Underwriting Tokenization Of The Fine Art
If beauty is in the eye of the beholder, the value of the beauty is in the bid of the capitalizer/monetizer, or shall we say the underwriter?
Take any initiative to monetize a major asset, historically, the role of underwriting has been fundamental. It will also be so, if liquidity has to be introduced into fine art as we discussed in one of my earlier posts demonstrating that tokenization makes it possible for anyone to own a piece of anything of value by allowing tokens to be divided into tiny units & sold to individual investors.
At least, one of the world’s top art collectors, who sold the world’s most expensive painting by Paul Gauguin in 2015 confesses:
“over 90% of our assets are paintings hanging for free in the museum.”
The art collector is Rudolf Staechelin and the museum is Kunstmuseum in Basel. Whether hanging free or locked up in the vaults, it’s a norm with most art collectors. Why keep it dormant?
So having determined that the role of underwriting is fundamental in monetizing an asset on global scale, let’s look at the brief history of underwriting.
The Brief History Of Underwriting Assets
Wealth is created by trade and exchange of assets and is increased when they are increased. The more liquid the asset, the more tradable it is. The more tradable an asset is, the more wealth generating it is. Underwriting makes an asset tradable and wealth generating.
The term underwriter originated from the practice of having each risk-taker write their name under the total amount of risk they were willing to accept for a specified premium. The term is believed to have been coined by the famed insurer Lloyd’s of London which, in its early days, would accept some of an event’s risk in exchange for a premium (for example, a sea voyage that features the possibility of a shipwreck and the subsequent loss of cargo and/or even the crewmembers). The individuals paying the premium would literally write their names under the text describing the possession or event for which Lloyd’s was assuming some risk; hence, the term written under or underwriting.
In a nutshell, underwriting is the process by which an individual or institution takes on financial risk for a fee. The risk most typically involves loans, insurance, or investments. Although the mechanics have changed over time, underwriting continues today as a key function in the financial world.
Types of Underwriting
As noted above, the main types of underwriting are for loans, insurance, and securities.
Loans: Underwriters assess the degree of risk of insurers’ business. evaluate loans, particularly mortgages, to determine the likelihood that a borrower will pay as promised and that enough collateral is available in the event of default. Underwriting helps set fair borrowing rates for loans, establish appropriate premiums, and creates a market for securities by accurately pricing investing risk.
Insurance: Underwriters seek to assess policyholders’ health and other factors, and to spread potential risk among as many people as possible.
Securities: Underwriting ensures that an IPO company will raise the amount of capital needed, and provides the underwriters a premium or profit for their services. It helps determine the value of the underlying company compared to the risk of funding the IPO.
Before freddie mac pioneered the asset-backed securities (ABS) in early 80s US real estate was a fairly illiquid market. Established with $1.2 billion in asset-based securities, ABS market in the US has grown exponentially over the decades approaching $2 trillion mark in 2007 and $3.1 trillion in 2019. This is entirely on account of securitization of mortgages.
From ABS To ABT (Asset Backed Tokens)
Art industry estimates the total value of global art assets at $3 trillion, but only a tiny fraction of it register sales. Art assets have a tremendous inflationary advantage, but lack of liquidity mellows it down. Tokenization is indeed the next quantum leap in asset-based securitization, which is already happening in some of the traditional asset classes, such as real estate, equity funding and even venture capital.
However, global scale decentralized tokenization of art is a totally different ball game. It may not thrive without a major role of art underwriting. We believe a new breed of fine art underwriters (not art insurance, but art equity) is waiting to be born.
So who are the fine art stakeholders poised to seize this next big opportunity in the world of fine art?
Let’s look at the fine art stakeholders landscape and guess the probability.
Fine Art Stakeholders:
Gallerists own or run an art gallery. They exhibit and promote artists’ works in these galleries, and participate in art fairs in order to promote the artists whom they represent.
Collectors, of course, are key. They love art so much that they go through great lengths to collect it. Collectors come in all different shapes and forms, from the rich and famous to ordinary people with ordinary bank accounts. But each and every one of them is partially responsible for helping artists, and art itself, survive.
Curators are employed by museums or galleries in order to acquire, care for and develop a collection.
Art critics form the link between critical academic thought and the art world. They study and interpret artworks and artists, and create art theory.
Museum institutions, of course, are important parts of the fine art infrastructure. They are home to some of the most important artworks in the world.
Auctioneers work in auction houses, which are part of the secondary art market. In the secondary art market, art which has already been owned by someone other than the artist is traded. When the decision has been made by a collector/dealer/foundation/business to sell an artwork, it enters the secondary art market.
Fine Art Insurers & Brokers
Like any other insurance business, fine art insurers also actuaries and appraisers who appraise the value and estimate the risk before making a decision on the premium, which usually ranges between 1% — 7%. the world’s AXA Art is world’s largest art insurance specialist.
Last but not least, there are the artists. The entire world of art wouldn’t even exist if it weren’t for the artists. Artists are the core creators, the very reason we are all doing what we’re doing.
The Artland magazine lists top 10 players in the art world. They are:
- Hans Ulrich Obrist
- Adam Szymczyk
- David Zwirner
- Iwan and Manuela Wirth
- Gavin Brown
- Larry Gagosian
- Maria Balshaw
- Marian Goodman
- Monika Sprüth & Philomene Magers
- Marc & Arne Glimcher
Fine Art Underwriting Considerations
Underwriting fine art is about appreciating the value of what can’t be replaced while still understanding the practical measures needed for preserving the quality of any given piece. So there is a plethora of factors fine art underwriters have to examine, all meant to keep the work safe and secure. The more contemporary the piece, the more examination it needs because of the myriad of materials modern art uses.
Art storage facility has to be checked if it is climatized, because a change in temperature or humidity can damage the work. Along with storage conditions, the complexities of transportation also play into the art underwriter’s role.
Who Is Poised To Seize The Art Market Tokenization?
If we look at the stakeholder closest to the prerequisites of art appraisal & valuation for tokenization, it is the expertise of the art insurance industry. But who is to predict the stakeholder who takes the lead?
One of history’s biggest example of a peripheral stakeholder running away with the pie is with us in the form of the multi-hundred billion dollar angioplasty industry. The procedure was invented by a radiologist and could only be performed in radiology labs by radiologists, but the cardiologists who had access to patients eventually ran away with it with a little bit of politicking.
Only time will tell which one of the fine art stakeholders runs away with the multi-billion dollar fine art underwriting business.
This article was simultaneously published in Medium