despite concerns about art sales having plummeted during lockdown, recent market research indicates that the UK retains its second position in the international art market with a 20% market share equivalent to US $9.9 billion with many auction houses, dealers, and fairs moving to online platforms and viewing rooms during 2020/2021; – points out Hetty Gleave, Partner at Fladgate LLP, who adds – As many buyers have turned to online purchasing, they also started buying using cryptocurrency and have invested in digital art. Auction houses have been quick to embrace the trend by making up in online sales what they may have lost in relation to sales IRL.”
“The art market is agile and ever-changing. It has successfully weathered a period of transition. – comments Amanda Gray, Partner-Art Law, at Mishcon de Reya, who distinguishes between two types of art market – An old and new art market have emerged successfully out of the volatility of the last two years: the old being a traditional art market, the new focusing on digital, disruptive, and challenging market norms and behaviours. We see growth for both markets, with the familiar business of art continuing with an international calendar punctuated with auction sales, art fairs, gallery sales, running in parallel to a brave new world of digital art, NFTs, and artworks owned and sold in a Metaverse to a new client base.”
Also Ariel Sergio Davidoff, Partner at LINDEMANNLAW, reflects on new trends: “I can see a trend towards blockchain and glitzy NFTs or digital securitisation of artworks. Covid-19 made investors aware they want to live their lives to the fullest. This means they are ready to pay hefty prices for those items they truly adore. Outside the art market, for example at Suvretta in St. Moritz, prices sky-rocketed in 2021 due to limited supply. Investors are cash-rich, fun-deprived, they want to possess their art piece, now.”
Society, sustainability, securitisation
With developing trends constantly around the corner, it is crucial to scrutinise current service offerings on the lookout for useful intersections between past and future needs so that clients could always rely on up-to-date expertise.
Amanda offers an insightful overview on what to expect from the upcoming years: “2022/2023 will see old and new markets running in parallel. However, the art market reflects other wider societal issues: a reassessment of the artistic canon, public art, and collections; changes in collecting and buying behaviour; matters of reputation and scrutiny concerning collections and donors, in addition to the challenges of placing ESG and sustainability at the centre of commercial and public art worlds. By consequence, services, legal or otherwise, need to be flexible and nimble to be relevant to this evolving market. Clients will be best served by creative hybrids of technical, commercial, and legal expertise.”
Securitisation and digitisation of art are identified by Ariel as two major topics of discussion with clients: “Securitisation may occur by placing your artwork in a private fund and distributing the shares to your family members, while still keeping the collection together. This can result in governance, accountability, regular valuation, and control over your artwork. On the other hand, digitisation of art is more commercial. Entrepreneurs offer investors a way to own an art piece from traditional art, like Chagall or Renoir, to Street Art, like Banksy, via NFTs or other digital means. Both are in demand, the latter is more requested by new investors who do not trust the financial system and prefer to diversify.”
NFTs: benefits and risks of digital art
With digital art being one of the cornerstones of the art market at present, new measures to protect original digital art pieces come into force. To this regard, Andrew underlines the fundamental role of NFTs. “Digital art is becoming an increasingly important part of the art market. It is, though, a medium through which anyone can readily copy the original digital image or video and create an identical replica. Hence, the need for NFTs to allow artists to protect and market their original digital works.” Hetty confirms the changes imposed by NFTs: “The explosion of NFTs in the summer of 2021 has enabled the buying and selling of digital art, so it created a marketplace which did not previously exist, and millennials have poured in to ride the zeitgeist wave and be the first to own some of the digital art and collectables; – and numerous benefits are associated with the NFT success – Part of the attraction has also been the fact that, unlike analogue art, digital art gives an artist more control over their creation, making it easier for them to monetise their work on resale and is likely to mean that the NFT boom is only going to evolve rapidly to hyper-complex multimedia, multidimensional pixelated art pitched towards an increasingly digital society.”
But NFTs have not imposed themselves without posing any problem, as mentioned by Andrew: “The market for NFTs has gone far beyond original digital images or videos and that is where it may become problematic. Digital pictures of works created in conventional media are being offered as NFTs, for instance, a recent sale of 10,000 squares of a digital image of Gustav Klimt’s ‘The Kiss’. Additionally, the market for NFTs has become so fevered that NFTs are being created without artists’ consent. Litigation relating to NFTs is in its early stages, but we are starting to see a shift from clients asking for advice about the creation and selling of NFTs, to artists, sellers and buyers being involved in disputes.”
Moving towards a more sustainable art environment, can NFT systems be considered eco-friendly? The answer is not so obvious, as highlighted by Hetty: “The fact that NFTs represent affordable art, easy to store and transport, coupled with its authenticity being embedded on the blockchain, makes it highly attractive to a younger demographic. However, while digital art may be more environmentally friendly in that it removes the carbon cost associated with maintaining physical assets, such as transportation/storage, this is countered by the need to use massive amounts of electricity to verify transactions on the blockchain which do leave a large carbon footprint. This heavy reliance on fuel calls into question the sustainability of digital art in the long term. Opportunities for creating more eco-friendly NFT systems are currently being explored, and, if successful, it is likely to make the digital/NFT space more attractive to environmentally conscious collectors.”
Clients dealing with Crypto Art and NFTs? Our experts recommend to…
… look before you leap. As with any acquisition or disposal, ensure that any transaction is in line with your underlying objectives (whether short term/long term, investment, ethical or aesthetic) and that you undertake due diligence both on those you do business with and the NFT/artwork itself. - Amanda Gray
… be careful. Like many fast-growing economic bubbles, there is a risk that this one might burst. Do your due diligence and make sure you know what you are buying and how you are buying it. Also, be aware that whilst there may appear to be no physical waste when digital art is created, there is an environmental impact associated with the minting and transfer of NFTs. Furthermore, do not think that NFTs exist in some tax-exempt Metaverse: gains from trading in NFTs are likely to be subject to CGT or income tax. - Andrew Bruce
… be aware of all the possible pitfalls. As an investor, you may want to gather precious information on the piece of art you own, where it is traded, how you can get access to it, especially if the provider of the NFT goes bankrupt, the previous owner, how you can sell the art piece if you only own 1/10’000 of it and prices rise. - Ariel Sergio Davidoff
… buy digital art/NFTs that you actually like, rather than jumping on the hype train because you can. Research the NFTs that you want to purchase carefully as there are lots of people using well-known artists or creators of popular projects on secondary marketplaces. While some platforms, such as OpenSea, try to remove falsely minted or misappropriated artworks, it is not always possible to remove every fake project and it is very difficult to unwind the purchase and/or obtain a refund after the event. Be aware of potential copyright issues as some NFT creators may mint artworks without the authority of the copyright owner. Try and understand the terms and conditions that govern any NFT new purchase. For example, if you acquire an NFT that has certain physical assets linked to it (see Coachella NFTs that is a hyperlink) you may be expected to transfer the physical asset as well. Watch out for phishing emails which could lead to your crypto wallet being hacked. If you buy/sell via an auction house, make sure you understand how and when the NFTs (and any other assets) will actually be transferred as this is technically an 'off-market purchase'. Watch out for 'wash trading' (for instance, buying and selling the same NFT between the same anonymous owner in order to inflate the price) and 'rug pulls' (when an initial NFT collection sells out for a huge gain on the basis that the whitepaper stakeholders will receive future rewards, but then the founders behind the collection ditch the project rendering the NFTs with little to no value). - Hetty Gleave