“Non-fungible tokens,” more commonly referred to as NFTs, have been highlighted as the equivalent of an ICO in this market cycle. They control the mind’s share of the “rules” in space. As much as bitcoin traders don’t like to talk about it, it’s undoubtedly a huge part of the market dynamics in this cycle, and I personally don’t think it’s going away anytime soon, if at all. There is so much I want to unpack to argue why I think this is the case. The first question to be asked along these lines is: What is art?
This question immediately raises a whole host of other questions. Almost anything can make up art in this day and age. One only needs to look as far as Mark Rothko to see this. Pieces literally just colors and shapes. His work was widely praised and sold for huge sums of money. Where is the line between what is and isn’t art? For one person, Rothko is a masterpiece that they will pay to own, and for other people (like me) it’s just colors placed on a medium that a child can recreate. I won’t pay a cent.
So where is the line between what makes something artistic or not? There is no one. It’s a completely personal streak that varies depending on the eye of the beholder. There is no “line” in the objective sense of the definition. Given that, let’s consider my point, which is really all I can speak to in such a context. Art is something that moves me. Whether it’s emotional, intellectual, or otherwise, it’s something that elicits a deep spontaneous reaction from me – the statue of David, for example. Every time I see a marble statue of such detail and size, it amazes me. It makes me think of the skill, patience, and time it took me to create something so vibrant and meticulous in detail; Or in other words, imagine the “proof of work” required to produce such a thing. Just think of the skills required and the time it took to improve them, such as knowing how to disassemble a block of marble in such a precise way that the human form can be imitated from what is left. You have to know exactly how to break the marble in a way that leaves the basic space of those shapes intact and then refine every detail. One intermittent block is too far from the ruins of that potential, and how you approach making these decisions is different for each piece of marble. The thought of all this stirs up a sense of true awe within me looking at someone who has learned not only the theory behind these things, but how to do them in practice to such a precise degree. A colored line on a white background does not arouse such awe in me. I can do it myself in a minute.
When discussing my position on art in the context of NFTs, I have never seen an NFT qualify me as “art”. Not a single NFT I’ve seen before, even on Rarepe, has moved me more than giving me a chuckle or a quick laugh. If I had to categorize NFTs, I would call them collectibles. To me, they are not art in any sense of the word as I see it or define it. Think more about the Pokemon vs Mona Lisa card. Your favorite Pokemon doesn’t evoke some deep spiritual feeling of dread when you look at it on a card, but there is still some emotional reaction to having it on a lower level. I liken it to an obsession with owning something. When people collect Pokemon cards, baseball cards, coins, or anything else, it ultimately comes down to an obsession/compulsion to own more and more of the said things. I think this is a lot closer to the roots of what NFTs actually are than trying to compare it to art in the classical sense.
Market dynamics and money laundering
The global art market as of 2020 was valued at approximately US$50 billion with a combined value of $31.4 million in art transactions conducted that year. It is a huge market. Most transactions involving art occur very privately, with minimal paperwork or records, and in some cases completely anonymous. Historically it was a largely unregulated market. This has also led to the misuse of art galleries and auctions to launder money acquired through illegal activity, i.e. money laundering (although its size in relation to the total market is disputed).
One of the main aspects of facilitating such activities is the so-called “free port”. These are designated warehouses for territories, usually at or near airports, which for tax purposes are considered outside the borders of the host country regardless of their geographical location within them. This allows art owners and sellers to store pieces of valuable artwork in a tax shelter and defer customs taxes until the point of the art is physically removed from the free zone. It is very common for this to be taken advantage of permanently deferring these customs duties by never removing art from the free port, as it can be shipped from Freeport to Freeport internationally after the sale without “passing through customs” for tax purposes.
Two examples of documented laundering on two ends of the spectrum come to mind. The first concerned a Brazilian banker, Edemar Ced Ferreira, who was convicted of money laundering and other crimes in 2006. He fled Brazil and took Jean-Michel Basquiat’s painting “Hannibal” with him to the United States, with false customs documents claiming the value of the shipped item was only $100. It was valued, however, at $8 million. American authorities recovered the painting and Ferreira was reprimanded to Brazilian custody, but his intention was clearly to take advantage of the unregulated nature of the art market to sell the painting to fund his living expenses after fleeing Brazil.
Another example of the more extreme side is the documented cases of ISIS (the Islamic State of Iraq and Syria) obtaining artifacts from the region and smuggling them to the Western world to fund their operations. An example of a piece of art potentially obtained in this way from ISIS is the Gilgamesh Dream Tablet purchased by the chief of the Hobby Lobby for display at the Museum of the Bible in Washington, D.C. This i-tablet (as of September 22, 2021) is in the process of being returned to Iraq after it was seized approved by Immigration and Customs Enforcement (ICE).
Now, the severity of money laundering in the art market as previously mentioned has become a hotly debated issue, but it is undeniable that such things happen regularly regardless of the scale in relation to the market as a whole. Because of this, there has been a slow wave of governments around the world beginning to introduce the sale and transfer of works of art into anti-money laundering regulatory schemes that many other financial markets are forced to comply with. The first known example is a bill passed in Mexico in 2012 to combat suspected money laundering by drug cartels. The bill brought art, as well as other markets such as casinos, jewelry stores, and pawnshops, under Mexico’s anti-money laundering regulations. Most of the art galleries operating inside auction houses in the aftermath saw a 30% drop in sales on average. No matter how much that is due to cartels not being able to use art auctions to launder money against real buyers unwilling to comply with their privacy violations, the bill has had a huge impact on the market.
Similar bills have recently been passed in the European Union and the United States. In 2018, the European Union included art dealers in their anti-money laundering regulations under the Fifth Anti-Money Laundering Directive, and in January 2021 the United States did the same with the Anti-Money Laundering Act of 2020. The US Congress gave itself until 2021 to clarify who qualifies As an “Antiquities Dealer” as defined in the bill to be subject to regulatory authority. So what’s the takeaway here? Money laundering occurs in technical markets, regardless of the scope discussed. To apply deductive reasoning, the same thing is likely to happen in the NFT space. This not only negates the real demand for things from real people for the purpose of appreciating ‘art’, but it also should not be ignored. Governments are clearly aware of this from regulations creeping into art markets over the past five to 10 years just as the same regulatory creep has begun to occur on Bitcoin and the larger ecosystem.
The curve of emotional value vs. economic value
To get back to the philosophical side of things, I have one last point to try to really think about what is going on in the NFT space. When discussing the value of art, I think it is important to separate emotional/intellectual value from economic value. To illustrate why, let’s go over three examples.
Consider Beethoven’s music: it’s completely in the public domain, in and of itself economically worthless (ignoring things like live performances, selling records, etc., which anyone can do and head to for nothing in general) It still maintains its depth of social and cultural value hundreds of years after its establishment. Now think of Metallica. They are a well-loved and well-known band, and their art still holds great economic value to them. It’s nowhere near as deep as Beethoven, but it’s still undoubtedly of sentimental value. Finally, consider some artists you’ve never heard of, who never really became famous or created emotional art that passes on to anyone, whose art is worthless and in a dump somewhere.
Art can preserve a deep emotional value that lasts for generations no matter what economic value it may hold. Collectibles in my opinion are different, because the relationship between the obsession with collecting and the economic value of collectibles is more intertwined than art is like music. This is something to keep in mind when considering NFTs. How many people who compose the market view them as art versus view them as collectibles?
This is a guest post by Shinobi. The opinions expressed are their own and do not necessarily reflect the opinions of BTC, Inc. or Bitcoin Magazine.