Brian Mittendorf, Fisher’s Designated Professor of Accounting, The Ohio State Universityand Sean Stein Smith, assistant professor of economics and business, Lehman College, CUNY.
The spectacular sale price of $ 69 million on March 11, 2021 for a non-fungible token (NFT) created by digital artist Beeple caused an uproar in the art world. More multi-million dollar sales of these digital assets that exist on a blockchain and are held on networked computers soon followed.
At the same time, art museums have faced significant financial deficits accelerated by a decline in visitors and donations induced by the COVID-19 pandemic. Many have considered taking drastic measures, such as selling prized works of art, to fill budget gaps.
Can NFTs generate the revenue that many museums urgently need? Some are issuing their own tokens, including the British Museum and the Academy of Motion Picture Museum. The Miami Institute of Contemporary Art accepted one of the first NFTs from a donor. There’s even a museum-wide NFT called the Museum of Digital Life.
Yet more than six months after this disruption in the art world, museums in general have made little commitment to NFTs. As researchers examining both the finances of nonprofits and the growth of NFTs, cryptoassets, and other associated blockchain applications, we see four main reasons why museums have failed to turn the NFT craze into one. windfall financial gain.
1. NFTs are complicated
The people who run museums have backgrounds in art, education, and curation. NFTs are a completely different realm that is quite separate from art and has more in common with cryptocurrencies than typical works of art like paintings and sculptures.
What distinguishes NTFs from cryptocurrencies like bitcoin and ethereum, which are designed to be interchangeable, is that each NFT represents a unique asset. It is difficult to figure out how NFTs should be treated, preserved and valued, and the ability to quickly mint NFTs for auction does not come naturally to museum staff. Furthermore, NFTs are generally bought and sold with cryptocurrencies, and not many organizations, including museums, regularly transact with them.
In addition to any missing financial knowledge and a culture that seeks to minimize risk, there are legal complexities and insurance complications. So we can understand why museums have not rushed into the NFT market.
2. Monetary advantage may be missing
The connection between ownership of a work of art and an NFT associated with that work of art can be confusing. Although it may seem otherwise, the NFT is an independent asset of the art itself. Owners of the art retain ownership even after NFTs derived from that art are minted and sold.
This separation may mean that the owner of the art does not have the particular ability to turn an affiliated NFT into a large reward. Just as the value of a painting has little to do with the value of the painting, canvas, and frame, the financial value of an NFT 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, create NFTs connected to them. However, once the art is preserved in a museum collection, the value of NFTs is less clear.
Just as a copy of a book autographed by the author may be more valuable than a book without that signature, an NFT coined by an artist of a popular work of art may attract the interest of collectors. On the other hand, a book signed by the publisher or an NFT minted by a museum is likely to be less attractive to collectors. An NFT created by an artist who owns a museum might spark more interest.
Put another way, even if a museum owns valuable works of art, that doesn’t mean that minting NFT is a guaranteed income stream.
3. The NFT Market Values Artists, Not Institutions
An underlying reason the art-related NFT market has flourished is that buyers view the purchase and possession of an NFT as a means of interacting with and financially supporting the artist.
More broadly, the spirit is one of decentralization, and NFT buyers are less likely to be enthusiastic about a broker joining the fray.
An example of the spirit built around supporting artists is the prevalence of smart contracts that ensure royalties for the artist that will flow every time an NFT linked to one of their works is sold.
In fact, the monetization that is often touted as the main advantage for museums looking to enter the NFT market may not be as simple as it initially appears.
First, museums must see if monetizing their existing collections would in any way undermine public access to the collections, potentially violating their missions and statutes. Second, they must have protocols in place to ensure that collection-linked sales proceeds are properly reinvested. And there is a risk that this process could inadvertently lead to parts of the collection being treated as financial instruments if income is generated from them rather than serving solely as items on display for the public.
In the future, it remains to be seen whether NFTs will financially benefit traditional museums, rather than create new opportunities for virtual ones.
4. Volatility and Uncertainty Make NFTs Risky
Although the high prices they can fetch are striking, there are countless cases of NFT that quickly become useless.
And, as with cryptocurrencies, there is a lot of volatility. The value of several NFTs has suffered massive and dramatic losses, including those issued by Grimes, A $ AP Rocky and John Cena.
Relying on NFTs to raise cash can be risky, and museum boards may find it inappropriate for your charity to own them. That means museums may be forced to quickly liquidate any NFT they mint or receive, even if that sale will make the NFT less valuable to the institution.
Furthermore, there is still great uncertainty about what valuable NFTs can do for the primary purposes of an art museum. They are not physical in nature or works of art. Even the digital artwork that can be displayed is separate from any NFT derived from it.
NFTs are certainly still new. Banks and other traditional financial institutions initially stayed away from cryptocurrencies, but have gradually assumed a larger role in those markets. Certainly, something similar is likely to occur with traditional institutions in the art world as the NFT market matures.
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