Investing in fine art has been a privilege of the wealthy for centuries. However many expensive pieces are kept locked away in a mansion where only a few ever get to see it. For the plebs, the only way to appreciate art is to visit a museum or by a printed copy. Digital art allows for broader distribution of works, but as its reproducible, it’s not worth investing into, leaving many investors without a way to diversify into valuable artworks.
Additionally, auction houses act as gatekeepers, with Sotheby’s and Christie’s controlling 80% of the secondary market. They both charge art buyers up to 25% and sellers even more. Plus, they retain their sales information from the public, preventing accurate price discovery and forecasting. The only reason they have been able to charge these fees is that the art community trusts them. Provenance can be difficult to determine at times and obtaining an accurate history about a painting can be difficult, Thus, investors have traditionally used these long-operating trade houses as a means of insurance against fakes and ensuring proper execution of the sale.
With the arrival of modern cryptocurrencies, previously illiquid assets such as houses, debt, and fine art are now able to have their equity listed on a secondary market such as SmartRE, Real or LAToken to be sold for fractionalized tokens. In similar fashion to its real estate counterparts, Maecenas, named for the Roman patron of the arts Gaius Maecenas who helped democratize art by financing poor poets, wants to tokenize fine art with the ICO of their ART token. They will give investors the ability to add once out of reach art to their investment portfolio without the expensive costs of purchasing it through an auction house. Their platform will connect collectors, galleries and investors together using the blockchain and as a result reduce fees, open the market to price discovery and eliminate the need for pricey auction houses.
When an owner of piece of art wants to list it on Maecenas platform, it must first undergo a rigorous verification process. First, Maecenas establishes the provenance with their own in-house experts, who are flown in to conduct their assessment. Once verified, the artwork must then be moved to a secure storage vault. According to their whitepaper, these facilities, known as freeports, “sit within international designated areas next to airports so that the valuables kept in storage do not attract local tax when they’re transacted, making it attractive for investors.” CEO Marcelo Garcia Casil told me that these facilities are extremely secure, every door requires a key card to open it, all valuables must be left at the entrance, and the buildings are made from reinforced concrete and lack windows.
The reason for the high security is due to both the value of the artwork and the size of the insurance policy associated with it. At launch, Maecenas will require that all artworks be valued at more than $1 mln USD, however, when I spoke with Marcelo, he told me that eventually the cap could be lowered to 500,000, but the company needs higher prices at the moment to support their business structure. Unlike LAToken, all artworks offered by Maecenas must remain in storage, mainly because no insurer will issue a policy for a work kept in an unsecure home. Even if a policy was issued, the premiums would be too high to warrant being insured at all. This is the main reason why I think LAToken’s art offerings will never take off, they lack the close relationships and understanding of the art market that Marcelo and his group at Maecenas does.
This is also the reason why Maecenas has fees of 6% for sellers and 2% for buyers to establish provenance, verify and then facilitate the legal structure of the equity sale. In fact, it’s this last point which will take up the bulk of Maecenas’ budget. Because of the cross-border legal implications of the contracts, expensive international legal services will be used. Currently, PWC is the primary consultant and has provided 50 hours of free legal consultation with the expectation that Maecenas use their accounting, legal and auditing services in the future.
Next, all of this data covering provenance, insurance policy, storage method and location, independent valuation, condition and verification is added to the blockchain and the artwork then can be listed transparently on their platform. The seller then chooses which currency they would like to receive what’s gained through the sale, in either ART tokens, other cryptocurrencies or fiat.
Investors then take part in a Dutch auction and submit private bids stating how many shares they want to purchase and for how much. Maecenas describes this as “essentially a confidential and cryptographically secure book-building exercise.” Additionally, the method not only “gives investors bargaining power but it also provides them with a much fairer and transparent pricing mechanism.” The auction takes place over a number of days or weeks to allow for maximum participation. When the auction concludes, successful buyers receive the tokenized art asset or are returned their ART tokens if their bids were unsuccessful. Furthermore, buyers will be able to use both ART tokens and fiat to place bids. All “deposits are kept in a per- investor fully-segregated virtual bank account having a unique IBAN or in a secure multi-sig cold-storage.”
After the auction, investors will then be able to trade their asset tokens on Maecenas’ exchange with minimal fees. As mentioned before, buyers pay a 2% fee to acquire their asset tokens. This fee also applies to new purchasers of the token who did not take part in the auction.
Strengths and Weaknesses
The art world is ripe for disruption, as traditionally works have been illiquid and available only to a select few. Maecenas will open fine art investment to millions who have never previously allocated capital to this asset class. Conversely, many wealthy individuals will probably welcome the ability to unlock their illiquid equity to use for other purposes. It’s a great way to acquire capital without having to taken on debt.
Much of what I said above can also be applied to LAToken, however, what separates the two companies is Maecenas’ transparency and more traditional revenue model. Unlike LAT, which is simply a cheap exchange, Maecenas will use their fees to cover the costs of legal, verification, and other services need to list and sell art work on their platform. An ICO is only the very first part of a crypto business’ lifecycle. With the funds they raise, they have to hire developers to improve the interface and platform, pay for marketing, legal, and be able to have revenue to grow their business to satisfy demand. By charging 6%/2% fees, Maecenas will be able to focus on acquiring quality art instead of simply gathering assets like LAToken plans.
At launch they will be offering a collection of works totaling $100 million USD, with artists such as Warhol, Picasso, Monet, and Duchamp. Marcelo wasn’t able to disclose the exact works they have gained approval to be listed, as this information will be confidential until they go to auction.
One of the interesting aspects of their model which Marcelo told me about was Maecenas would release a private pilot of their platform for financial institutions. These institutions will then be able to list for their own clients’ single works of art, excluded from the public platform, but still hosted on the blockchain. While not democratic, I would think a lot of wealthy art owners would like to keep their transaction history private and kept under supervision.
On Sep 5, 2017 Maecenas will conduct an ICO of its ART tokens. Out of a total 100 million, only 30% will be available for purchase during the crowdsale, 30% will be kept to guarantee liquidity during art auctions, 20% will be used to incentivize “galleries, museums, art asset managers and other partners” and the last 20% will go to the Maecenas team with a 24 month vesting period and a 6 month cliff.
Maecenas hopes to collect a minimum of $3 mln USD to launch the platform and operate in Geneva. Their next funding milestone will be $10 mln, which will allow them to expand to other markets worldwide (New York, London, Paris, Luxembourg, Hong Kong and Singapore. If they hit their $20 mln hard cap to “create its own art fund of high-grade artworks to be listed on the platform.”
The target price for each ART token will be $0.66 and its price will be set to ETH a few days before the ICO. ART tokens will be transferable 7 days after the end of the crowdsale.
There is going to be a coming explosion of asset tokens in the coming decade. It already seems as if every other ICO is trying to tokenize different things from homes, tennis players and whatever else they can come up with. When looking at these different ICO’s to determine whether to invest into them, its extremely important to ask two questions. First, does their revenue model support the long term growth and health of the company? Second, does the company have the right legal structure in place to be able to successfully conduct the tokenized asset transactions. I’m going to let Marcelo speak for himself here at the end:
It’s all well and good to say that you will issue tokens backed by gold, tokens backed by real estate, or your asset of choice. But tokens are worthless without a legal contract that gives those tokens bearer rights over the underlying assets.
If you hold tokens of some tokenised asset, but they’re not hard tokens, you don’t really own the asset and you have no rights whatsoever over such an asset.
A global marketplace like Maecenas where asset owners, legal structures and investors could all be domiciled in different locations creates a cross-jurisdictional regulatory scenario that is actually fairly complex (and expensive) to resolve.
Asset tokenisation is primarily a legal exercise that in a way resembles a securitisation process. Anyone can create tokens and make any promises over them, but very few will go through the effort of identifying and designing the required legal framework behind it to harden the tokens and legally bind them to the asset.
Take heed of his words going forward. The coming explosion of tokens will have a lot of scams and shady marketplaces. Be wary and make sure to do your own DD.