Art and Tokenization

Introduction to Art Tokenization

One of the most promising applications of distributed ledger technologies (DLT) is the tokenization of assets. In this post we will outline the basic idea behind tokenization with a focus on art tokenization and its benefits.

Tokenization refers to act of creating a digital representation of a tangible or intangible asset on a distributed ledger such as the Ethereum blockchain. A token, which is Latin for symbol, represents then the ownership of an asset or the fraction of an asset. Tokens can represent anything from real estate to carbon credits to artworks.

Tokenizing an asset brings along the benefit of the underlying DLT. Since assets are represented as tokens on a blockchain, their ownership record is always up-to-date and cannot be tampered with, settlements are instant, and ownership is publicly and pseudo-anonymously stored on the blockchain. Further, similar to native tokens such as Bitcoin and Ethereum, these asset tokens can be traded 24/7/365.

Fractional Ownership of Assets

One of the most popular use cases for tokenizing an asset is fractionalization, especially for expensive assets such as artworks and real estate. The idea behind tokenizing these assets is simple: increase the investor base and make illiquid assets liquid. Many assets are illiquid because they are expensive, and most investors cannot afford to purchase a whole real estate or artwork. With the advent of tokenization, an asset can now be split into multiple tokens, each representing a share of the asset and therefore massively reduce minimum capital requirements for investors.

Sygnum together with Artemundi recently tokenized the Picasso painting «Fillette au béret» priced at CHF 4 million. The artwork was tokenized and split into 4000 Art Security Token (AST), with one AST being priced at DCHF 1,000[1]. With this, the minimum capital required to purchase an exclusive asset such as a genuine Picasso painting has been massively reduced and made available for a much wider range of investors. This brings the promise to give a wider audience of investors the possibility to invest into such exclusive assets, which were advent inaccessible, while simultaneously giving issuers a larger investor base.

Increase Liquidity of Assets

A further benefit of tokenization for issuers and investors is increased liquidity. For issuers of exclusive artworks, the liquidity of their assets increases as fractional ownership extremely opens up the investor base and they can sell a part of their tokens when in need for liquidity.

For investors, tokenization enables and simplifies secondary markets trading. If we continue with the example of the Picasso painting, an investor usually must invest quite some time and resources until he finds a suitable buyer to make his holdings liquid again. With the tokenized artwork, an investor can easily sell his share of the Picasso on a secondary marketplace such as Sygnum’s SygnEx and already make his investment liquid prior to a final sale of the artwork. This offers great flexibility for investors and decreases the holding period of artworks that usually would be several years. Furthermore, this also allows for more flexible portfolio diversification.

Not every art token is an NFT

Currently there is a big hype around non-fungible tokens (NFTs) as they allow to proof ownership of a digital artwork such as a popular meme and enable artist to implement royalty systems for their tokens. As their names states NFTs are non-fungible which makes them unpractical for fractional ownership. Creating multiple NFTs of parts of an artwork would result in different prices for each NFT. For this reason, Sygnum does not offer NFTs but fungible (interchangeable) tokens allowing co-ownership of an artwork. Nevertheless, NFTs are highly attractive for the beforementioned reasons and increased awareness of the benefits of DLT in the mainstream.

Closing Thoughts

The tokenization of artworks and other assets brings multiple benefits for both issuers and investors. Suddenly assets that have been reserved for high-net-worth individuals become accessible for regular investors which is in line with the spirit of crypto to democratize finance. While there is a lot of hype especially in the NFT sector there is real added value for artists and investors. At Sygnum we are proud to offer the first fully regulated, banking-grade tokenization solution that is end-to-end from issuance to secondary trading of tokens.

[1] DCHF is a stablecoin issued by Sygnum that is pegged to the Swiss Franc 1:1/Token price does not include agio

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Disclaimer

This document is purely for educational purposes and has been issued by Sygnum Group. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication. It does not constitute an offer or a recommendation to subscribe, purchase, sell or hold any security or financial instrument. It contains the opinions of Sygnum Group, as at the date of issue. These opinions and the information contained herein do not take into account an individual‘s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes personalized investment advice to any investor. Therefore, you must verify the above and all other information provided in the document or otherwise review it with your external advisors. Some investment products and services, including custody, may be subject to legal restrictions or may not be available worldwide on an unrestricted basis. The information and analysis contained herein are based on sources considered as reliable. Sygnum Group uses its best efforts to ensure the timeliness, accuracy, and comprehensiveness of the information contained in this document. Nevertheless, all information indicated herein may change without notice.

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