4 reasons why museums don’t participate in the NFT game

The dazzling sale price of US$69 million on March 11, 2021 for a non-fungible token created by digital artist Beeple sent shockwaves through the art world. More multimillion-dollar sales of these digital assets that exist on a blockchain and are maintained on network computers soon followed.

At the same time, art museums have faced significant financial shortfalls, accelerated by a decline in visitor numbers and donations due to the COVID-19 pandemic. Many have considered taking drastic measures, such as selling precious works of art, to close budget deficits.

Can NFTs generate the revenue that many museums desperately need? Some issue their own tokens, including the British Museum and the Academy Museum of Motion Pictures. The Miami Institute of Contemporary Art accepted an early NFT from a donor. There is even an NFT of the entire museum called the Museum of Digital Life.

But now, more than six months after this disruption of the art world, museums in general have paid little attention to NFTs. As researchers examine the finances of nonprofits as well as the growth in NFTs, crypto assets and other associated blockchain applications, we see four main reasons why museums have failed to turn the NFT craze into a financial windfall .

1. NFTs are complicated

The people who run museums have expertise in art, education, and curatorship. NFTs are a very different realm quite separate from art and have more in common with crypto currencies than typical works of art like paintings and sculptures.

What sets NTFs apart from crypto currencies such as bitcoin and ethereum, which are designed to be interchangeable, is that each NFT represents a unique asset. Figuring out how NFTs should be handled, preserved and valued is difficult, and the ability to quickly coin NFTs for auction is not something that museum staff members take for granted. In addition, NFTs are typically bought and sold with cryptocurrencies, and not many organizations, including museums, regularly transact with them.

In addition to any missing financial know-how and a culture that aims to minimize risk, there are legal complexities and insurance complications. So we can understand why museums haven’t rushed into the NFT market.

2. The Monetary Advantage May Be Missing

The relationship between ownership of a work of art and an NFT associated with that work of art can be confusing. Although it may appear otherwise, the NFT is a separate property from the art itself. The owners of the art retain ownership even after all NFTs derived from that art have been minted and sold.

This separation can mean that the art owner has no particular ability to convert an affiliate NFT into a large payout. Just as the value of a painting has little to do with what the paint, canvas and frame are worth, 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 maintain control of their work, can – and do – NFTs associated with it. However, once art is included in a museum collection, the value of NFTs is less clear.

Just as an author-signed copy of a book can be more valuable than a book without that signature, an NFT minted by an artist of a popular work of art can spark the interest of collectors. On the other hand, a publisher-signed book or a museum minted NFT will be less attractive to collectors. An artist-beaten NFT that owns a museum could spark more interest.

In other words, even if a museum owns valuable works of art, that doesn’t mean minting NFTs is a guaranteed revenue stream.

3. The NFT Market Values ​​Artists, Not Institutions

An underlying reason why the market for NFTs linked to artworks has thrived is that buyers view buying and holding an NFT as a means of interacting with and supporting the artist financially.

More broadly, the ethos is one of decentralization, and NFT buyers are less likely to be excited about a middleman joining the fray.

An example of the ethos built around supporting artists is the prevalence of smart contracts that secure royalties to the artist that will accrue whenever an NFT associated with one of their works is sold.

In fact, monetization, often touted as the primary benefit for museums looking to enter the NFT market, may not be as easy as it may seem at first.

First, museums should consider whether the monetization of their existing collections would in any way undermine public access to collections — possibly in violation of their missions and statutes. Second, they must have protocols in place to ensure that the proceeds from sales associated with the collection are properly reinvested. And there is a risk that this process could inadvertently lead to pieces of the collection being treated as financial instruments when generating revenue rather than just serving as items for the public.

In the future, it remains to be seen whether NFTs will be financially beneficial to physical museums, rather than creating new opportunities for virtual museums.

4. Volatility and uncertainty make NFTs risky

While the high prices they can fetch are striking, there are numerous instances of NFTs that quickly become worthless.

And, as with crypto currencies, there is a lot of volatility. The value of several NFTs has suffered huge and dramatic losses, including those of Grimes, A$AP Rocky and John Cena.

Relying on NFTs to raise money can be risky, and museum boards may determine it is inappropriate for their charitable organization to own them. That means museums could be forced to quickly liquidate any NFT they create or receive, even if that sale makes the NFT less valuable to the institution.

There is also still a lot of uncertainty about what valuable NFTs can mean for the primary goals of an art museum. They are not physical in nature, nor are they works of art. Even digital artwork that can be displayed is separate from any NFT derived from it.

Certainly, NFTs are still new. Banks and other traditional financial institutions were initially on the sidelines of cryptocurrencies, but have slowly grown into those markets. It is certainly possible that something similar will happen to traditional institutions in the art world as the NFT market matures.

Article by Brian Mittendorf, Fisher Designated Professor of Accounting, The Ohio State University and Sean Stein Smith, Assistant Professor of Economics and Business, Lehman College, CUNY

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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