The eye-popping sale price of $69 million on March 11, for a non-fungible token created by the digital artist Beeple sent shock waves through the art world. More multimillion-dollar sales of these digital assets that exist on a blockchain and are maintained on networked computers soon followed.
At the same time, art museums have faced substantial financial shortfalls accelerated by a decline in visitors and donations induced by the Covid-19 pandemic. Many have considered taking drastic measures, such as selling treasured artworks, to plug budget gaps.
Can non-fungible tokens generate the revenue many museums sorely need? Some are issuing their own tokens, including the British Museum and the Academy Museum of Motion Pictures. The Miami Institute of Contemporary Art accepted an early token from a donor. There is even a non-fungible token of an entire museum called the Museum of Digital Life.
Yet, more than six months into this disruption of the art world, museums have generally engaged very little with the tokens. As researchers who examine both the finances of nonprofit organisations and the growth in non-fungible tokens, crypto-assets and other associated blockchain applications, we see four primary reasons why museums have failed to turn the non-fungible token craze into a financial windfall.
1. NFTs are complicated
The people running museums have expertise encompassing art, education and curation. Non-fungible tokens are an entirely different realm that is quite detached from art and have more in common with crypto-currency than typical artworks like paintings and sculptures.
What sets non-fungible tokens apart from cryptocurrencies like Bitcoin and Ethereum, which are designed to be interchangeable, is that each token represents a unique asset. Figuring out how non-fungible tokens must be treated, held and valued is hard, and the ability to quickly mint non-fungible tokens for auction is not something that may come naturally to museum staff. What’s more, non-fungible tokens are typically bought and sold with cryptocurrencies, and not many organisations – including museums – regularly make transactions using them.
On top of any missing financial know-how and a culture that seeks to minimise risks, there are legal complexities and insurance complications. So we can understand why museums have not rushed into the non-fungible token market.
2. No monetary upside
The connection between the ownership of a piece of art and a non-fungible token associated with that artwork can be confusing. Although it may appear otherwise, the token is a separate asset from the art itself. The owners of the art retain ownership even after any non-fungible tokens derived from that art are minted and sold.
This separation may mean that the owner of the art has no particular ability to turn an affiliated non-fungible token into a big payoff. Much like the value of a painting has little to do with what the paint, canvas and frame are worth, a token’s financial value is subjective. It depends on what others are willing to pay.
The creators of the underlying art, such as musicians and artists who retain control over their work, can – and do – mint non-fungible tokens connected to them. Once art is held in a museum collection, however, the value of non-fungible tokens is less clear.
Much like an author-autographed copy of a book can be more valuable than a book without that signature, a non-fungible token minted by an artist of a popular artwork can attract interest from collectors. On the other hand, a book signed by the publisher or a non-fungible token minted by a museum is bound to be less appealing to collectors. An artist-minted token that a museum holds could fetch more interest.
Stated another way, even if a museum possesses valuable artwork, that does not mean minting the tokens is a guaranteed revenue stream.
3. Market values artists
One underlying reason the market for non-fungible tokens tied to artwork has thrived is that buyers view purchasing and holding a token as a means to interact with and financially support the artist.
More broadly, the ethos is one of decentralisation, and non-fungible token buyers are less likely to be enthusiastic about an intermediary joining the fray.
An example of the ethos built around supporting artists is the prevalence of smart contracts that secure royalties for the artist that will flow every time a non-fungible token tied to one of their works is sold.
In fact, monetisation often touted as the primary upside for museums seeking to jump into the non-fungible token market may not be as simple as initially appears.
First, museums need to see whether monetising their existing collections would in any way undermine public access to collections – potentially violating their missions and bylaws. Second, they must have protocols in place to ensure that proceeds from sales tied to the collection are correctly reinvested. And there is a risk that this process could inadvertently lead to pieces of the collection being treated as financial instruments if income is being generated from them rather than solely serving as items on display for the public.
Moving forward, it remains to be seen whether non-fungible tokens will financially benefit brick-and-mortar museums, rather than creating new opportunities for virtual ones.
4. NFTs are volatile
Though the high prices they can fetch are eye-catching, there are countless cases of non-fungible tokens that quickly become worthless.
And, as with crypto-currencies, there is lots of volatility. The value of several tokens has undergone massive and dramatic losses, including ones issued by Grimes, A$AP Rocky and John Cena.
Relying on the tokens to raise cash may be risky, and the boards of museums may determine that it is inappropriate for their charitable organisation to own them. That means museums may be forced to quickly liquidate any non-fungible tokens they mint or receive – even if that sale will make the token less valuable to the institution.
Also, there is still a great deal of uncertainty about what valuable non-fungible tokens can do for an art museum’s primary goals. They are neither physical in nature nor works of art. Even digital artwork that can be displayed is separate from any token derived from it.
To be sure, non-fungible tokens are still new. Banks and other traditional financial institutions initially stood on the crypto-currency sidelines but have slowly assumed a bigger role in those markets. It is certainly possible that something similar will occur with traditional institutions in the art world as the non-fungible token market matures.
Brian Mittendorf is a Fisher Designated Professor of Accounting at The Ohio State University. Sean Stein Smith is an Assistant Professor of Economics and Business at the Lehman College at The City University of New York.
This article first appeared on The Conversation.