A New Due Diligence Toolkit for the Art Industry
Tags: Blockchain, Compliance, Cryptocurrency, Investing, Art

Can we build an art market with higher Due Diligence standards and lower transaction costs? We may soon have an answer to this question with profound impact on the future of the art market

Words by Javier Tamashiro — Maecenas Head of Technology Risk & Compliance

Lower Validation Costs

The art industry is heading to an inflection point that presents an incredible opportunity to rethink and take a leadership role in the broader technology landscape. The fuel for this transformation is the rapid adoption of blockchain technology throughout the art industry, and the consolidation of online art marketplaces, proving to be viable alternatives to the traditional offline market.

As the online art market scales in size and transaction volume, the need for solutions capable of verifying transactions at a lower cost becomes more and more valuable. Reducing the verification cost of transactions is a particularly relevant issue in an industry where average transaction costs are considerably higher than in many other industries, such as financial markets. The direct implications of these high costs is that many transactions in the art market never occur, and a large number of interested investors never participate.

The blockchain uses a consensus protocol which enables a decentralised network of participants to agree about the true state of a shared database. Within a trading context, this shared data can represent, for instance, cryptocurrencies or asset-backed contracts linked to artworks.

In order to facilitate access to art investment, Maecenas has embarked on a mission to enable buyers and sellers to transact directly, without intermediaries. The Maecenas business model is based on two revenue streams: issuance and secondary markets. First, a one-time issuance fee is charged to the asset owner when listing the artwork. Second, asset-backed contracts will be tradable on the Maecenas platform. While there are no charges for selling asset-backed contracts, buyers are required to pay a small commission.

The Need for High Due Diligence Standards

In a blockchain environment, a technical distinction can be made between cryptocurrencies and asset-backed contracts. They are both executed and validated in a decentralised network, but an asset-backed contract is a digital representation of a physical object. Maintaining a robust and trustworthy linkage between the online asset and the real object is at the core of the value chain. At least for now, this problem cannot be tackled by relying solely on the blockchain.

Technology needs to be coupled with industry specialists capable of producing and verifying reliable profiles and product catalogues containing owner identities, source of wealth information, provenance of the object and a set of key attributes that confers value to the artwork.

That is why the application of rigorous standards governing the Due Diligence process is not an exercise restricted to banks, but also to a new generation of fintech companies building decentralised applications linked to physical assets.

Stepping Towards an Art Market 2.0

At Maecenas, we are proud to support the Responsible Art Market (“RAM”) conference, next February 2nd, 2018 in Geneva, Switzerland. Since its creation, the RAM has done tremendous work in raising awareness of the risks faced by the art industry; providing Due Diligence guidance to mitigate those risks and meet regulatory expectations. We are looking forward to supporting this effort to bring transparency and innovation. Join us in shaping the future of the art market.

For further details about RAM conference, please visit: http://responsibleartmarket.org/save-date-building-art-market-2-0/

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