GLOBAL ART MARKETDISRUPTION
Pushing the Boundaries
Citi GPS: Global Perspectives & Solutions
March 2022

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Citi GPS: Global Perspectives & Solutions

March 2022

Authors

Suzanne Gyorgy
Global Head of Art Advisory & Finance
Citi Private Bank

Betsy Bickar
Art Advisor, Art Advisory & Finance
Citi Private Bank+1 (212) 559-5466 | suzanne.r.gyorgy@citi.com+1 (212) 559-3995 | betsy.bickar@citi.com

Birgit Kurtz
Attorney at Law
New York / New Jersey

Anders Petterson
Founder and Managing Director
ArtTactic

Dominic Picarda
Global Head of Content Strategy
Citi Private Bank

Steven C. Wieting
Chief Investment Strategist andChief Economist
Citi Global Wealth Investments+44 (20) 7508-3073 |dominic.picarda@citi.com+1 (212) 559-0499 |steven.wieting@citi.com

March 2022

Citi GPS: Global Perspectives & Solutions

GLOBAL ART MARKET DISRUPTION
Pushing the Boundaries
Kathleen Boyle, CFAManaging Editor, Citi GPS

The COVID-19 pandemic has been a catalyst for rapid change in the art market.
With galleries forced to close their doors, international art fairs postponed, andmajor auctions delayed, the art world quickly needed to adapt. In our 2020 Citi GPS
report The Global Art Market and COVID-19, we highlighted how the industry was
adept in shifting to the digital world, with leading auction houses conducting virtual
auctions, and art fairs going online and creating new kinds of experiences forattendees. Coming from being behind the curve on digital, this belated shift
increased transparency in pricing and attracted Millennials who were more
comfortable buying art online.
Over one year later, the art industry is continuing to transform and adapt. The shift
to digital has given a wider range of people access to the art world than ever before,
and increased both the geographic and demographic diversity of buyers. This has
led to a stronger focus on diverse artists and genres, and on artists who workoutside mainstream platforms. We expect this to continue in 2022, along with newsynergies between auction houses, galleries, artists, and collectors, as well assustained growth in private sales.
The biggest change in 2021 has been the rise of a new art medium — non-fungible
tokens, or NFTs. From being nearly non-existent in 2020, this new market
generated sales of almost $25 billion in 2021 and posted an additional $7.4 billion in
January 2022 alone. NFTs are not only a new way to consume art and collectibles,
they are disrupting the traditional art ownership model through a kind of“democratization”. This disruption holds the possibility for catalyzing change for both
(1) the artists, as it potentially allows them to monetize their work and talent
equitably, and (2) traditional distribution players, including auction houses andgalleries, who have been quick to be involved in the transformation. Ultimately, therise of NFTs has helped drive an increase in overall art sales, with $2.3 billion of art
sold in just a two-week span at the November 2021 auctions.
The strength of the art market throughout the COVID-19 pandemic is also reflectedin the performance of major art indices. From January 2020 through June 2021, theMasterworks.io All Art Index delivered a 28.2% return — comparable to broad,
publicly-traded risk asset classes including developed market equities, emerging
market equities, and commodities. Broad shifts in real interest rates from negative
to deeply negative, helped by stimulus and central bank asset purchases, likely
contributed to performance.
Regulation has been and will continue to be a feature of the art market for theforeseeable future. There are still challenges in the NFT market with issues
surrounding trademark infringement, security regulations, and the potential for fraud
and abuse. And it is not just the digital art market raising concerns among
regulators. Lawmakers around the globe have started to implement new laws andregulations requiring certain art market participants to help prevent and detectmoney laundering in their operations.
With single NFTs regularly selling above the million-dollar threshold, there is also aquestion about whether the NFT market can sustain current levels. That said, as
noted by Anders Petterson, Founder and Managing Director of ArtTactic, “Bursting
bubbles rarely signal the end, but rather the beginning of a new development
phase.”© 2022 Citigroup3

Expanding Boundaries, Expanding Markets
ART CONTINUES STRONG PERFORMANCE- pandemic —from the beginning of 2020 to the middle of 2021 — the global art market
Over an 18-month period during the COVID 19
as an asset class returned 28.2%, with the Impressionist and Modern Art index gaining 41%. This overall performance is comparable
to strong returns from developed market equities, emerging market equities, and commodities.

Asset Class Returns Amid a Pandemic*
65.9%
41.0%
31.4% 28.4%

31.2% 28.2%
19.2%
9.8%

IMPRESSIONIST AND
MODERN ART

POST-WAR AND
CONTEMPORARY ART

ALL ART

COMMODITIESREAL ESTATEPRIVATE EQUITYHEDGE FUNDS

0.3%
CASH

HIGH YIELD FI

DM IG FIEM EQUITIESDM EQUITIES

3.1%

4.2%
EM FI

10.0%

25.0%

* Source: Art represented by the Masterworks.io All Art, Post-War & Contemporary Art, and Impressionist & Modern
Art indices; All data estimated in U.S. dollars covering period from end-December 2019 to end-June 2021. Other asset
class returns estimated by Citi Private Bank's Global Asset Allocation team. Past price performance is no guaranteeof future price performance. © 2022 Masterworks.io LLC; All rights reserved. Indices revised as of November 2021.
DM = Developed Market; EM = Emerging Market; FI = Fixed Income; IG = Investment Grade

NFTS —BOTH A DISRUPTOR AND A CATALYST FOR CHANGE

NFTs, or non fungible
tokens, are rapidly gaining mainstream interest across the art market.
Spurred by a younger, digitally native
audience, the emergence of a new ownership model for
digital art has ﬁnally become a reality and is disrupting the traditional art market.

NFTs act as adisruptor by creating:

NFTs are also a catalyst
for change as they:

New ways to
consume art andcollectibles

Democratize art
ownership

A new ownershipmodel that provides
digital scarcity

Help artists monetize
their work and talent
equitably

A new secondary
market that
operates without
intermediaries

Expand the offeringof traditional auction
houses, galleries, andart fairs

Artist creates a work of art
and “mints” it in NFT form

WHY ARE CREATORS AND CONSUMERS
ATTRACTED TO NFTS AS A MEDIUM?
The creation of an art NFT provides a direct
relationship between the artist and fans andpotential buyers. Raising awareness aroundan artist’s work creates a community with aﬂywheel effect for all involved — fans get tointeract directly with the artist and get accessto new artwork, while artists generate royalties
from the NFTs themselves.

Artist beneﬁts throughroyalties baked into the
NFTs themselves

Creator then uses social
media to raise awarenessabout their artwork

Artist builds loyalty withfans which creates tradevolume for the artist’s work

Potential fans and buyers
come together in a“community”

Fans of the art are rewarded withengagement and perks

WHAT WE EXPECT FOR THE ART MARKET IN 2022
Challenges faced by the global art market in 2020 forced the industry toadapt quickly and embrace a more digital world. A wider range of people
now have access to the art world than ever before, resulting in trends that
became apparent during 2021, and are expected to continue into 2022.

Trends in 2021:
Collector base becoming
younger
Increasing focus on lessestablished and relatively
unknown artists
Galleries and auction
houses increasing focus
on living artists
Increased sales in“New Now” portion ofContemporary Art
Collector base becoming
more global

Expectations for 2022:
Continued growth in art
market with new participants
and new preferences
New synergies between
auction houses, galleries,
artists, and collectors
Continued strength inprivate sales
Tightening of regulationas art market expands

Increased focus ondiverse artists
Increased focus on more“vogue” art vs. “important”
or “serious” art© 2022 Citigroup

6

Citi GPS: Global Perspectives & Solutions

March 2022

Contents
Art in Investment Portfolios

9
10
11
12
13

NFTs — Disruptors, Catalyst, or Bubble?

15

NFTs — Beyond Art

21

Art and Money Laundering

26

What’s New in 2022 for Art?

36

Disruptive Model
Catalyst for Change
Bursting Bubble

Not All Fun and Games
Summary
Background
United States
The European Union and United Kingdom
Suggested Approached for Collectors and Family Offices
Trends in the Art Market Emerge in a Time of Crisis
New Collectors and Shifting Genres
Changing Tastes
Level Playing Field
No Auction Slowdown for Impressionist and Contemporary
Classics
Increased Sales Volume Brings Greater Transparency
What’s Next?

© 2022 Citigroup8

Art’s Recent Performance in Context
Explaining Art’s Recent Strength
The Outlook for Art
Risks to Art
Art in Portfolios

15
16
18
23
24

26
27
30
31
36
37
38
38
40
41
42

Chapter 1

Art in Investment Portfolios:
Broad-Based Performance© 2022 Citigroup

Citi GPS: Global Perspectives & Solutions

8

March 2022

Art in Investment Portfolios
The COVID-19 pandemic has been an unusual period, with persistent health fears
and the sharpest global economic downturn in 2020 since the end of World War II,
yet also areas of progress and opportunity. The performance of financial markets isa case in point. As of mid-2021, broad asset classes including equities, high-yieldbonds and alternatives had surpassed their pre-crisis peaks, in some cases
substantially. How did the global art market fared amid these conditions?

Dominic Picarda
Global Head of Content Strategy
Citi Private Bank
Steven C Wieting
Chief Investment Strategist andChief Economist
Citi Global Wealth Investments

To find an answer to this question, we look to the Masterworks.io family of art
indices. Masterworks is a platform for buying and selling shares representing an
investment in iconic artworks that allows anyone to invest in shares in blue-chipworks of art — see www.masterworks.io. Its indices are built from data sourced fromauction sales and are calculated using the Case-Shiller Home Price Index
methodology. At the end of June 2021 — the latest point for which data is currently
available — the Masterworks.io All Art Index was 28.2% above its level at the end of
2019. For the full year 2020, the index was up by 21.2%.

Figure 1. Asset Class Performance Amid COVID-19 (January 2020-June 2021)

65.9%

70%
60%
50%

41.0%
40%

31.4%

30%

31.2%

28.4%

28.2%

25.0%

19.2%

20%
10.0%

10%

9.8%
4.2%

3.1%

0.3%

Impressionist &Modern Art

Post-War &Contemporary

All ArtCommodities

Real Estate

Private Equity

Hedge Funds

Cash

Emerging Market
Fixed Income

High Yield
Fixed Income

Investment Grade
Fixed Income

Emerging
Market Equity

Developed
Market Equity

0%

Source: Art represented by the Masterworks.io All Art, Postwar and Contemporary Art, and Impressionist & Modern Art price indices; All data estimated in U.S. dollars covering
period from end-December 2019 to end-June 2021. Other asset class returns estimated by the Global Asset Allocation team, Citi Private Bank. Past price performance is no
guarantee of future price performance. © 2022 Masterworks.io LLC; All rights reserved. Indices revised as of November 2021.

© 2022 Citigroup

March 2022

Citi GPS: Global Perspectives & Solutions

Art’s Recent Performance in Context
The performance of the index in 2020 was strong compared to the index’s own
history. Since 1962, the Masterworks.io All Art Index has delivered annualized
appreciation of 9%. The increase in 2020 also ranks as its highest gain since 2010,
when the world was emerging from the Global Financial Crisis. As shown in Figure
1, looking at the 18-month period from the end of 2019 to the middle of 2021, theprice performance of art has also been comparable to that of three broad, publiclytraded risk asset classes: developed equities (e.g., shares from advanced
economies such as the U.S., U.K., and Japan) which gained 31.5%; emerging
equities (e.g., shares from the likes of China, India, and Brazil), which gained
28.4%; and commodities (including metals, energy, and agricultural products),
which gained 31.3%.
The strong appreciation rates for the art index in 2020 also seem to have beenbroad-based. Both the Masterworks.io Post-War and Contemporary Index and the
Impressionist and Modern Art Index — which cover the largest categories of themarket — registered increases of 19.7% and 19.8%, respectively. Intriguingly, this islower than the 21.2% price performance for the whole market. Those aggregate
increases may have been attributable to other sub-categories such as Asian andContemporary Art and Latin American Art. Although Masterworks does not publish
indices for these specific segments, appreciation of works in these segments in2020 suggests they were areas of strength.
The performance of art remained robust in the first half of 2021. But while the broad
art market grew by 5.8%, the two largest sub-indices diverged after their strikingly
similar showing in 2020. While the Post-War and Contemporary Index rose by just
4.4% in the first half of 2021, the Impressionist and Modern Art Index was up 17.8%.
The contrast with 2020’s similar price performances aside, this divergence marks adeparture from the long-term trend across the indices. Since 1985, when the data
series began, the Post-War and Contemporary Index has seen stronger
appreciation versus the Impressionist and Modern Art Index.
As much as the price performance of art during the pandemic has resembled that ofcertain other risk asset classes, there is also at least one difference. Although the
likes of equities, high-yield fixed income, and real estate saw sharp declines invalue in early 2020, no such effect is apparent for art. Whereas price data for otherasset classes appear in real time or at least monthly, the Masterworks indices are
published semi-annually. There is no sign of a sell-off in the broad market’s
performance for the first seven months of 2020. The All Art Index registered a 5.5%
increase for that period.
Around various previous episodes of widespread turmoil, art prices have frequently
suffered alongside other risk asset classes, such as high yield bonds, commodities,
and equities. During the Global Financial Crisis in 2008-09, the Masterworks.io All
Art Index dropped 25%, while it dropped 56.2% in the early 1990s recession.
Substantial and more frequent drawdowns were also seen during the inflationravaged 1970s, although art still produced positive real returns during the period ofhighest inflation.
In 2020, the general turmoil was brief, albeit intense, with U.S. large-capitalization
equities — represented by the S&P 500 Index — declining 34% in just 33 days. At
that time, art auctions and other sale activity were largely suspended owing to
COVID-19 restrictions, such that little price data exists. Rather than showing art’s
resilience, therefore, the lack of a substantial art market sell-off in early 2020reflects the market’s effective closure for business at that time.

© 2022 Citigroup9

Citi GPS: Global Perspectives & Solutions

10

March 2022

Perhaps the closest precedent for this was October 1987, where equities
experienced a dramatic but short-lived crash. Annual art returns for the years 1987
and 1988, however, were very strong.

Explaining Art’s Recent Strength
While art may not have sold off in early 2020, it participated fully in the rally in risk
asset classes from late March onwards. Stimulus was the main driver of thepowerful surge in risk asset classes. The rapid and unprecedented monetaryintervention by leading central banks not only prevented financial markets fromseizing up but buoyed them. On the fiscal side, emergency spending measures bymany governments also helped to cushion the blow of forced economic shutdowns.
Enormous asset purchases in 2020 and 2021 by global central banks have helped
to keep bond yields near multi-year lows. At the same time, the economic reopening
in 2021 brought a noticeable rise in inflation across many countries. In the U.S., forexample, the year-over-year rate of inflation reached 7.5% in February — thehighest rate in forty years. As a result of economic expansion and inflation, realinterest rates — i.e., rates adjusted for inflation — went from somewhat negative tovery negative (see Figure 2). This too represented a multi-decade low.
Figure 2. Real Rates: From Negative to Deeply Negative

10

Real Interest Rates (%)

8
6
4
2
0
-2
-4
-6

2021

2018

2015

2012

2009

2006

2003

2000

1997

1994

1991

1988

1985

1982

1979

1976

1973

1970

1967

-8

Source: Bloomberg, as of January 30, 2022. Past performance is no guarantee of future returns.

Over time, art prices have tended to have an inverse relationship with broad shifts inreal interest rates (see Figure 3). When real rates have fallen, the art market has
tended to rise. This phenomenon relates to art’s characteristics as a non-yielding
asset class. Art pays no income stream to its owners, in contrast to bonds that pay
coupons and some equities that pay dividends. Indeed, art has a negative income
stream, given that its owners have to pay out ongoing costs such as insurance,storage, shipping, and maintenance.

© 2022 Citigroup

March 2022

Citi GPS: Global Perspectives & Solutions

11

Figure 3. Lower Real Rates, Higher Art Prices

-3
-2

60

-1
40

0
1

20

2
0

3
4

-20

5
-40

6
7

1989
1991
1992
1993
1995
1996
1997
1999
2000
2001
2003
2004
2005
2007
2008
2009
2011
2012
2013
2015
2016
2017
2019
2020

-60

Real Interesr Rates (Year-on-Year, %)Art Prices (Year-on-Year, %)80

Source: Bloomberg, as of January 1, 2022. Past performance is no guarantee of future returns.

If real interest rates rise, art also has an opportunity cost. Its owners forego potential
returns they might otherwise have made had they invested instead in interestbearing assets. In an environment such as today’s, with real interest rates negative,
this opportunity cost is not an issue. The same consideration applies to gold,
another tangible asset. In the low to negative real rate environment of recent years,
both art and gold have registered gains, albeit not at the same time. While gold
performed more robustly from 2016 to 2019 — perhaps correcting a pronounced
pullback between 2011 and 2015 — art has led the way from 2020 onwards.

The Outlook for Art
Citi Private Bank’s proprietary strategic asset allocation methodology does notaddress art. We instead approach art primarily from the collector perspective of theclients whom we serve rather than strictly as an investment. In any case, art does
not lend itself to an objective cash flow-based analysis as equities, fixed income,and real estate do. In this regard, it has more in common with commodities. As
such, rigorous estimates of future long-term returns are not possible.
The outlook for real interest rates may be a key influence on art returns, with thepersistence of negative real rates over the coming decade very possible. We liken
the effect of negative real interest rates on cash and many bonds to activities of a“cash thief,” who stealthily pilfers investors’ purchasing power.1 In 2021, the cash
thief was prolific, plundering trillions of dollars in this way globally. Given the inverse
relationship between art performance and real interest rates, in such anenvironment, the art market may be able to register further positive real returns.

1 Steven Wieting, "Beat the Cash Thief!" Citi Private Bank, December 9, 2021.

© 2022 Citigroup

Citi GPS: Global Perspectives & Solutions

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March 2022

The extension of other recent trends may also assist the art market. Interest incollecting art has broadened alongside increasing levels of wealth worldwide but
particularly in faster-grower emerging economies in Asia. Simultaneously, access tothe art market has become easier, thanks especially to the advance of digitaltechnology. Further innovation could attract yet more people to collect art,
particularly among the younger generations of wealth owners.

Risks to Art
While our base case is for conditions that have historically favored the art market,
there are risks to our view. Given history, a significant rise in real interest rates
would threaten the art market. One possible scenario might involve inflation
increasing even further and remaining at high levels, requiring central banks to raise
policy rates aggressively. Such moves to choke off inflation in the 1970s and early
1980s were followed by substantial declines in the art market.
In recent decades, the art market has also benefited from growth in the world’s
ultra-wealthy population. A larger number of multi-millionaires and billionaires
represent greater potential demand for expensive works of art. Some of the mostsignificant increases have occurred in emerging economies, particularly those in
Asia. Any reversal of this trend — perhaps resulting from declines in investment
portfolio wealth — would likely be detrimental to art.

Art in Portfolios
Interest in art — both for collecting and investment purposes — may well continue
to grow over the coming years. Market accessibility is continually improving thanks
to innovative technology.
Appreciating and purchasing artworks digitally took a great leap forward during the
lockdowns of 2020, and these practices look set to endure and evolve. From an
investment perspective, new methods of art ownership that enable fractional
ownership of fine artworks open the market to even more potential buyers, wellbeyond the ultra-wealthy cohort.
Besides the quest for returns in a negative real interest rate environment,
diversification will remain an important consideration. Over the long term, art returns
have had a low correlation with all the broad asset classes that our strategic asset
allocation methodology addresses. Most of its correlations were weakly positive or
close to zero (see Figure 4). Its strongest relationship was with real estate —another tangible asset class — with a correlation of 0.21. In fact, art’s correlation
characteristics are quite rare as far as asset classes go. Typically, one asset class(e.g., developed market equities) might have a lower correlation to another asset
class (e.g., developed investment grade fixed income) but might simultaneously
have a higher correlation to a third asset class (e.g. emerging market equities).
Broad-based exposure to the art market or to a category within the market thus mayhelp mitigate overall portfolio risks while also pursuing positive real returns. There ismore to art than meets the eye.

© 2022 Citigroup

March 2022

Citi GPS: Global Perspectives & Solutions

13

Figure 4. Art’s Correlation with Other Asset Classes
1962-2020
Developed Equities
Emerging Market Equities
Investment Grade Fixed Income
High Yield Fixed Income
Emerging Fixed Income
Cash
Hedge Funds
Private Equity
Real Estate
Commodities
Art
Post-War & Contemporary Art
Impressionist & Modern Art

Invest
Dev.
Emg.
Grade
Market Market
Fixed
Equities Equities Income
1.00
0.64
0.25
0.64
1.00
-0.07
0.25
-0.07
1.00
0.63
0.54
0.45
0.31
0.52
0.11
0.04
-0.02
0.31
0.77
0.56
0.45
0.79
0.58
0.08
0.52
0.37
0.12
0.11
0.44
-0.26
0.09
0.20
-0.08
-0.04
0.27
0.15
0.11
0.28
-0.18

High
Yield
Fixed
Income
0.63
0.54
0.45
1.00
0.41
-0.05
0.65
0.51
0.29
0.11
-0.07
-0.18
-0.17

Emg.
MarketFixed
Income
0.31
0.52
0.11
0.41
1.00
-0.09
0.39
0.34
0.29
0.50
0.01
0.10
-0.02

Cash
0.04
-0.02
0.31
-0.05
-0.09
1.00
0.46
0.03
-0.01
0.00
0.12
0.29
0.27

Hedge
Funds
0.77
0.56
0.45
0.65
0.39
0.46
1.00
0.73
0.46
0.12
0.11
0.15
0.09

PrivateEquity
0.79
0.53
0.08
0.51
0.34
0.03
0.73
1.00
0.73
0.04
0.07
0.10
0.06

Real
Estate
0.52
0.37
0.12
0.29
0.29
-0.01
0.46
0.73
1.00
-0.01
0.21
0.15
-0.04

Commodities
0.11
0.44
-0.26
0.11
0.50
0.00
0.12
0.04
-0.01
1.00
0.19
0.18
0.23

Post-War Impress&
ionist &Contemp Modern
All Art orary Art
Art
0.09
-0.04
0.11
0.20
0.18
0.28
-0.08
-0.33
-0.18
-0.07
-0.38
-0.17
0.01
-0.02
-0.02
0.12
0.31
0.29
0.11
-0.11
0.09
0.07
-0.16
0.06
0.21
-0.08
0.21
0.19
0.22
0.23
1.00
0.77
0.92
0.77
1.00
0.55
0.92
0.57
1.00

Source: Citi Private Bank Global Asset Allocation Team, as of January 1, 2022. Correlations are measured on a scale of 1 to -1, where 1 = two asset classes move in the same
direction all the time; -1 = two asset classes move in the opposite direction to each other all the time. Art represented by the Masterworks.io All Art, Contemporary Art andImpressionist Art Indices © 2022 Masterworks.io LLC; All rights reserved. Indices revised as of November 2021.

© 2022 CitigroupChapter 2

NFTs:
Disruptor, Catalyst, or Bubble© 2022 Citigroup

March 2022

Citi GPS: Global Perspectives & Solutions

NFTs — Disruptors, Catalyst, orBubble?
Anders Petterson
Founder and Managing Director, ArtTactic

As the global art market bounced back in 2021 from the lows of the COVID-19
pandemic, another lockdown phenomenon has dominated the media headlines overthe last few months, namely non-fungible tokens, or NFTs. NFTs are rapidly gaining
mainstream interest as global brands from Walt Disney to Nike launch their own
NFTs. Unsurprisingly, the art market is also taking notice, with Sotheby’s andChristie’s spearheading the art market’s entry into NFTs and the metaverse.2
Although NFTs can be traced back to 2014, the market for NFTs really started toaccelerate in December 2020 when the digital artist, Beeple, set a new record for
The Complete MF Collection, which sold for more than $3.5 million through Nifty
Gateway, one of the world’s largest curated NFT marketplaces.3 Three months later,
Beeple’s Everydays: The First 5000 Days sold for a record $69 million at Christie’s— an event that opened up the flood gates for the NFT market, and which,according to a recent article in Reuters and based on data from DappRadar,reached sales of $24.9 billion in 2021, compared to just $94.9 million the year
before.4
So, what are the implications for the traditional art market? In the following sections,
we take a closer look at how the art market has responded to date and what might
be in store for the future.

Disruptive Model
What the art world has lacked for a long time is a new way of consuming art andcollectibles. NFTs are providing a potential new model for this to happen. Spurredby a younger, digitally-native audience, the emergence of a new ownership modelfor digital art has finally become a reality.
Up until very recently, the world of art buying and selling has been something thathas generally happened in physical spaces with physical artworks; however, as wehave seen over the last two years, the online art market has rapidly changed this.
But while buying and selling physical artwork over the internet has grownexponentially, collecting digital art has remained a niche market with only a small
number of dedicated collectors.

2 The metaverse is a virtual world in which participants, represented by an avatar, cannetwork, buy, sell, play, invest, and learn. Its development has become a priority formany tech companies, including Facebook (which recently changed its company nameto Meta) and Microsoft. Sotheby’s launched its presence in the metaverse in June 2021,
when a digital replica of their London Galleries was launched on Decentraland.
3 The digital artist, Kevin McCoy, minted his non-fungible token “Quantum” on May 3,
2014.
4 Elizabeth Howcroft, “NFT Sales Hit $25 Billion in 2021, But Growth Shows Signs of
Slowing,” Reuters, January 11, 2022.

© 2022 Citigroup

15

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Citi GPS: Global Perspectives & Solutions

March 2022

So how does the advent of NFTs change this? In simple terms, an NFT stands for“non-fungible token,” and can be described as a unique asset in the digital worldthat can be bought and sold like any other piece of property or asset, but which has
no tangible form of its own. NFTs seek to achieve something unique — creating
digital scarcity. From a buyer’s perspective, the NFT market has in certain ways
“democratized” the ownership of digital art by building an infrastructure that creates
unique, traceable, and undisputed ownership records of a digital artwork. This
record can be easily traded in the secondary market and functions without the needfor any traditional art market intermediaries. Therein lies the potential for disruption.
Another powerful aspect of an NFT is that it allows digital artists to monetize theirwork and talent in a potentially more equitable manner, and can redefine therelationship they have with the market and audiences. While the first wave of NFTs
have largely been from digital artists operating outside the traditional art market, weare likely to see more adoption of NFTs from the art world in coming years, withboth artists and intermediaries carving out their role in this new virtual and digital
ecosystem.
What role should the traditional art market play in the future development of the
NFT market? Sotheby’s, Christie’s, and Phillips quickly understood the value ofembracing NFTs both from a branding perspective and as an effective tool toengage and cultivate a new generation of crypto-millionaires. The auction houses
have carved out their position as the bridge between the old and the new art value
system, adding their own “brand premium” and validation to the nascent NFT
market.
This might be a path to follow for other art market stakeholders. One of the aspects
rarely discussed in the NFT art market is the question of “quality.” Who decides?
What are the benchmarks? There are ample opportunities for existing art market
players to create and influence the development of the NFT art market going
forward, by building on their reputation, expertise, and knowledge, and to help build
a validation and reputation system that merges the old with the new.
It is time for the art world to get off the fence, and explore what this new technology
can potentially offer. And while the frenzy and speculation in the NFT market might
go away, the technology itself will not.

Catalyst for Change
In recent months, NFTs have opened up and created possibilities of new models ofcollecting both digital and physical art, and in the process have arguably added newvalue to both the collecting experience and artworks themselves.
International auction houses have been at the forefront of bridging the traditional art
market with the emerging market for NFTs. It was Christie’s and its sale of Beeple’s
Everydays: The First 5000 Days in March 2021 for a record $69 million that opened
up the flood gates for the NFT market, and it was Sotheby’s record sale of a single
CryptoPunk #7523 in June 2021 for $11.8 million that spearheaded the CryptoPunkboom that followed, generating sales of an estimated $1.05 billion between July andOctober 2021. There is no doubt that the crypto community is using the good oldfashioned bricks-and-mortar reputation of the auction houses to validate these newforms of digital collectibles. At the same time, the auction houses seem happy totake their share of the crypto boom, and build closer relationships with crypto
collectors and investors.

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Citi GPS: Global Perspectives & Solutions

Besides the auction houses’ foray into NFTs in the spring of 2021, we have also
seen blue-chip galleries such as Pace Gallery announce a dedicated NFT platform
in 2021, with two major NFT projects launching in collaboration with artists Simon
Denny and Urs Fischer. Another gallery, Unit London, launched Institut, an art
world-led platform for NFTs in July 2021.
Some big-name artists are also embracing NFTs. In August, Damien Hirst launchedhis first NFT project called The Currency, a collection of 10,000 NFTs, whichcorrespond to 10,000 unique physical artworks by the artist. By early November
2021, more than $70 million worth of Hirst’s NFTs had been transacted.
For many galleries, launching NFTs on OpenSea, SuperRare, Foundation, Nifty
Gateway, or any of the other NFT marketplaces would be quite a big leap, as many
galleries are still adjusting to selling traditional art online. However, as more familiar
online platforms start embracing NFTs, traditional galleries might find it easier totake the next step into the world of NFT-ization. According to recent findings fromthe Hiscox Online Art Trade Report 2021, existing online art platforms are alreadymoving into the NFT space. More than half of online art platforms surveyed in thereport were offering NFTs or will do so in the near future. The adoption of NFTs into
existing product offerings is already underway. Among online art platforms
surveyed, 14% said they are already offering NFTs through their platform, withanother 38% planning to do so in the near future. In August 2021, two online
platforms, Artnet and 1stDibs, both announced the launch of their proprietary NFT
platforms. Even the art fairs are getting in on the game, with Art Basel Miami
launching its own NFT exhibition in collaboration with the blockchain currency Tezos
in December 2021.
Figure 5. NFT Art and Collectible Market: Selected Curated NFT Platforms and NFT Collectible Projects(US$ Millions)
2,000
1,800
1,600

Auction Houses (Christie's, Sotheby's, and Phillips)
Crypto Collectible Projects (CryptoPunks, Bored Apes, Mutant Apes, Punks Comic)
Generative Art Projects (Block Art, Art Blocks, CryptoKitties)

1,400
1,200
1,000
800
600
400
200
-

Methodology: Data sources are collected from ArtTactic, NonFungible.com, and CryptoSlam!. NFT sales in this analysis are based on some of the key curated NFT platforms
such as SuperRare, Rarible, Nifty Gateway, MakersPlace, KnownOrigin, Foundation, BlockArt, Async Art, as well as NFT sales through Christie’s, Sotheby’s, and Phillips.
Crypto collectibles are based on data sales from CryptoPunks, Bored Ape Yacht Club and PUNKS Comic. Generative art is based on sales of CryptoKitties, ArtBlocks, andBlockArt.
Source: ArtTactic© 2022 Citigroup

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While the first NFT boom (which peaked in March 2021) was largely focused on
digital art by single artists, the recent boom in crypto collectibles, such as
CryptoPunks and Bored Ape Yacht Club (BAYC), suggests that collecting habits are
moving towards a different NFT collectibles market focused on code-generated art(algorithmic art) aimed at generating communities of followers, buyers, andinvestors. Although the art itself might be perceived as trivial for outsiders, thecombination of uniqueness, ownership, community, gamification, and storytelling isfueling sales of this type of digital collectible among a new generation of buyers andinvestors.
Virtual worlds or metaverses are also likely to play an important role in the near
future, as the next evolution of connectivity. These virtual worlds will allow users to
act and interact — combining virtual reality, augmented reality, online gaming, social
media, NFTs, and cryptocurrencies. The development of the metaverse has becomea priority for many tech companies, including Facebook (which recently changed its
company name to Meta) and Microsoft. In the art market, Sotheby’s has alreadyestablished itself in one of these metaverses, by creating a digital replica of its New
Bond Street galleries in the Voltaire Art District of Decentraland. In June 2021, theauction house launched the “Natively Digital” curated NFT sale, which was
streamed live into the virtual gallery, and resulted in a new record for a single
CryptoPunk, when #7523 sold for $11.8 million.

Bursting Bubble
With single NFTs regularly selling above the million-dollar threshold, and an
estimated $3.5 billion worth of NFT art and collectibles transacted in the first ninemonths of 2021, there are frequent questions what the fundamental value of these
digital assets are, and whether the NFT market can sustain current levels.5
It might be useful to draw a comparison between the boom and bust of the Initial
Coin Offering (ICO) market that took place between 2016 and 2019 and the current
rise in the NFT market. Is there a risk the same destiny could face the NFT market?
And what lessons can be learned?
Among the first notable ICO was Ethereum in 2014. The organizers sought tofinance the development of a new blockchain, different from that of Bitcoin,
implementing the famous “smart contracts” that now govern most of the NFT
market. During 2017, ICOs became a way for start-ups and online projects to raisemoney without selling stock or going to venture capitalists — it was essentially a
new form of crowdfunding and an analogy for classic initial public offerings (IPOs).
ICOs were the antithesis to the Silicon Valley venture capital industry. The market
was seen by some as a way to rebel against existing authority and traditional
capitalism, and some entrepreneurs and investors were starting to dream about anew, decentralized future offering an alternative to existing rules and practices. The
ICO market quickly caught on given the prior perceived successes of Bitcoin andEthereum, and between 2017 and 2019, an estimated $19.2 billion had been raised
from ICOs.6 However, the market started to wobble in 2018, and out of the 141
largest ICOs in 2017, 86% were trading below their listing price by October 2018,and 30% had lost almost all their value according to an EY study at the time.7

5 Hiscox, Hiscox Online Art Trade Report 2021, October 2021.
6 “Total Funding Raised by Blockchain Initial Coin Offerings (ICO) Worldwide in 2017and 2019 Link),” Statista, accessed February 22, 2022.

7 EY, Initial Coin Offerings (ICOs): The Class of 2017 – One Year Later, October 2018.

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Citi GPS: Global Perspectives & Solutions

An academic study found that for ICOs issued in 2019, 87% of these tokens weretrading below their ICO price by July 2020 and only 13% were profitable, with morethan 65% of tokens having lost most of their value.8
What caused the collapse of the market? Lack of regulation was one factor, and thesignificant number of scams, fraud, and cases of manipulation clearly dented
confidence in the market. A study published in 2018, claimed that 81% of ICOs were
scams and only around 8% of ICOs went on to the trade on the designatedcryptocurrency exchanges.9 The question about regulation in the crypto currency
market is still a hot topic and in August 2021, U.S. Securities and Exchange (SEC)
Chairman Gary Gensler called cryptocurrency an asset class “rife with fraud,scams, and abuse” and said investors do not have enough regulatory protection
from the swarms jumping into crypto finance, issuance, trading, and lending. This
was a clear signal towards a strategy to regulate the crypto market, but so far, thegrowth and innovation of cryptocurrency markets have outpaced the government’s
ability to create and impose a suitable regulatory framework for this new asset
class.
Despite the ICO bubble that burst in 2019, the ICO model nevertheless gave birth to
many of the important building blocks in the current blockchain and NFT ecosystem— from Ethereum to Decentraland. The market frenzy seen in the NFT market in2021 bears many of the hallmarks of previous crypto booms — large volumes of
new entrants, FOMO (fear of missing out), prices shooting up exponentially, “pumpand-dump” strategies, high levels of volatility, and low liquidity. Like the previous
ICO boom, the majority of NFTs might end up worthless or illiquid. However, the art
world has been generally cautious in embracing NFTs over the last 18 months, andthere is limited risks of spillovers to the traditional art market in case of a collapsing
market. Also, bursting bubbles sometimes signal not the end, but rather the
beginning of a new development phase often built on the winners from the previous
cycle – a path NFTs might follow.

8 Lars Haffke and Mathias Fromberger, ICO Market Report 2019/2020 – Performance

Analysis of 2019’s Initial Coin Offerings, December 30, 2020.
9 Shobhit Seth, “80% of ICOs are Scams: Report,” Investopedia, April 2, 2018.

© 2022 Citigroup19

Chapter 3

NFTs:
Beyond Art© 2022 Citigroup

March 2022

Citi GPS: Global Perspectives & Solutions

NFTs — Beyond Art
Digital Assets Group
Citi Global Wealth

Before 2020, many millennials had never purchased physical art. Yet nowadays,
many are finding themselves perusing digital galleries full of artworks to decorate
the walls of their own digital galleries, which are created by organizations such as
RTFKT (pronounced “artefact”). The pieces on the wall and the gallery itself areissued as non-fungible tokens (NFTs), where anybody can walk around the gallery
on their web browser or via virtual reality headset, and even make offers on a piece
they might want to purchase.
In January 2022, roughly $7.39 billion worth NFTs traded hands, according to The
Block Research.10 This was by far a single month record, and comes amidst a
broader equity and crypto market selloffs.
The “metaverse” is here and is not some distant dream.
Figure 6. A Digital Gallery

Source: oncyber.io

With growing volumes and a broadening audience, the NFT landscape is evolving
rapidly. What started as simple “profile pictures” of animated characters to use onsocial media platforms is now attracting traditional artists, musicians, andentrepreneurs seeking to utilize the technology and enable digital ownership andscarcity such as private dining club membership tokens.11
So besides “liking the art,” why are creators and consumers alike attracted to thisnew medium? Some will say it is due to pure speculation and profit seeking, whichis certainly a component. But this overlooks the potential benefits of fundraising andcommunity-building for creators. After the creation of an artwork and “minting” thepieces in NFT form, creators typically use social platforms like Twitter, Instagram,
Telegram, and Discord to raise awareness about their artwork, often bringing inthousands of potential fans and buyers to interact with the artist directly. For
example, three of the pieces in the pictured gallery in Figure 6 above are works
from Refik Anadol, a pioneer in “AI data paintings.”

10 “NFT Marketplace Monthly VolumeLink),” The Block, accessed February 17,2022. 11 “The 1st NFT Restaurant Link),” VCR Group, accessed February 17,
2022.

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In collaboration with Google Quantum, Refik issued 1,000 computer-generated“synthetic landscapes” and built a Discord community of now ~7,000 fans andcollectors where Refik himself is often hosting Zoom meetings to interact directlywith his community, and offering access to real-world exhibits of his artworks atplaces such as ARTECHOUSE in New York City.12 Another example is artist Kurtis
Dawe taking his experience working on household name movies from Disney andMarvel to the NFT art world with his release of Prime Ape Planet, whose Discord
community amassed over 400,000 fans.
This building of communities can create a flywheel effect for all involved. Fans of
the art and artist are rewarded with engagement and perks, which build loyalty andawareness for the artist’s next work, which in turn builds trade volume of the works,
which benefits the artist through royalties baked into NFTs themselves. Royalties on
NFT sales typically range from 2.5% to 10%, which on $7 billion plus of volume inJanuary alone is certainly attractive for artists old and new.
The fundraising mechanism of NFT issuance and royalties also allows issuers tofurther develop the utility of the NFTs they issued. Looking at the well-known NFT
project Bored Ape Yacht Club, the project’s founders issued 10,000 NFTs which
now trade at a floor price of 99 Ethereum (ETH) each (equivalent to $315,000 as ofFebruary 7, 2022) and over $1 billion equivalent has traded with a 2.5% royalty tofounders. This money has been used to grow staff and partner with gaming
producers to create mobile games, one of which was released in early February
2022 and attracted thousands of users competing for real-world prizes. In thisexample, the NFT is simply an image of an ape, but it also acts as a membership
token to an exclusive community amongst crypto-natives and celebrities alike.13
Universal Music Group has even formed a virtual band called “Kingship” made up of
Bored Apes that will produce music and perform in the metaverse. The direct-toconsumer model of NFT issuance can be potentially compelling for artists andmusicians alike, and companies are beginning to jump on board to both protect theirown intellectual property and capitalize on new consumer engagement models that
could bring significant new revenue streams, even if cannibalizing existing sourcesof income.
In addition to art and music, NFTs are creeping into the esports/gaming world,
where gamers spend over $50 billion on in-game items annually already.14 Where
gamers would purchase outfits or “skins,” or unique assets or abilities that help levelup their characters, the money spent goes straight to the game creator, the asset
itself is still owned by the game, and can only be used within that game. Now, with
NFT-based gaming, players can truly own similar in-game skins or assets, with thecompany still benefiting from issuance cost and ongoing royalties of players trading
items. Additionally, game creators have incentives to allow items to be interoperablewith varying games, increasing royalties and gamer loyalty. We have alreadywitnessed the rise of blockchain-based games by blockchain-natives, such as Axie
Infinity, The Sandbox, Vulcan Forged, Decentraland, and Gala Games, and we arelikely to see traditional gaming studios looking at both offensive and defensive ways
to engage with the technology going forward.

12 “Machine Hallucination: NYC

Link),” ARTECHOUSE, accessed February 17, 2022.

13 Andrew Hayward, “The Biggest Celebrity NFT Owners in the Bored Ape Yacht Club,”Decrypt, January 31, 2022.
14 “Consumer Spending on In-Game Purchases Worldwide from 2020 to 2025,” Statista, accessed February 22, 2022.

© 2022 Citigroup

Link)

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Citi GPS: Global Perspectives & Solutions

Lastly, the long-heralded tokenization of real estate may be finally arriving. One
pioneer in the space, Propy, told the news outlet Blockworks they “have developed
all the necessary smart contracts and a compatible legal framework that allows
tokenizing any real estate property in the United States.”15 Not only do they havethe legal framework in place, their latest Florida home hit the market with a$650,000 starting point, where the home’s deed and all property rights will be
minted as an NFT. So far, 1,500 bidders have registered for the auction. Reductionof closing time and costs are the goals here, and a key area to watch develop
outside the art and media space for NFT disruption.

Not All Fun and Games
While unique digital property and provenance have already created a significant
industry and offer potential disruption across numerous others, the market is still in
its infancy and open to nefarious actors or opaque legal frameworks, in addition toinvestment risks such as price volatility and illiquidity. For example, fashioncompany Hermès is suing an NFT artist for creating the MetaBirkins, accusing theartist of leveraging the famous “in real life” Birkin Bag the company sells for $10,000
to $500,000 per piece. The company claims trademark infringement, while the artist
claims free speech. The ongoing case is likely to have ramifications on other artists’works across the industry, but regardless of the outcome, it may shed light on the
court’s views on artistic freedoms in the digital realm.
Figure 7. Examples of Mason Rothschild’s MetaBirkins

Source: Artnet

Furthermore, regulators are also forced to consider whether or not many of these
NFTs are in fact securities. If you raise money by issuing tokens, use that money tobuild a network and products such as games, and profit off what is built using
money from the issuance, then there is potential for securities law violations in theeyes of regulators as the issued tokens are unregistered and available to the public.
Many market participants are calling for more specific clarity from securities
regulators on the right approach to issuance without hindering innovation. U.S.
Securities and Exchange (SEC) commissioner Hester Peirce spoke at Draper
Goren Holm’s Security Token Summit in March 2021 stating, “People are being very

15 Morgan Chittum, “NFT Home Sale Has 1,500 Bidders Lining Up,” Blockworks,

February 7, 2022.

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creative in the types of NFTs they’re putting out there. You better be careful thatyou’re not creating something that's an investment product, that’s a security.”16
Further, the NFT community calls for guidance have been heard, but the challenge
for regulators is balancing a pro-innovation and pro-safety approach for an
emerging market that anybody with an internet connection can tap into.
As with many new internet-based technologies and applications, there is potential
for fraud and abuse. As blockchain-based applications are typically permissionless,meaning anybody in the world with a smartphone or computer can access them andissue assets in token or NFT form, there are avenues for bad actors to takeadvantage of those without expertise in the field. The term “rug pull” has become
all-too common in the industry, describing a fraudulent project in which an NFT
issuer promises an attractive roadmap of the utility for an NFT, issues the tokens toraise capital, then disappears altogether. Citi Ventures-backed blockchain analytics
firm TRM Labs showcases two examples of rug pulls here (Link), such as the“Baller Ape Club” project whose founders raised $2 million from investors thensubsequently deleted both their websites and Discord community chatrooms, anddisappeared with the money. Firms like TRM Labs and Chainalysis are service
providers working with law enforcement globally to help trace illicit on-chain activity.
However, it is still important for those involved with blockchain-based assets to truly
do their own research and know what they are buying.
While rug pulls have been relatively small compared to the total volume of NFTs
trading daily, there has also been a rise in wash trading and potential money
laundering on certain platforms. Wash trading is where a single party is both thebuyer and the seller of an asset, with the intention of misrepresenting the volume
and value, and then selling it later to an unsuspecting third party. While Chainalysis
reports most wash traders are unprofitable, mainly due to royalties andcommissions to NFT exchanges, some players have been successful in duping
investors into believing they are buying into a highly-demanded NFT.17 Moneylaundering using NFTs is also a major headwind for an asset class vying for
legitimacy. However, analysis to date suggests that only a small percentage of total
NFT transactions are for money laundering purposes, and so far are an evensmaller percentage when compared to traditional art or money markets.

Summary
The NFT market is still relatively small compared to the broader digital asset or“crypto” economy, with Chainalysis reporting an estimated $44 billion spent on NFTs
in 2021 versus an estimated $2 trillion market cap for publicly traded crypto
assets.18 However, the explosive growth of issuance, transaction volume, andapplication of the NFT data type is likely to continue as platforms provide easieraccess, regulations become clear, and education continues to permeate the masses
outside today’s crypto-native community. Art, music, film, real estate, gaming, andmore industries are likely to begin incorporating NFTs for new customer and fan
experiences, engagement models and revenue streams. Booms and busts will
occur in the NFT space as they do throughout all markets, and issuers, collectors,
and investors alike need to be aware of the potential pitfalls and promise of thisburgeoning market.

16 “PYMNTS NFT Series; Can NFTs be Securities? The SEC Says Yes

January 12, 2022.

Link),” PYMTS.com,

17 “Crime and NFTs: Chainalysis Detects Significant Wash Trading and Some Money

Laundering in This Emerging Asset Class Link),” Chainalysis, February 2, 2022.

18 “Report Preview: The 2021 NFT Market Explained [UPDATED 1/13/22]© 2022 CitigroupLink),” Chainalysis.

Chapter 4

Art and Money Laundering:
Shifting Regulatory Tides© 2022 Citigroup

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March 2022

Art and Money Laundering
Birgit Kurtz
Attorney at Law (NY and NJ)

From time to time, headlines announce that “another” case of money laundering in
the art world has been uncovered, followed by the argument that it is merely “the tipof the iceberg.” Whether or not such an extrapolation is justified, several countries
around the world have responded by proposing or enacting laws and regulations
specifically geared towards the art market. These laws and regulations require
certain art market participants to help prevent and detect money laundering in theiroperations.
In light of these developments, it is important for art market participants to know
which rules apply to them and what they can do to avoid unwittingly participating ina money-laundering scheme. The good news is that, in general, anti-money
laundering (AML) requirements are “risk-based” and align well with common risk
management approaches and thoughtful strategies for long-term sustainablesuccess.
This article aims to raise awareness of the money-laundering risks collectors andfamily offices may face, and to offer some ideas on how they can mitigate thoserisks. Readers are encouraged to seek competent advice from legal andcompliance professionals in order to maximize their AML impact.

Background
What Is Money Laundering?
The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN)
defines “money laundering” as:“…the process of making illegally-gained proceeds (i.e., ‘dirty money’) appear legal(i.e., ‘clean’). Typically, it involves three steps: placement, layering and integration.
First, the illegitimate funds are furtively introduced into the legitimate financial
system. Then, the money is moved around to create confusion, sometimes bywiring or transferring through numerous accounts. Finally, it is integrated into thefinancial system through additional transactions until the ‘dirty money’ appears‘clean.’ ” 19
FinCEN warns that money laundering can “facilitate crimes such as drug trafficking
and terrorism, and can adversely impact the global economy.”

Scope of the Problem
Money laundering is a serious, worldwide problem. It is estimated that about 3-5%of global GDP is laundered globally every year, equaling an astounding $2.17 trillion
to $3.61 trillion.20
Money laundering has also been linked to terrorist financing, which encompasses
the means and methods used by terrorist organizations to finance their activities.
Terrorist groups often obtain their financing from illegal activities such as trafficking
in weapons, drugs, people, and stolen goods. Funds derived from these crimes arethen laundered to make them usable in commerce. Because of this link, anti-

19 “History of Anti-Money Laundering Laws

Link),” U.S. Financial Crimes Enforcement

Network, accessed February 17, 2022.
20 “Anti-Money Laundering / Counter Terrorist Financing Link),” U.S. Department of State,accessed February 17, 2022.

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Citi GPS: Global Perspectives & Solutions

money-laundering and combating the financing of terrorism (AML/CFT) are often
discussed in the same breath.

Vulnerability of the Art World
The art world at large appears to be an appealing target for criminals with large
sums of dirty money to launder, ostensibly exploiting certain inherent features of theart world, including: large sums of money changing hands on a daily basis; a lack of comprehensive AML regulations applicable directly to all art market

participants;
 a lack of transparency, based in tradition and the desire for privacy;
 common use of intermediaries, contributing to the lack of transparency;
 challenges in accurately documenting provenance; portability of most art objects, easing cross-border transactions and concealment;and subjective valuation of artworks leading to high volatility and potential for abuse.

In theory, criminals could use art to launder dirty money in different ways. First, they
could purchase artworks with dirty money and later sell those artworks in exchange
for clean funds. Second, they could use art previously purchased with dirty money
as collateral for loans. And, finally, they could hide a transfer of dirty money by overor under-invoicing the purchase or sale of a work of art.

United States
While art market participants as such are not yet subject to AML regulations, it isimportant to remember that the participation in a money-laundering scheme can,nonetheless, be a federal crime, punishable by imprisonment and severe financial
penalties. That can be the case if a person who plays a part in such a scheme
knew or should have known that the proceeds of a specified unlawful activity(e.g., drug deals, embezzlement, stock manipulation) are laundered (1) to promotethat activity; (2) to avoid taxes; (3) to conceal or disguise the nature, location,
source, ownership, or control of the proceeds; or (4) to avoid certain reporting
requirements.
A person “knows” that the property in question represents proceeds of some form of
unlawful activity if that person has “direct knowledge” (e.g., “please take this drugmoney and launder it for me”), or if that person was aware of facts giving rise to ahigh probability of a money-laundering scheme (e.g., “please accept this bag of$50,000 in rubber-banded $20 bills”), or consciously avoided knowledge (e.g., “don’ttell me how you made this money — I’d rather not know”).
Trade-based money laundering (TBML) appears to be particularly suitable to theart trade. For that method of money laundering, criminals would use the legitimate
trade to disguise their criminal proceeds. The method involves any one of several
schemes to complicate the documentation of legitimate trade transactions, as forexample: moving illicit goods;© 2022 Citigroup

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 falsifying documents;
 misrepresenting financial transactions; and under-invoicing or over-invoicing the value of goods.

Art market participants are, therefore, well advised to take great care whencompleting or checking documentation and to conscientiously avoid any incorrect
valuations or other material misrepresentations.

U.S. AML Laws and Regulations
U.S. AML laws, including the Bank Secrecy Act (“BSA”) and related regulations, aredesigned to help identify the source, volume, and movement of currency in order toassist U.S. government agencies in detecting and preventing money laundering.
The laws cover banks and certain enumerated non-bank financial institutions,
including casinos, securities and commodities firms, insurance companies,
pawnbrokers, loan or finance companies, operators of credit card systems, anddealers in precious metals, stones, or jewels. In early 2021, Congress amended the
BSA in a number of ways relevant to the art market.

Antiquities Trade to Be Covered by AML Regulations
The January 2021 law added another type of “financial institution” to the above listof financial institutions:“…a person engaged in the trade of antiquities, including an advisor, consultant,or any other person who engages as a business in the solicitation or the sale ofantiquities.”
Final regulations for these new covered entities will likely be issued sometime in2022. While it is not yet clear what exactly these regulations will require of theantiquities trade, the regulations may well resemble the ones already in place for“dealers in precious metals, stones, or jewels” (31 C.F.R. Part 1027), which
include: The written AML program:– Policies, procedures and internal controls– Risk assessment– Compliance officer– Education and training– Independent testing Reporting Record-keeping Information sharing

The regulations for the trade in antiquities will most likely also contain definitions ofcentral terms (e.g., antiquities, trade) and may exempt certain dealers based on
size and/or annual revenue.

© 2022 Citigroup

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Citi GPS: Global Perspectives & Solutions

Art Market StudyThe January 2021 law also commissioned a “Study of the Facilitation of Money
Laundering and Terror Finance Through the Trade in Works of Art,” obligating theTreasury Secretary to research money laundering and terrorist financing in the art
market. On February 4, 2022, the Treasury Department released the results of thestudy.21
The study concluded that, compared to other industries with higher moneylaundering risk, “the art market should not be an immediate focus for the impositionof comprehensive AML/CFT requirement.” The study determined that AML/CFT
risks are not equally distributed across the U.S. market. Instead, while there is somemoney-laundering risk in the institutional, high-value art market and possibly inthe emerging online art market, there is little evidence of terrorist finance risk.
Based on the perceived risk of money laundering in different sectors of the U.S. art
market, the study recommended that companies which provide art financing
services, such as art lending firms and auction houses with lending programs,
should be covered by AML/CFT requirements; if other art market participants were
to be regulated, entities with annual sales of less than $500,000 or $1 million should
be exempted. Instead, small- and medium-sized art businesses should be assisted
through the creation of an “information sharing mechanism” that would facilitatecustomer due diligence efforts without disproportionately increasing complianceburdens.

Pandora Papers and Aftermath
Following the Panama Papers (2016) and Paradise Papers (2017), on October 3,
2021, the “Pandora Papers” were published by a number of news organizations,leaking close to 12 million documents from 14 offshore financial services firms. The
documents included information on more than 330 politicians and public officials
from more than 90 countries and described the practice of using shell companies
and trusts to hide billions of dollars, often to avoid the reach of tax authorities andlaw enforcement. One case described in the documents that received a lot of
attention was that of Donald Latchford, an art dealer and leading scholar of Khmer
art. Before his death in 2020, he was accused of trafficking in looted Cambodian art.
The Pandora Papers reported that money related to the allegedly looted artworks
passed through offshore accounts associated with Latchford.
Just a few days after the Pandora Papers were published, the “ENABLERS Act”
(H.R. 5525) was introduced by a bipartisan group of federal lawmakers. The Act
would add a number of art market participants to the BSA’s list of financial
institutions:“…a person engaged in the trade in works of art, antiques, or collectibles,
including a dealer, advisor, consultant, custodian, gallery, auction house, museum,or any other person who engages as a business in the solicitation or the sale ofworks of art, antiques, or collectibles.”In addition to those art market participants, the ENABLERS Act would also add
several other categories of people and entities to the list, including lawyers and law
firms, accountants, realtors, investment advisers, and public relations firms.

21 “Treasury Releases Study on Illicit Finance in the High-Value Art Market,” U.S.

Department of the Treasury, press release dated February 4, 2022.

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Whether the ENABLERS Act or a similar bill will be enacted in the United States is
an open question. What is not in doubt, however, is that the U.S. government andthe greater public are laser-focused on the art market, with several voices forcefully
demanding broad AML regulations for art market participants. The worldwide
pressure for more transparency in the art world seems to have an effect on U.S.
lawmakers. Stay tuned!

The European Union and United Kingdom
European Union
As part of a comprehensive attack on money laundering and terrorist financing, theEU has issued a series of Anti-Money Laundering Directives. EU Directives require
each Member State to enact domestic legislation that meets a minimum standard,
including (1) risk assessment, (2) customer due diligence, (3) record-keeping, and(4) suspicious transaction reports.
The Fifth Anti-Money Laundering Directive (5AMLD) required Member States toenact domestic laws by January 2020 that specifically cover certain art market
participants (persons trading works of art, including art galleries; auction houses;
persons storing or trading works of art “when this is carried out by free ports;”
intermediaries) if the value of a transaction is € 10,000 or more (including a series oflinked transactions and any payment method).
The requirement to conduct customer due diligence is stricter for a number of cases
set forth in 5AMLD’s Annex III because they indicate a “potentially higher risk,”including:“…transactions related to oil, arms, precious metals, tobacco products, culturalartefacts and other items of archaeological, historical, cultural and religious
importance, or of rare scientific value, as well as ivory and protected species.”
Such riskier transactions require “enhanced customer due diligence” (EDD),
meaning that the covered entity must ask more questions and request more
documentation from its business partner.
5AMLD also introduced some provisions for the purpose of increasing transparency,
including central registers for ultimate beneficial ownership (UBO) information thatmust be created in each EU Member State; a new EU Platform will connect thesecentral registers. Access to the information in the registers will be given to law
enforcement and entities required to perform due diligence, among others.
The Sixth Anti-Money Laundering Directive (6AMLD) had to be implemented byeach Member State by June 3, 2021. Among other things, 6AMLD raised criminal
penalties across the EU. For example, in addition to persons who profit directly fromacts of money laundering, 6AMLD added aiding, abetting, inciting, and attempting tolaunder money as covered offenses.
In July 2021, the European Commission introduced a bold set of legislative
proposals to strengthen the EU’s AML rules, including a proposal for the creation ofa new EU authority to fight money laundering. Until this new regulation becomes
effective, each Member State has a different law: 5AMLD and 6AMLD provide aminimum set of rules, and a number of Member States have already enacted
stricter rules than required by the EU Directives. Art market participants should,
therefore, consult knowledgeable counsel in each Member State in which they are
doing business.

© 2022 Citigroup

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Citi GPS: Global Perspectives & Solutions

United Kingdom
In the U.K., “art market participants” are subject to anti-money laundering andterrorist finance regulations. Because these regulations were enacted when the
U.K. was still a member of the EU, the U.K. regulations very much resemble theabove-described EU regulations. Even after Brexit, the U.K. has continued its
leading role in combatting money laundering and terrorist financing.
One important obligation for art market participants in the U.K. is the duty toregister with HM Revenue & Customs. See the U.K. government’s website (Link)
for more information.
The required customer due diligence (CDD) process includes:
 request documents: picture ID, recent proof of residential address;
 request UBO information for companies, trusts, etc.;
 inquire into the purpose of planned transaction and source of funds;
 consult watch lists (e.g., government sanctions, “politically exposed persons”(PEPs), etc.);
 react to “red flags” by conducting EDD; and keep records

Other obligations resemble those in effect in the EU: the U.K. rules require staff
training, the appointment of a “money laundering reporting officer” (MLRO) anddeputy, as well as the submission of “suspicious activity reports” (SARs).

Suggested Approached for Collectors and Family Offices
As the above overview makes clear, collectors and family offices are well advised toconsider adopting carefully tailored AML programs. There is no “one size fits all”
approach, and any program should be based on the results of the particularcollector’s or family office’s risk assessment. An AML program should be reasonably
designed to prevent the collector or family office from being used to facilitate
money-laundering activities through the purchase and sale of covered goods.
What is essential to meet regulatory expectations is: (1) that the collector or family
office make a reasonable effort to mitigate the risks it faces, and (2) that it be able todocument all measures it implemented and steps it took in mitigating those risks,
including that “red flags” were followed up on. In many organizations, existing risk
management, accounting, auditing, and other practices may provide a roadmap for
an effective AML program, and existing personnel may be able to take on all or mostof the new duties.
In any event, a robust AML program can be one piece of a long-term strategy forsustainable success. While the new obligations may place a significant complianceburden on art market participants in the short run, they may prove to be blessing in
disguise in the long run — when they protect art market participants from becoming
unwitting participants in money-laundering schemes. An effective AML program canprotect an organization from a government investigation, criminal prosecution, civil
litigation by affected business partners, and the related legal fees; it can also
prevent harm to the organization’s reputation as a result of negative publicity.

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Most people prefer to do business with ethical organizations that have safeguards
against money laundering in place. Because transparency leads to trust, collectors
and family offices should regard AML procedures not as a challenge, but rather as
an opportunity and possibly even a differentiator.
For more detailed, practical guidance on how to get started, art market
participants are encouraged to visit the website (Link) of the Responsible Art
Market (RAM) Initiative — a non-profit, cross market initiative formed in Geneva in
2015. For example, the RAM Guidelines on combatting Money Laundering andTerrorist Financing offer step-by-step suggestions on how to approach AML risk
mitigation:22
1. Do a risk assessment of your business and apply risk based measures
2.

Know and comply with the laws where you are doing business and be alert to“red flags”

3.

Know Your Clients (KYC) and establish their risk profiles: Check for client red
flags

4.

Research the artwork, its ownership and provenance: Check for artwork red
flags

5.

Know the background and purpose of transaction: Check for transaction red
flags

6.

Keep records

7.

Train staff and monitor processes and procedures

8.

If grounded suspicions exist, know how to act

On the RAM website, each of the above eight guidelines leads the user to moredetailed suggestions on how to handle the issue. The website also offers (nonexhaustive) Lists of Red Flags, which can assist in identifying circumstances thatwould warrant further inquiry or, potentially, the rejection of a particular deal.

22 “Guidelines on Combatting Money Laundering and Terrorist Financing

Art Market, accessed February 17, 2022.

© 2022 Citigroup

Link ),” Responsible

Chapter 5

What’s New for Art in 2022?
Trends Emerge in a Time of Crisis© 2022 Citigroup

Timeline – Art Disruptors
The history of Western Modern art has long celebrated the “avant-garde,” those artists, art works or movements
who have fore fronted innovation and have broken the rules, often to much controversy. The intersection of art and
NFTs offers a new chapter in this ongoing history of radical disruption. Here we take a look back at those who havepushed the boundaries of art making and art marketing over the last 150 years.

1870s-1880s
THE IMPRESSIONISTS
Not only did the Parisian-based painters create an
uproar with their contemporary subject matter andloose brushstrokes, but their application of scientifictheories of color and light was considered especiallyextreme. Just as revolutionary was their outright
rejection of the institutional Academy with its annual
salon exhibitions. This denunciation resulted in the riseof the art dealer system, introducing a radical new wayof displaying and selling art.

1910s-1920s
DADA AND THE READYMADE
Against the brutality of World War I, Dada sought todestroy conventional ideas about art, particularly that it
had to be beautiful. One of the leaders of the movement,
Marcel Duchamp, epitomized the subversive Dadaist
attitude with his “Readymade” sculptures like The
Fountain (1917), in which a mass-produced urinal becamea work of art because the artist designated it as such.
Antithetical to skill and aesthetic, Dada art appealed tothe mind and encouraged complete artistic liberation.

© 2022 Citigroup1950s-1970s
FROM HAPPENINGS TO CONCEPTUAL ART
Artists from Asia, South and North America, and Europe
staged performances and “Happenings” that disputed theconvention that an artwork could only exist as a physicalobject. Foregrounding audience participation that converted
viewer into creator, these ideas would find further expansion
in Conceptual art, which argues that the idea, as opposed toan artwork’s “object-ness,” is its most significant feature. This
challenged the commodification of art and questioned theauthority of the art dealer and gallery.

1980s-1990s
STREET ART AND RISE OF AUCTION HOUSESStreet and graffiti art, epitomized by artists including Jean Michel
Basquiat and Keith Haring, made art accessible to a broader
audience, often by relocating it from the walls of the gallery to
the spaces of their communities. Artists like Cindy Sherman andRichard Prince of the Pictures Generation appropriated elementsof mass media and culture, throwing into question the concept
of artistic originality and ownership. Meanwhile auction houses
redefined themselves as global purveyors of luxury goods andsaw record prices, a phenomenon spurred by the concept ofart as an investment vehicle along with the ascendency ofcontemporary art as a market category.

2010s-2020s
TECHNOLOGY, THE INTERNET, AND NFTs
Online buying platforms and social networking services
like Instagram and have transformed how informationis shared and traded, propelling the art market’s
extraordinary growth across the globe. The NFT market
has radically democratized ownership of digital art bybeing easily traded in the secondary market without
the need for any traditional art market intermediaries.
Digital artists can monetize their work in a more equitablemanner, and redefine the relationship they have with themarket and audiences.

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March 2022

What’s New in 2022 for Art?

Trends in the Art Market Emerge in a Time of Crisis
Betsy Bickar
Art Advisor, Art Advisory & Finance
Citi Private Bank

No one could have imagined the challenges that 2020 presented to the art market:
the threat of a pandemic halting nearly all commercial activity was more thandaunting. The situation had sprung economic and logistical challenges upon the art
world that not only created uncertainty, but also made many uneasy about themarket’s entire structure and outlook. Globally, artists, museums, and art dealers all
faced unique challenges, and their survival hinged upon the ability to quickly adapt.
Although pre-pandemic many of us had been feeling an unsustainable level of “artfair and auction fatigue,” these events still provided the majority of a gallery’s orartist’s annual revenue. Would we ever get back to visiting galleries, museums, art
fairs, and auctions in the same way? How would artists, museums, and small
galleries endure this level of economic crisis?
Fast forward to December 2021: in just a two-week span at the November auctions,$2.3 billion dollars of art sold — up 173.9% from the previous year.23 Art Basel
Miami Beach ended the year with a bang, marked by lavish parties andperformances by Cardi B, Alicia Keys, and Lizzo, even amid global concerns about
COVID-19’s recently identified Omicron variant. Approximately $10.7 billion dollars
of art minted as non-fungible tokens (NFTs) sold as of the third quarter of 2021.24 As
2022 begins, dealers are now reporting a new energy in the overall art market, witha resurgence of in-person events and venues.
There were other changes in 2021, some unrelated to the pandemic: increased
regulation around anti-money laundering and strong sales of the scions of Postwar,
Modern, and Impressionist art.25 New auction house-gallery relationships also
emerged as the sense of artistic community prevailed over commercial interests. In
the absence of the physical, the purely digital started to take hold in more ways thanone. A new comfort level of buying art online and sight-unseen is evident. Artists,museums, and dealers quickly adapted to a more digital world and managed tosurvive — and many even thrived — in these unprecedented times. The art market
has proven to be beyond resilient — it seems to be almost unstoppable, farreaching, and quickly evolving. Here are some of the biggest trends we have seen
this year.

23 Price indicated includes auction house premiums. Kelly Crow, “The Art Market Surges,

Selling $2.3 Billion in Works,” The Wall Street Journal, November 19, 2021; Lindsay
Dewar, “Marquee Evening Sales,” ArtTactic, November 2021.
24 Gregory Bobillot “Soaring NFT Sales Redraw the Art Market”, FT, November 28, 2021.
25 Judd B. Grossman et al., “New U.S. Anti-Money Laundering Laws and Sanctions
Advisory Impose Compliance Obligations on Art Market”, ARTnews, March 30, 2021.

© 2022 Citigroup

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Citi GPS: Global Perspectives & Solutions

New Collectors and Shifting Genres
A wider range of people now have access to the art world than ever before. Indeed,anyone with a smartphone or computer can buy art online, not just those on coveted
VIP lists. As such, we have seen a rapid increase in buying from a more global
collecting base, with younger collectors making their presence felt. A recent Artsy
survey found 83% of the respondents said they had purchased art online. Thatshare was even greater among “Next-Gen collectors,” a subset of buyers who had
started collecting in the last four years and had spent at least $10,000 on art in agiven year, 91% of whom said they have bought art online.”26
Galleries have long focused on the careers of living artists, but auction houses have
only begun to tap this sector. While auction houses rarely take primary market
consignments directly from artists, that model is changing as 2022 begins. Auction
houses are in the stages of planning exhibitions in conjunction with galleries topartner in new ways. Large galleries such as David Zwirner, Jeffrey Deitch, andothers have created online platforms and formalized relationships with younger,
more emerging galleries.
Figure 8. Kwesi Botchway, Green Sofa, 2020 — Acrylic on canvas 60 1/4 x 55 in. (537 x 139.7cm) at Phillips 20th Century and Contemporary Evening Art, November 17, 2021 for $214,200
with premium

Source: Image courtesy of the artist

26 Benjamin Sutton, “Artsy Insider: How the Next Generation of Collectors Is Buying Art,”

Artsy, June 30, 2021.

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A trend that began to take hold a few years ago strengthened dramatically in 2021,
with a continued interest in a more diverse artistic output in the Contemporary
sector. In fact, semantics around what is “Contemporary” art are shifting, withauction houses and galleries talking about “21st Century art” or “The Now.” The“new” is even more in vogue than ever before — record prices for less establishedor relatively unknown artists are now so common that many wouldn’t even refer to it
as speculative anymore. Auction houses are finding that collectors who areinterested in Impressionist and Modern artworks are also increasingly drawn toContemporary.
Phillips began its “New Now” sale of ultra-contemporary art several years ago topresent an edited selection of emerging art. This sale has steadily been gaining
traction among younger buyers and 2021’s insatiable appetite was further evidenceof that. Christie’s and Sotheby’s have also traditionally held midseason sales,
dubbed “First Open” and “Contemporary Curated”, respectively. However recently,
instead of taking a backseat, these types of sales — which are made up of younger,
more diverse, and lesser-known artists — arrived in a prominent spot in New York’s
marquee week, each auction house taking a slightly different approach but all
markedly focusing on the “new”, or ultra-contemporary work that typically wouldn’t
have been seen at auction for a number of years to come. For example, Phillips
now designating their 2021 New York sale “20th Century & Contemporary Art”, todistinguish between a Joan Mitchell from 1992 and a Jadé Fadojutimi from 2018,illustrates how different artmaking has become in a short span of time, and how it
speaks to diverse collector bases. Underscoring the further classification of the term“Contemporary Art,” Sotheby’s mounted a standalone sale called “The Now,” andChristie’s hosted two separate sales: “20th Century Evening Sale” and “21stCentury Evening Sale.”

Changing Tastes
As audiences become more diverse, so too does the art that speaks to them.
Museums, particularly in North America and Europe, have facilitated this byfocusing on historically underrepresented and marginalized artists and movements.
Academic institutions and private collectors are reshaping the art historical canon,
which is now drawing long overdue attention to women, artists of color, and otherdemographics. These complex narratives are the subject of museum exhibitions
and reinstallations of many permanent collections across the United States andEurope.
The increasing diversity of figurative painting is a case in point. Over recent years,
market successes such as Kerry James Marshall, Kehinde Wiley, and David
Hammons have paved the way for the markets of other artists to grow and flourish.
Among them are Lynette Yiadom-Boakye, Amy Sherald, Jordan Casteel, Titus
Kaphar, Mickalene Thomas, Calida Rawles, and Toyin Ojih Odutola.

Level Playing Field
The rarefied and academic art market has traditionally been an insiders’ club that
rejected more commercial and less esoteric works. However, that has now
changed. Galvanized in part by the Asian contemporary market, along with the
emergence of newer, younger collectors globally, there has been a significant shift
in collecting tastes. Newer collectors do not always have the preconceived notions
that fine art should be “important” or “serious.” Instead, a broad base of collectors
and even museums have embraced a more open way of thinking about what
constitutes fine art.

© 2022 Citigroup

March 2022

Citi GPS: Global Perspectives & Solutions

Digital art, cartoons, youth culture imagery, graphic design, and toys are now much
more in vogue. Early in 2021 many — including me — were wondering “what is an
NFT?” Yet the market adapted rapidly, and art works minted as NFTs now feature
regularly in auction sales, and galleries are participating as well. A new digital
medium has captivated the art world, with galleries, museums, and collectors
wanting in on the action.
Figure 9. Still Image from Beeple’s Open-Source Short Film FITC TORONTO TITLES

Source: Beeple website

Amid this democratization of the art world, there is widespread celebration of artists
who work outside of the mainstream. One example is the street artist known as
Banksy. His Love Is in the Bin sold in 2021 at Sotheby’s London for £18.6 million($25.4 million). This work famously sold three years prior at Sotheby’s for £1 million($1.4 million). As the gavel struck, surprised auction-goers watched as the work
shredded itself. This stunt in the end created a new, “damaged” work that later
resulted in yet another record price for the artist.
Another example is graffiti-artist turned fine-artist KAWS (aka Brian Donnelly), who
was the subject of a major retrospective in 2021 at the Brooklyn Museum of Art,
achieving record ticket sales. What is surprising about this is the artist’s career
trajectory (his work frequently references characters from Sesame Street,SpongeBob SquarePants and Mickey Mouse) is that he was outside of any current
artistic trend or intellectual movement until recently. Tagging trains as a graffiti artist
since the 1990s, KAWS later trained at the School of Visual Arts in Manhattan.
Instead of working with an art gallery, he opened a store to sell his own collectibles
in Tokyo. His images were worn on clothing by some of music’s biggest names inthe early 2000s — Jay-Z, Kanye West, Swizz Beatz, and others. Some years later,
he created partnerships with major retail brands like Dior and Uniqlo. He eventuallyfound gallery representation in 2008 but it wasn’t until 2019 when The KAWS Albuma painting of the Simpsons characters, sold at Sotheby’s Hong Kong for an
astounding $14.8 million dollars that collectors across the globe took notice andcould no longer exclude this international sensation from the art world at large.27
Prior to the sale, The KAWS Album had been estimated to sell around $1 million
dollars. There was no denying the market for KAWS’ work, and his 2021 Brooklyn
Museum exhibition solidified the artist as part of a cultural movement.

27 M.H. Miller, “The Surprising Ascent of KAWS,” The New York Times Magazine,

February 9, 2021.

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March 2022

No Auction Slowdown for Impressionist andContemporary Classics
Not everyone is buying Banksy, KAWS, and NFTs, however. There is still a strong
market for more historical artworks, as evidenced by the Cox Collection sale at
Christie’s in November 2021. A single-collection sale belonging to the late oil tycoon
Edwin Lochridge Cox achieved a stunning $332 million dollars, including fees.
Sixteen works were backed by third-party or in-house guarantees, including the starlot, Jeune homme à sa fenétre (1876) by Gustave Caillebotte. This painting sold toan advisor on behalf of the Getty Museum in Los Angeles for $53 million dollars,
including premium, against an estimate of $50 million dollars, which was a record
for the deceased artist. The combined total of the three van Goghs reached $147.8
million dollars with premium, with one work entitled Jeune homme au bleuet (1890),
selling for $46.7 million dollars, exceeding its conservative $5 million to $7 million
dollar estimate. This colorful, engaging, and almost contemporary style of painting
appealed to collectors worldwide, not just Impressionist experts. Three other auction
records were also set in the sale, which was an example of highly coveted andimportant group of works that had never been sold publicly.
Figure 10. Vincent van Gogh, Jeune homme au bleuet, 1890 — Oil on canvas 16 x 12-5/8 in.
(40.5 x 32 cm). Sold at Christie’s The Cox Collection: The Story of Impressionism sale,November 10, 2021 for $46,732,500

Source: CHRISTIE'S IMAGES LTD. 2022

© 2022 Citigroup

March 2022

Citi GPS: Global Perspectives & Solutions

As the Contemporary market raged on, the highly anticipated sale of The Linda andHarry Macklowe collection at Sotheby’s in November 2021 did not disappoint. Built
over decades, the blue-chip collection of mostly 20th Century masterworks by bluechip artists including Robert Ryman, Willem de Kooning, Cy Twombly, Andy Warhol,
and many others, achieved a jaw-dropping $676 million dollars in a single evening’s
guaranteed sale. One of the top lots was a vibrant, and arguably joyful, Mark
Rothko, No. 7, 1951, which sold to a collector in Asia for $82.5 million dollars.28
In the same auction cycle, Christie’s 20th Century sale achieved $420 million dollars
in a single evening. Andy Warhol’s portrait of Basquiat sold for over $40 million
dollars with fees, doubling its “on request” presale estimate of $20 million dollars.
Phillips’ November 2021 20th Century & Contemporary Art evening and day sales
totaled $172.5 million dollars, a record for the company.
Sotheby’s reported a total of $7.3 billion dollars in art sales in 2021. Its private salevolumes were up by one-third over 2020 levels, with the auction house citing an
influx of younger buyers and their allowing payment with cryptocurrency for certain
lots.29
Records were set for many different artists in 2021, including Frida Kahlo, whose1949 self-portrait at Sotheby’s sold in November for $34.9 million dollars. Highly
coveted works like this are even rarer given the fact that it is one of only a handful inprivate hands and in free circulation outside of Mexico. This sale set the current top
auction record for a Latin American artist of all time. In addition to these public
auctions, the major houses are also beginning to organize smaller and moreexclusive invitation-only auctions.

Increased Sales Volume Brings Greater Transparency
It is no secret that the art market has long been opaque and unregulated. Although
it is slowly shifting to a model of increased transparency, many aspects remain
stuck in the old mentality of the “handshake deal” — no paperwork, verbal
agreements that bind multi-million dollar deals, and transactions based simply on
trust and old friendships. However, in the Anti-Money Laundering Act of 2020, theU.S. Congress passed a new regulation which now includes any “person engaged
in the trade of antiquities, including an advisor, consultant, or any other person who
engages as a business in the solicitation or the sale of antiquities” in its definition ofa financial institution. Because galleries typically have not had the infrastructure tohandle such monitoring, many have partnered with large auction houses to attempt
to meet compliance goals of the new regulation. Regardless, even more stringent
sellers were cited to have had gaps in the monitoring system, according to the U.S.
Senate’s Permanent Subcommittee on Investigations. This legislation is similar to
the European Union’s previously enacted Fifth Anti-Money Laundering Directive,
which includes, but is not limited to, extending certain anti-money laundering andcounter-terrorism financing rules to art dealers.

28 Robin Pogrebin, “Blue-Chip Art From Bitter Macklowe Divorce Brings $676 Million at

Sotheby’s,” The New York Times, November 15, 2021.
29 Kelly Crow, “Sotheby’s Sells $7.3 Billion in Art, Fueled by Moneyed Millennials,” The

Wall Street Journal, December 15, 2021.

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March 2022

Subsequent to the legislation, in February 2022, after interviewing dozens ofdealers, auction houses, and other art market participants, the U.S. Department of
the Treasury concluded that it is not necessary to increase regulation on sales bygalleries and auction houses at this point in time, as terrorism financing using art isa relatively low risk. Additionally, they found that cash is rarely used to purchase art,and even in those cases, financial institutions are already required to report highvalue cash transactions. They also found that many dealers already take measures
to perform appropriate due diligence on buyers, but cautioned that NFTs could
present new money laundering risks, and recommended sharing of information
ongoing training for regulatory officials on art-related financial crimes.30

What’s Next?
If 2022 is anything like 2021, we can expect the art market to grow and evolve
further and faster. New participants will continue to enter, and different perspectives
and narratives will critically influence both art-historical and art-market
conversations.
New synergies are forming between galleries and auction houses, artists, andcollectors and even among competing galleries. Auction houses and art fairs arehoming in on new collectors, a growing global collector base, and are finding new
ways to maintain the allure of exclusive and VIP access even as swaths of newparticipants enter. Dealers and auction houses report that the growth of private
sales remains on a strong upward trajectory. New ways to buy art keep emerging,as the old ways persist, yet adapt to a changing transactional model. As the art
market expands exponentially, regulation is tightening in both Europe and in the
U.S. Digitalization and globalization have accelerated the pace of change, and we
can certainly anticipate further evolution of this fast-moving and dynamic art market.

30 “Treasury Releases Study on Illicit Finance in the High-Value Art Market,” U.S.
Department of the Treasury, press release dated February 4, 2022.

© 2022 Citigroup

Citi Global Perspectives & Solutions (Citi GPS) is designed to help our clientsnavigate the global economy’s most demanding challenges, identify future themes andtrends, and help our clients profit in a fast-changing and interconnected world. Citi GPS
accesses the best elements of our global conversation and harvests the thought
leadership of a wide range of senior professionals across the firm.
All Citi GPS reports are available on our website www.citi.com/citigps
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October 2020

September 2020

Negative Interest Rates
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July 2020

ePrivacy & Data Protection
Data Privacy & its Influence
on AI Ethics, Competition &Tech Evolution
July 2020

Technology at Work v5.0
The New Normal of Remote
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June 2020

5G and Mobile Operators
Is Virtual Becoming Real?
April 2020

Closing the Loop on Global
Recycling
Finding a Global Solution to
the Patchwork of Recycling
February 2020

Disruptive Innovations VII
Ten More Things to Stop andThink About
February 2020

Building a TCFD With Teeth
What the Markets Need toPrice Climate Risk
February 2020

Banking the Next Billion
Digital Financial Inclusion in
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Experiential Commerce
A Brave New World
January 2020

Investment Themes in 2020

Corporate Finance
Priorities 2020
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Car of the Future v4.0 –2020 Update
The Race for the Future of
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The Global Art Market
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Education: Power to thePeopleExploring Opportunities forPrivate Capital in Education
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December 2019

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January 2020

March 2022

Citi GPS: Global Perspectives & Solutions

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March 2022

Citi GPS: Global Perspectives & Solutions

NOW / NEXT
Key Insights regarding the future of the Global Art Market

INNOVATION

The art market has long dominated by the old mentality of the ‘handshake deal’’
with no paperwork, verbal agreements that bind multi-million dollar deals andtransactions based simply on trust and old friendships. / NFTs are disrupting theownership model of art and democratizing the ownership of digital art by building
an infrastructure that creates unique, traceable and undisputed ownership records
of a digital artwork.

SHIFTING WEALTH

Millennials are increasingly entering the art market and exerting their demand foronline and mobile offerings. A survey of ‘‘NextGen Collectors,’’ showed 91% had
bought art online. / The rise of Millennial art buying underscores the digital
imperative and signals more sweeping change across the industry.

SOCIAL CHANGE

The shift to digital has widened the range of people who have access to art. As theaudience for art becomes more diverse, so does the art that speaks to them. /Academic institutions and private collectors are reshaping the art historical canon,
which is now drawing long overdue attention to women, artists of color, and otherdemographics.

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