[Japanese translation] Part.1 - 2023 edition “The Art Basel and UBS Art Market Report”

*+ART GALLERY ONLINE, an online sales platform for contemporary art operated by Plus Art Co., Ltd., is creating articles to help all art collectors and those who are thinking about starting an art collection to gain a deeper understanding.

The Global Art Market

Do you know what the global art market is like?

Art Basel, the world's largest art fair sponsored by UBS Securities, a major global securities firm, provides global art market reports.

▶︎2023 edition The Art Basel and UBS Art Market Report ”

Published by: This report has been jointly published by Art Basel and UBS.

Written by Dr. Clare McAndrew

Designed by: Superfield

Production: Denken Studio

Above is the table of contents for the 2023 Art Basel and UBS Art Market Report.

The report provides a comprehensive overview of the global art market and covers a wide range of topics, including market size, sector and regional performance, and latest trends and developments.

P3: Table of contents/Main contents

1. The global art market in 2022
   1.1 Global sales overview
   1.2 Regional Market Performance
   1.3 Online sales
   1.4 Art and NFTs in 2022

2. dealer
   2.1 Dealer sector in 2022
   2.2 Dealer sales
   2.3 Artist Representation
   2.4 Dealer Costs and Margins
   2.5 Buyer
   2.6 Sales Channels and Art Fairs
   2.7 Online Sales and Strategies
   2.8 Dealer priorities for 2022 and beyond
   
   
3. auction
   3.1 Auction sales in 2022
   3.2 Top-tier auction houses
   3.3 Second-tier auction house
   3.4 Online Auction Sales
   3.5 Price Segmentation in Fine Art Auctions
   3.6 Fine arts sector
   3.7 Post-war and contemporary art
   3.8 Modern Art
   3.9 Impressionism and Post-Impressionism
   3.10 Classical painting and European classical painting
   
   

4. Outlook
   4.1 Outlook for 2023

5. appendix
   Primary data sources used in The Art Market 2023Rights and Disclaimers

P10-11: Acknowledgements

Art Market 2023 presents the findings of a study on the global art market in 2022. The information presented in the report is based on data collected and analysed by Arts Economics (artseconomics.com) from dealers, auction houses, collectors, art fairs, art and financial databases, industry experts and other participants in the art trade. (The appendix provides an overview of the main data sources used in the report.)

An important part of this research is the annual global survey of art dealers. We would like to express our sincere gratitude to all dealers who participated in the questionnaire. We would also like to thank the dealer associations around the world who distribute the survey to their members. We would like to thank the presidents and secretaries of these associations who play a vital role in increasing the response rate every year. This report expands the scope of our research in Asia, and in Japan we would like to thank Ms. Sayuri Fujinami (Fujinami Gallery), the Agency for Cultural Affairs (Art Platform Japan), the Japan Art Dealers Association, the Contemporary Art Dealers Association Nippon (CADAN), and the Contemporary Art Promotion Association (APCA) for their help and cooperation. We would also like to thank Mr. Shim Jeong of Korea Arts Management Services (KAMS) for his cooperation in the Korean art market research.

We would also like to thank Erika Bochereau from CINOA (Confederation Internationale des Negociants en Oeuvres d'Art) for her ongoing collaboration on the survey, and Art Basel for distributing the survey, as well as the dealers who shared their valuable art market insights with us through interviews and discussions throughout the year.

We would like to thank the top- and second-tier auction houses for participating in our auction survey and providing us with insights into how the sector will evolve in 2022. In particular, we would like to thank Graham Smithson and Susan Miller (Christie's), Simon Hogg (Sotheby's) and Jason Schulman (Phillips). We would also like to thank Rebecca Edelman and Richard Lewis (Auction Technology Group) for providing data on online auctions.

Data on NFTs was provided by NonFungible.com and we are very grateful to Gauthier Zuppinger for his assistance and access to the data. We would also like to thank Pauline Loeb-Obrenan of artfairmag.com for access to her comprehensive database on art fairs and for providing us with insights into the sector.

Additionally, we would like to express our sincere gratitude to the expert authors who shared their valuable insights in this report: Till Vere-Hodge (Payne Hicks Beach LLP), Katalin Andreides, Caroline Taylor (Appraisal Bureau), Vejay Lalla, Peter Hart, Monica Kim, Kevin Kirby (Fenwick), and Yuhao (Zach) Dai (UCLA / Sheppard, Mullin, Richter & Hampton LLP).

The primary fine art auction data for this report was provided by Artory, and we would like to thank Nanne Dekking and her data team, Anna Bews, Benjamin Magilaner and Praveer Kumar, for their generous assistance in putting together this highly complex data set. China auction data was provided by the Artron Research Academy of Arts (ARAA), and we are extremely grateful for their continued support. In particular, we would like to thank President Tracy Xu and senior analyst Jiali Duan.

Finally, thanks to Noan Horowitz for his insight, Jeni Fulton for editing the draft, and Nyima Tsamdha for coordinating production.

Dr. Clare McAndrew Arts Economics

P12-13: Greetings from Art Basel

Art Basel CEO Noah Horowitz's Foreword

The Art Market has been subjected to various, sometimes contradictory, forces over the past year: inflation, the long-term impact of the COVID-19 pandemic, supply chain issues, cryptocurrency volatility, etc. The sixth edition of the groundbreaking report "The Art Market", written by Dr Clare McAndrew, founder of Arts Economics, and published in collaboration with UBS, aims to decipher this territory. In an increasingly quantified, yet at the same time increasingly complex, world, the benefits of data-driven analysis in providing transparency into the Art Market are significant, and this latest report provides a clear picture of how the industry has fared.

The overall art market expanded despite wider economic uncertainty. But a closer look paints a mixed picture: the larger dealer segment grew, while smaller dealers and many parts of the auction market contracted. Overall, the market grew 3% driven by dealer sales up 7% year-on-year, returning to pre-pandemic 2019 levels in that sector. This was driven by the resumption of the regular rhythm of art fairs, gallery openings and auctions.

For Art Basel, 2022 has been a year of exciting milestones, notably the launch of "Paris+ par Art Basel" in October and its 20th anniversary exhibition in Miami Beach in December. The end of this impressive year once again highlighted the vitality of international travel, discovery, and in-person viewing. In line with this, galleries report that fair attendance now accounts for 35% of their business. This is up from 27% in 2021, but still below pre-pandemic levels, indicating there is still room to grow.

Despite the challenging conditions of the past two years, the number of dealerships operating in multiple regions increased from 5% in 2021 to 9% in 2022. This may be due to dealers trying to stay relevant with their customers.

And despite the crypto winter, digital, film, and video art saw a huge increase in popularity: from 1% of dealer sales in 2021 to 5% last year. Much of this change was driven by NFT-backed digital art, showing that the market continues to evolve and adapt to the times.

A survey conducted last year by Arts Economics and UBS Investor Watch found that wealthy collectors remain optimistic about the market, spending more in 2022 than before the pandemic. They are also bullish about 2023, with 77% of collectors expecting market growth and the majority planning to purchase art in 2023. So, despite concerns about macroeconomic instability heading into 2023, the data points to a robust art market supported by wealthy collectors, particularly at the high end.

"On behalf of Art Basel, I would like to extend my sincere gratitude to Dr. Clare McAndrew for her exceptional efforts in putting together this industry-leading study, and to everyone at UBS for being an exemplary partner whose invaluable contributions grow year on year. Finally, I would like to extend my sincere thanks to the gallery owners, art market experts and our global team who make it all possible."

Noah Horowitz CEO Art Basel

+ART SUMMARY

The art market grew by 3% in 2022, despite various influences including inflation, COVID-19 and supply chain problems. This was driven by increased sales by large dealers and the resumption of art fairs and auctions.

Wealthy collectors also remain optimistic about the market, spending more in 2022 than before the pandemic, and are bullish about 2023, with 77% expecting market growth and the majority planning to purchase art in 2023. This means that despite concerns about macroeconomic instability heading into 2023, the art market is expected to be supported by wealthy collectors, especially at the high end.

Art Basel CEO Noah Horowitz expressed his gratitude to Dr Clare McAndrew and everyone at UBS for their extraordinary efforts in compiling this report.

P14: Greetings from UBS Securities

2022 has been the year in which the Art Market has maintained its post-pandemic reversal and even strengthened, despite deep economic uncertainty and the return of hostilities to Europe. Financial markets slumped as central banks battled inflation and scenes of arbitrary destruction flashed on our television screens that we might have assumed were a relic of the past.

However, collectors maintained their commitment to the market, attending live events, and exhibitions, auctions and art fairs returned to a fuller schedule. This cautious growth amid deep uncertainty is testament to the strength of the post-pandemic art market and gives hope for its resilience. Global art sales in 2022 are estimated to grow 3% year-on-year to $67.8 billion, surpassing pre-pandemic levels in 2019. However, not all segments grew equally, making 2022 a year of divergence. Market growth is concentrated at the high end.

Sales in mainland China and Hong Kong also declined amid the fight against COVID-19. However, the US market has regained momentum and once again secured its leading position in the world. In particular, Christie's auction of the Paul Allen collection in New York in November recorded a record high of more than $1.6 billion. There was a sense of optimism about the second half of 2022, especially among dealers in mainland China and Hong Kong.

Developments in digital technology are also opening up the market further. Blockchain technology is providing new tools to assist artists, collectors and dealers in a rapidly evolving legal and regulatory environment. We are seeing increased price transparency and access to information, which is encouraging. It is also lowering the barrier to entry, making it easier for new collectors to enter the market, which is essential for the long-term health of the market.

Collecting art is an act of courage and faith, driven by curiosity, inspiration and the desire to forge new relationships. That courage carried us through 2022, showing that the art market remains resilient and hopeful. UBS has been Art Basel's lead partner for almost 30 years and has been analyzing and co-publishing art market trends and information since 2017, a role that is perfectly suited to UBS's position as one of the world's leading financial research analysts. We hope that this publication will lead to a deeper understanding of the state of the art market today.

Christl Novakovic CEO UBS Europe SE and Head Wealth Management Europe Chair of The UBS Art Board UBS, Global Lead Partner of Art Basel

+ART SUMMARY

The Art Market in 2022 has grown robustly, despite global economic uncertainty and the European invasion of Ukraine. This is because wealthy collectors continue to invest in the Art Market. The US market in particular has performed well, with some of the most expensive auctions in history taking place.

Developments in digital technology are also having an impact on the art market, with blockchain technology garnering attention as a means to make art ownership and transactions more secure and transparent.

UBS, lead partner of Art Basel and publisher of art market analysis, reports that the art market is showing resilience and remains optimistic for 2022.

P17 - P18: Key findings

1. Global art sales increased 3% year-on-year to an estimated $67.8 billion, surpassing pre-pandemic levels in 2019. After a well-below year-on-year decline in 2021 due to the pandemic, growth slowed in 2022 with varying performance across sectors, regions and price ranges.
   
   
2. The pandemic caused a sharp decline in transaction volumes in 2020 but they have rebounded in 2021, with sales increasing 19% to 37.3 million. In 2022, sales are up just 1% to 37.8 million, driven mainly by increased dealer sales.
   
   
3. Market growth continued to be driven by the high end in 2022. Sales in the public auction sector fell 1% to $26.8 billion, with only works over $10 million showing an increase in value. The dealer sector increased 7% to $37.2 billion, with dealers operating at the high end significantly outperforming their lower-end counterparts.
   
   
4. The United States maintained its number one position globally, with a 45% share of sales, up 2% from last year. The United Kingdom rose to second place with an 18% share, while China dropped to third place, down 3% to 17%. France maintained its fourth largest market with a 7% share.
   
   
5. After a significant decline in sales during the pandemic, the US Art market has recovered among the strongest of the major markets. Sales, which slumped in 2020 due to the pandemic, recovered in 2021, increasing in value by 31% to $28 billion. Growth continued in 2022, increasing 8% year-on-year to a new record high of $30.2 billion. This was driven by a strong rise at the high end of the auction sector and slower but positive growth in the dealer sector.
   
   
6. Despite severe economic and political pressures, UK sales are maintaining momentum, growing 5% to $11.9 billion in 2022. A second consecutive year of growth has helped the market emerge from a sluggish 2020 period, but sales are still below 2019's pre-pandemic level of $12.2 billion.
   
   
7. China recorded a significant setback in 2022, with lockdowns stifling activity and scaling back or cancelling sales and events. Revenue fell 14% year-on-year to $11.2 billion, and while 13% higher than 2020, it marks the first time it has fallen below that level since 2009.
   
   
8. The French market grew 4% year-on-year in dollar terms, although growth slowed slightly due to the depreciation of the euro. After a 30% decline in 2020, France showed a particularly strong increase in sales in 2021, growing 58% to $4.8 billion. Growth will continue in 2022, reaching a record peak of just under $5 billion.
   
   
9. As exhibitions, auctions and art fairs all resume full schedules and collectors begin to re-engage with live events and sales, dealers and auction houses both report a further decline in the e-commerce share in 2022. Online-only sales totaled $11 billion, down 17% from its 2021 peak of $13.3 billion, but still 85% higher than in 2019. Online sales accounted for 16% of the Art Market's total 2022 sales, down from a peak of 25% in 2020 and 4% below the global retail e-commerce share (20%, 2022).
   
   
10. Sales of art-related NFTs peaked in the second half of 2021 at around $2.9 billion, while sales on platforms outside the Art Market fell 49% year-over-year to around $1.5 billion. Although sales were significantly lower, they were still more than 70 times higher than 2020 levels (around $20 million).

+ART SUMMARY

The art market grew 3% year-on-year to $67.8 billion in 2022, exceeding pre-pandemic levels, but growth slowed due to uneven performance across sectors, regions and price ranges.

Specifically, the auction market was worth $26.8 billion, down 1% year-on-year, while the dealer market was worth $37.2 billion, up 7% year-on-year. By region, the United States maintained its position as the world's leader with 45%, up 2 points from the previous year, followed by the United Kingdom in second place with 18%, and China in third place with 17%, down 3%. By price range, high-priced works priced at over $10 million increased 11% year-on-year, driving the growth of the overall market.

And sales of art-related NFTs fell 49% year-over-year to $1.5 billion after peaking in the second half of 2021. But that's still more than 70 times higher than 2020 levels (about $20 million).

Thus, the art market in 2022 maintained its post-pandemic recovery, but overall growth slowed. High-value works remained popular, but online sales declined. Also, art-related NFTs are still in their infancy.

P19 - P24: Global sales overview

2022 was expected to be the year when the Art Market would regain a more normal momentum after two years of disruption caused by the global pandemic. At the beginning of the year, a surge in sales was predicted, due to the full resumption of the art fair schedule and the offering of prestigious collections at auction. Collector sentiment surveys conducted during the year also indicated optimistic purchasing plans. In reality, however, although the year certainly recorded exceptional sales and events, the overall results were less than impressive, with performances across sectors, regions and segments resulting in more modest growth than expected.

The COVID-19 pandemic created an extremely challenging operating environment for the Art Market. In 2020, sales fell 22% to $50.3 billion, the lowest level since the 2009 global financial crisis, due to restrictions on business, travel, exhibitions and events. However, just as the market recovered in 2010, sales recovered quickly in 2021. This was due to the Art Market's quick adaptation to digital channels and robust sales at the higher end of the market, buoyed by the growing wealth and purchasing power of high net worth (HNW) collectors. In 2021, almost all regions and most segments recovered, with sales reaching $65.9 billion, up 31% from 2020, and the market surpassing its pre-pandemic level in 2019.

Collectors and art market participants started 2022 with great optimism, as sales and events resumed at a more normal pace in most regions. The first half of the year was marked by robust sales in the auction market, with many record prices achieved. The dealer sector also showed positive signs, with active fairs and exhibitions. However, as the year progressed, the situation proved more challenging than expected, with political and economic instability, the intensifying war in Ukraine, soaring inflation rates, supply problems, and recession fears in major markets. The market appeared to be overheating, especially in the fourth quarter, despite the much-talked-about auction of the Paul Allen Collection at Christie's in New York, which sold for over $1.6 billion, and reports of subdued bidding and purchases. In addition, the strict implementation of the zero-COVID policy in China led to the cancellation of many events and auctions throughout the year, dealing a major blow to the growth of the art market. High infection rates due to the abrupt end of restrictions in early 2023 continue to cause short-term disruptions. This discrepancy in performance meant that global sales rose just 3% to $67.8 billion, despite strong results in other major markets such as the United States and the United Kingdom.

The Art Market is set to grow more slowly than expected in 2022, with performance varying across regions and segments: Global sales are estimated at $67.8 billion, up just 3% from the previous year.

In the auction market, only works in the highest price range, over $10 million, showed an overall increase, while in the dealer market, works in the higher price ranges performed significantly better than works in the lower price ranges.

These trends negate expectations of a significant restructuring of the old Art Market hierarchies after the pandemic, with sales continuing to follow previous patterns of outperformance at the higher end, lifting the tally but becoming even more concentrated at the top.

Annualized change in global art market sales from 2009 to 2022

In 2009, the effects of the global financial crisis caused Art Market sales to fall by 36%, but since then they have been recovering. In 2010, the rapid growth of the Chinese market combined with robust sales in the United States led to a 44% increase in sales over the previous year, to $64.6 billion. The collapse of the Chinese market bubble slowed global sales growth in 2012, but between 2009 and 2011, global Art Market sales increased by 63%.

Prior to the 2020 sales decline brought about by the pandemic, the market was already under pressure, with geopolitical tensions and economic uncertainty causing sales declines in 2019. The outbreak of the pandemic in early 2020 created an unprecedented crisis for the market. Store closures and event restrictions exacerbated the sales decline. However, the market showed considerable resilience, with online transactions helping to preserve value and resulting in a significantly smaller decline than in 2009. However, it was a slower recovery than the 2009-2011 recovery, with sales increasing by only 35% from 2020 to 2022.

Since the declines in Art Market sales due to the Global Financial Crisis in 2009 and the pandemic in 2020, the market has rebounded in both cases, outweighing the declines: sales in 2022 exceeded pre-pandemic levels and reached their highest level after the peak in 2014. A key factor that limited the market contraction and supported a quicker recovery was strong demand for higher-priced works from wealthy collectors.

Despite the widespread socio-economic impacts of the pandemic, global billionaire wealth increased by almost a third in 2020, with industries such as technology, e-commerce and healthcare particularly thriving. The continued growth of this segment highlights an important difference between the pandemic and other past financial crises, notably the 2009 Global Financial Crisis, in which the number of billionaires worldwide fell by 30% and their wealth fell by 45%. The growth in wealth at the high end continued in 2021, with the number and wealth of billionaires rising by 16% and 19%, respectively, to reach all-time highs of $13.6 trillion and 2,657 billion.

Art market sales in 2022 surpassed pre-pandemic levels and reached the second highest level on record. Prices fell just short of the 2014 peak, buoyed by strong demand for high-end works from wealthy collectors.

According to the Forbes World's Richest People Ranking (announced annually since 1987), the real-time assets in December 2022 decreased year-on-year, but the growth rate slowed. The number of billionaires was 2,487 (down 6% year-on-year), and the total assets were $11.7 trillion (down 14% year-on-year). In particular, Russia suffered a large loss, with the number of billionaires down 18% and assets down 25%, and China (including mainland and Hong Kong) suffered a large loss, with 99 billionaires down (down 16% year-on-year) and assets down 27%.

Yet even taking into account the decline in 2022, the wealth of the rich has more than doubled in a decade and increased by more than a third since 2019, just before the pandemic began. In addition to market adaptation, the growing wealth of the world's richest individuals has undoubtedly helped the Art Market to weather the COVID-19 crisis and recover more quickly, although the focus of the rich on certain segments of higher-priced works may be widening the gap in the performance of Art Market participants.

Auction and dealer performance will vary depending on market conditions

The auction and dealer markets performed differently in 2022. The dealer market outperformed the auction market amid a more uncertain market.

In 2020, the pandemic caused a downturn in both the auction and dealer markets. Public auction sales fared slightly worse than dealer sales, down 29%, while auction house private sales rose by more than 40%. As the market recovered in 2021, all segments bounced back, but auction sales grew the most year-over-year, rising by just over 50%. Auction house private sales also grew by just over a third, while total dealer sector sales increased by 18%. As we have noted in previous reports, when the market outlook is favorable, public auction sales often perform particularly well. This is because sellers want to be attracted by the chance to make returns that exceed expectations. However, when the economic and political situation is uncertain, private sales often have an advantage over public auctions, as sellers want to keep the details of their transactions and the possibility of a failed sale private. This was the case in 2019.

Despite an optimistic start to 2022, political and economic trends that became evident throughout the year, including the war in Ukraine, surging inflation, interest rate hikes, COVID-19 lockdowns in China, and recession fears in major markets (such as the US), resulted in a slight decline of 1% in the auction market compared to last year, while the dealer market increased 7% compared to last year.

Factors that contributed to the difference in performance between the auction and dealer markets were:

• The more uncertain market conditions in 2022 have led sellers to become more risk averse, and some auction markets have seen thinner bids and more cautious and slower transactions in the private sector.
• This could have led to better performance of the dealership market in 2022 as an uncertain and less optimistic market outlook has led buyers and sellers to turn more to the private sector.
• At the same time, within each segment of the market, companies performed unevenly: as is often the case in times of uncertainty, the very top of the market was less affected, with wealthier buyers turning to the most established artists and works, which they perceive as lower risk and a better store of value.

Sales for the auction and dealer markets in 2022 are as follows:

• In the auction market, sales from both public and private auctions accounted for 45% of the total market (down 2% year-over-year).
• The dealer market and galleries (including all online and offline retail sales of art and antiques in the primary and secondary markets) accounted for 55% of the total market.

Transaction volumes in the auction and dealer markets also fell sharply during the pandemic, down an estimated 23% to 31.4 million transactions, but recovered in 2021, with transactions up 19% to 37.3 million. Transaction volumes in 2022 increased slightly by 1% to 37.8 million due to increased dealer sales, but transactions in the fine art auction sector contracted. Transactions outside the traditional art market are also thriving, through online platforms and offline marketplaces that support direct sales from artists, creators and resellers. Art market sales in 2022 do not include art-related sales on Non-Fungible Token (NFT) platforms, but are discussed in more detail in Section 1.4.

P26 - P29: 1-2 Market performance by region

In terms of sales value for 2022, the three largest art markets - the United States, China and the United Kingdom - will still dominate the global market, with a combined share of 80%, unchanged compared to 2021.

The United States was one of the strongest markets in 2022, with its share by sales value rising by 2 percentage points to 45%. The UK and China have been competing for second and third place for the past decade, and this trend continued in 2022, with the UK market regaining second place with an 18% sales share (up 1 percentage point from 2021). The Chinese art market struggled, dropping 3 percentage points to return to third place with 17% sales share. France maintained its fourth place position with a 7% sales share. The EU as a whole accounted for 12% of global sales, unchanged from 2021 and up 2% from 2020.

US

The United States was one of the strongest markets in 2022, accounting for 45% of sales by value. After a steep decline of 25% in 2020 due to the pandemic, the United States has seen the strongest recovery among major markets and maintains its key role as the global art trading center. Sales recovered in 2022, up by just over a third year-on-year to $28 billion, driven by a robust supply at the higher end and strong demand from local and international high net worth (HNW) collectors. This growth continued in 2022, with a series of multi-million dollar transactions in the auction sector and a modest but positive growth in the dealer sector, which increased 8% year-on-year to $30.2 billion.

The United States has been one of the strongest markets over the past two decades, leading the market recovery after the 2010 global financial crisis, with sales growing steadily through 2015. However, sales fell 16% in 2016 as supply at the higher end of the market declined. They have since recovered, reaching nearly $30 billion in 2018. There was a further two years of decline through the end of 2020, but the rebound in sales over the past two years has pushed values ​​to their highest level ever, 1% above the previous high in 2018.

The US market is supported by local demand and supply, as it has the world's largest population of HNW and UHNW (ultra-high net worth) individuals and a strong cultural infrastructure. However, one of the main growth drivers for the US market is its status as a global art trading center. The most expensive artworks are brought to New York for sale to local and international buyers. US sales are fueled by imports of fine art and antiques, which exceeded $10.3 billion in 2021, up 60% year-on-year and a further 23% in 2022.

United Kingdom

The UK art market has been under great pressure over the past few years due to Brexit complexities and the impact of the pandemic. However, after two years of decline, the UK market in 2021 recovered some of its losses, growing 15% year-on-year to just over $11.4 billion. Still, the recovery has been weaker among the major markets, with a share of 17% in 2021, the lowest in the past decade. In 2022, despite increased economic and political pressures, sales maintained momentum, growing 5% to $11.9 billion. This is still slightly below pre-pandemic 2019 levels, and the UK market's value has fallen by 7% between 2013 and 2022 (the US market grew by 46% over the same period).

Elsewhere in Europe, French sales also recorded positive growth of 4% year-on-year in dollar terms, although the increase slowed somewhat due to the depreciation of the euro, which hit a 20-year low against the dollar in the second half of 2022. Following a 30% decline in 2020, French sales showed a particularly strong increase in 2021, increasing 58% year-on-year to $4.8 billion. Continued growth in 2022 will see the market reach a new record of just under $5 billion, its highest level ever. Sales in Germany and Spain also showed growth, with the EU as a whole estimated at $58.8 billion, up 5% year-on-year.

China

China (including the mainland and Hong Kong) fared significantly worse in 2022. Lockdowns halted activity in some regions, limiting access and supply, and strict zero-COVID policies led to some sales being scaled back or cancelled. Some of the major auctions for the autumn season were postponed, and strict measures led to fairs being cancelled or shortened in duration. China sales fell 14% year-on-year to $11.2 billion, dropping the market to third place behind the UK. During the period when China sales surged from 2010 to 2014, China's sales surpassed those of the UK. Then, in 2018-2019, the UK took the lead as Chinese sales fell due to trade and political issues. After three consecutive years of declines in 2020, China's market fell to $9.9 billion, its lowest since 2009. It rose by just under a third year-on-year to just over $13 billion in 2021. While 2022 sales were still 13% higher than 2020, they were the second-lowest since 2009.

P30 - P32: 1.3 Online sales

As the event-driven market returned to its normal schedule in 2022, sales trends continued to develop. Attention was focused on whether the shift to online would be sustained or was merely a knee-jerk reaction to the unique circumstances of the pandemic. The growth of e-commerce has been one of the most significant developments in the art market over the past three years, and although the share of online sales has not sustained the significant increase seen in 2020, the market has not returned to the pre-pandemic division of online and offline sales.

After a slow but positive growth trajectory for most years leading up to 2019, online sales reached a record high of $12.4 billion in 2020, doubling year-over-year as the pandemic limited offline channels and events. Growth continued in 2021, with sales reaching $13.3 billion, with a rising market boosting all sales despite a slight decline in the share of online sales. Most companies maintained digital sales and programs in tandem with a gradual return to live sales and exhibitions.

However, in 2022, with exhibitions, auction sales and art fairs all proceeding more or less as normal and collectors beginning to attend live events and sales, both dealers and auction houses reported a further decline in the share of pure e-commerce. Online-only sales fell to $11 billion, down 17% year-over-year from their 2021 peak, but up 85% from 2019 levels.

The share of online-only sales in 2022 was 16% of total Art Market turnover, down 4% year-on-year and 9% from its peak in 2020. Again, despite the decline, it remained at a much higher level than in 2019 or any previous year. Online sales are sales conducted by galleries, dealers and auction houses through their own websites, Online Viewing Rooms (OVRs), other platforms or by email, without a face-to-face viewing or pre-sale contact. In the case of auctions, online-only sales refer to sales where there is no live auction and do not include online bidding in a live auction. Online sales by dealers and auction houses are discussed in more detail in Chapters 2 and 3.

To put it in a broader context, the share of online sales in the Art Market is below the total retail e-commerce share of 20% reported in 2022 (4% above the Art Market). After lagging significantly behind other industries, online sales in the Art Market grew sharply in 2020, with the e-commerce share at 25%, surpassing total global retail (18%) for the first time. However, in 2021 it has converged to a closer level. As is clear from figure 1.8, the pandemic has caused a significant shift in e-commerce in many industries, doubling from 9% in 2016 to 18% in 2020. E-commerce is projected to continue to grow, but the annual growth rate is expected to slow in the coming years. Retail e-commerce growth was 17% in 2021, slowing to 10% in 2022. The pace is expected to remain relatively stable, and by 2025 its share of total sales could rise to around 23%.

Given that the Art Market has invested in digital platforms and strategies, and collectors’ acceptance and regular use of digital channels, it seems unlikely that the share of sales will return to pre-pandemic levels. However, it may not be able to expand beyond a minority share, as high-value transactions tend to take place offline. In addition to the slow growth of online-only sales in 2022, the importance of digital technologies to aid and support sales continues to grow. In the auction sector, online bidding is more active than ever, with Sotheby’s reporting that 91% of works sold at auction in 2022 were bid online (compared to just 44% in 2017 and 18% in 2012). Similarly, at Christie’s, 75% of sales in 2022 were made online, compared to just 45% in 2018. While the dealer sector has yet to replicate this type of engagement, there is evidence that this sector is also seeing an increase in the frequency and acceptance of online transactions. A survey of HNW collectors conducted by Arts Economics in collaboration with UBS in 2022 found that 95% of the 2,709 collectors who responded have at some stage purchased a work rather than viewing it in person and of those, more than half (51%) do so regularly. The majority (69%) bought directly from a gallery website in 2022, and 53% bought online or through a social media platform. There has also been a positive shift in preferences towards online purchases from dealers (more on this in Chapter 2).

However, despite the increased use of online channels, 93% of respondents still consider it important (42%) or very important (51%) to see a work in person before purchasing, with price being the main reason. The preference to see a work in person before buying remains dominant: the survey, which covered 11 different markets, found that 73% of collectors prefer a live or in-person viewing at a gallery or art fair, up 4% from the 2021 survey and 7% from the 2020 survey. 17% prefer online exhibitions or platforms (down 2% from 2021), and 10% say they don't mind either way.

P33 - P40: 1.4 Art and NFTs in 2022

Over the past three years, there has been much discussion about the diminishing role and importance of intermediaries (dealers and auction house professionals), or "disintermediation", as the proliferation of online platforms allows for more direct communication and transactions between artists and collectors. However, the impact of disintermediation on the Art Market has so far been relatively weak.

The aforementioned survey of HNW collectors found that only 10% of collector spending in 2022 was through direct purchases from artists' studios (6%) or direct consignments (4%), with a further 4% coming from transactions with other collectors or individuals. Most spending still took place through dealers and galleries (30% direct purchases and 15% through art fairs), with auctions accounting for 17%. The survey also revealed that 20% of spending took place through third-party online platforms (6%) and Instagram (6%), which includes both direct and mediated sales, and 8% took place through NFT platforms outside the art market.

The rise of NFT-related platforms outside the art market has been a key development over the past three years, with growing interest in NFTs being one of the biggest trends of 2021, most of which took place on external platforms outside of traditional galleries and auction houses. A cooling of this market is also being noted in 2022. With less attention on price inflation and speculative trading, the discussion is shifting to the long-term impact of blockchain applications on the art market.

As attention wanes on price inflation and speculative trading, the discussion is turning to the long-term impact of blockchain applications on the art market.

Transactions conducted through NFT platforms are not included in the total art market value estimated in this report (as they take place outside of galleries, dealers, and auction houses), but an analysis of buying and selling on these platforms shows a sharp increase in activity in 2021 followed by a subsequent decline in 2022. NFT platform buying and selling data is provided in this report by Nonfungible.com, which tracks the buying and selling of NFTs on the Ethereum network in ERC-721, the leading NFT standard.

NFT platforms cater to many different types of collectibles, including art, sports, music and entertainment collectibles, as well as in-game and in-world digital items. Art-based NFTs accounted for just 2% of all NFT trading volume in 2019, but their popularity has grown rapidly, reaching 31% of all NFT trading volume in 2021.

In 2022, the NFT market as a whole cooled off, with art-based NFTs also seeing a significant decline in trading volume. Art-based NFT trading volume increased from $605,000 in 2019 to just over $20 million in 2020, then rose to $2.9 billion the following year. However, after peaking in August 2021, trading volume declined significantly in 2022 as Ethereum prices fell and trading volume declined due to market saturation. This significant decline in trading volume and volume helped to dampen the media frenzy around NFTs and filter out some of the more speculative traders.

As noted in 2021, the high liquidity, accessibility, and instantaneous nature of NFTs attracted a large number of speculative buyers who were primarily interested in buying and selling NFTs for short-term profits. The anonymity of transactions also created a lower barrier to entry compared to the traditional art market, with a lower starting price making it accessible to a larger audience.

The average number of days between purchase and resale of an art-related NFT was just 33 days in 2021. This means that art-related NFTs were resold within about a month of purchase (the average resale period in the art market is 25-30 years). Figure 1.10 shows the rapid price increase that attracted speculative trading. The average price of an art-related NFT increased more than 20x from the end of 2020 to its peak in August 2021. 91% of NFTs traded in 2021 were profitable.

To support these transactions, the number of buyers buying and selling NFTs has also increased significantly. In 2019, there were 2,287 unique buyers and 1,891 unique sellers involved in art-related NFT transactions, increasing to 153,382 buyers and 92,252 sellers in 2021. Despite the market contracting in 2022, the number of wallets operating on these platforms is still increasing, with unique sellers increasing by 55% to 180,416 and buyers increasing by 14% to 174,764. This is due to an increase in secondary market participants, while the number of primary market participants (both buying and selling) decreased by 12%.

Total sales of art-related NFTs in 2022 reached approximately $1.5 billion, down 49% year-over-year, despite a significant drop from the end of 2021. This is still a large market, more than 70 times the market size in 2020 ($20 million). However, the decline in sales in the art segment was significantly worse than the performance of NFTs overall (a 12% decrease in value across all segments), and contrasts with the performance of the much larger collectibles segment (a 15% increase in value from $510.3 billion in 2021 to $118 billion in 2022).

Another change in the NFT art market in recent years is the change in the share of primary and secondary sales. Secondary sales have always had the majority share in the collectible segment (76% in 2019, rising to 89% in 2022), and while the majority of sales for art-related NFTs came from primary market transactions in 2019 and 2020, primary market transactions accounted for the majority in both value and volume of sales. However, in 2021, the ability to buy and sell NFT art instantly and the rise in prices led to a rapid growth in the secondary market, with most transactions concentrated in resales. Of the total sales of art-related NFTs in 2021, secondary market sales rose to 73%, while primary market sales fell to 27%. The share of secondary resale transactions also doubled, reaching 42%. In 2022, the secondary market accounted for 80% of sales and the majority of transactions (61%), confirming that resale has become the dominant activity over primary sales and new launches.

Secondary sales of art-related NFTs accounted for 80% of market value and 61% of transactions in 2022, confirming that resale has become the dominant activity on these platforms.

While much of the media attention has been focused on the economics and profitability of buying and selling NFTs, the art industry is steadily embracing the more significant, long-term impact that the web and blockchain will have on its business. Some larger firms are building teams dedicated to issues related to digital assets. But firms of all sizes are facing significant change as innovation challenges old practices while also bringing significant opportunities to support relationships between artists and collectors. Figure 1 discusses some of the key developments and innovations in the field, while Figure 2 summarises some of the key legal and regulatory issues the market currently faces in relation to blockchain and related technologies.

P41 - P45: Exhibit 1. Adoption of Technological Innovation in the Art Industry

Caroline Taylor, Appraisal Bureau

An NFT (Non-Fungible Token) is a unique digital identifier recorded on the blockchain that represents a digital file such as an image, video, or music. NFTs can be bought, sold, and traded. NFTs can exist as independent, dependent, or valueless entities, such as digital twins of physical items, standalone artwork, or interoperable in-game items. But it's the use cases and utility of blockchain that will matter most in the long term.

NFTs are a proof of concept for Web3. Web3 is the next generation of the internet that relies on decentralized networks. Web2 was introduced when internet users began to take an active role in the internet through the launch of social media platforms. Web1 was defined in the early to mid 1990s with the launch of html/static web pages and sparked the dot com boom in the following decade. The rapidly evolving Web3 allows for unique ownership of your digital identity and assets. In a growing digital world, it is a natural transition to own your assets instead of renting them as in Web2.

The advent of NFTs has created an ecosystem known as the Creator Economy, where artists and creators are continually rewarded through royalties and have direct contact with their audiences. Art and music have been at the forefront of promoting the benefits of blockchain, paving the way for other industries to follow. Creators have rewritten many of the rules through their engagement with the new technology, which will continue to be enhanced by real-world use cases for blockchain applications.

As with any new movement, community engagement is essential not just to drive success but to survive. Applications built on Layer 1 blockchain infrastructure support underlying cryptocurrencies such as Bitcoin and Ethereum. While the “Crypto Winter” has put an end to many protocols, 2023 will see new and intelligent projects take their place.

In the current skeptical environment, it is easy to assume that the new technology is the cause of failure (e.g. FTX), but in fact it was not the code that was to blame, the blockchain served its purpose and played its part. After the dust settles, the need for regulation and standards will come into play. It goes against the purist nature of blockchain, but to some extent it is necessary if the assets in question are physical and must be aligned with real-world institutions and authorities. Best practices, security and regulation are key themes for Web3 in 2023.

Institutional Investor Recruitment

Auction houses, led by Sotheby's and Christie's, have launched digital asset divisions. NFTs have changed the artist-dealer relationship, so digitally native creators are increasingly auctioning directly. While fees for buying NFTs from traditional auction houses can be higher than buying from marketplaces such as OpenSea, auction houses generally offer higher quality pieces. NFT data in the report shows that while volumes have declined from historical levels, interest remains high and they are attracting new collectors.

In 2022, Yuga Labs, creators of Bored Ape Yacht Club (who purchased CryptoPunks' IP in a groundbreaking deal), launched the Punks Legacy Project to donate significant NFTs to major international institutions. CryptoPunk #305 was donated to the Institute of Contemporary Art in Miami, a pioneer in the NFT field. The piece is exhibited alongside Andy Warhol's "Kay Fortson (an American Lady)" (1976). One of the project's aims is to promote best practices in NFT ownership through responsible storage, insurance, and valuation reporting. More donations to institutions are planned for 2023.

Evaluation variables

Valuing NFTs is a complex issue, as different sectors overlap in the classification of this fast-growing asset. What is consistent, however, is the need for compliance and regulation in the approach to reporting. Valuation standards are set by the Appraisal Foundation, which is chartered by Congress and funded by the federal government, and the Appraisal Standards Board develops and amends the USPAP. Appraisers must define different types of value for NFTs, ranging from traditional personal property valuations (normal market value, retail exchange value, etc.) to standards administered by the Financial Accounting Standards Board (FASB). For example, Accounting Standards Codification 820 considers normal market value to be an approximation of the exit price of a venture portfolio, which may be adopted in the audit of certain types of NFTs held in a fund.

NFTs have some additional factors in valuation compared to traditional art, such as the need to take into account the volatility of the underlying blockchain. Depending on the use case, you may need to recalculate the valuation daily, or monthly or quarterly reports may be sufficient.

NFT Insurance and Security Considerations

Valuation is a key component of insurance policies, including digital asset insurance, which has grown significantly in recent years. The largest insurance limits are in the Specy market, a niche insurance market that covers high-value assets such as art, diamonds, gold bullion, and now digital assets. Specy covers assets "at rest" (i.e., in a vault), while other markets, such as crime, cover additional perils not considered in Specy insurance. There are synergies between these insurance markets, allowing creative underwriters to adjust the language of insurance policies. In 2023, we will see the emergence of new solutions to safely and easily manage digital assets. Responsible ownership of Art NFTs in particular will continue to depend on third-party storage facilities and custodians that comply with evolving regulatory requirements.

When considering how to insure non-tangible assets, insurance companies investigate the potential perils that the insured faces. NFTs are unique crypto assets on the blockchain, and are “owned” through a web wallet that can be accessed via a seed phrase or private key. (A private key can only access one account, whereas a seed phrase can access one entire wallet). Therefore, protecting the private key is crucial to safeguarding digital assets. Multiple solutions have been introduced to provide different levels of coverage. Full liability insurance is available from the specie market at Lloyd’s of London where assets are kept completely “offline” in a safe with a physical BIP38 wallet (a two-factor authentication private key recorded on a metal card). In this case, the physical card safely stored in the safe is insured, and the amount insured is tied to a valuation that is updated daily to manage volatility. NFTs and cryptocurrencies are literally stored with a bunch of gold bullion. The insurance market is also adopting solutions such as multi-party computing (MPC), which distributes the signing step across multiple participants. This reduces risk by distributing points of failure rather than relying solely on one person holding the private key.

License to build

As applications on the blockchain continue to develop, legal frameworks are emerging that support the concept of open source. This is especially relevant for artists and the sharing of digital content. The Creative Commons Zero (CC0) license inverts traditional copyright and intellectual property rights, allowing artists (as well as scientists, educators, and other creators and content holders) to open their work to the public domain. CC0 waives all rights and instead encourages a “remix culture,” especially when used in conjunction with NFTs. Crypto artist XCOPY applied the CC0 license one month after his Right-Click and Save Guy went on sale, and has since announced that he will waive rights to all of his work. Original content continues to thrive in the hands of other creators and digital outlets.

While Creative Commons itself is nothing new, more traditional outlets have recently begun to adopt the license as well. The Metropolitan Museum of Art, through its open access initiative, makes all public domain images in its collection available under the CC0 license. The license provides data on over 420,000 objects from the museum's collection, spanning 5,000 years of history. The open access images have been reported to have been viewed over 1.2 billion times.

Future outlook

Security and responsible ownership of digital assets will continue to be important themes. We will continue to see new products emerge that leverage blockchain to support established real-world industries. Multi-party computing (MPC) is a crypto tool that is growing in popularity and is expected to become more widespread in the coming year. Private keys held in a single source, such as a hot or cold wallet, are a single point of failure, but MPC distributes keys across multiple nodes. To sign a transaction, all nodes (controlled by multiple parties) must participate, and authentication is communicated to the underlying blockchain.

The most obvious use case for MPC is private key management, which provides a secure solution for holding digital assets, especially for institutions. MPC also acts as a digital non-disclosure agreement with the ability to control information distribution. Personal data is never published on the underlying digital ledger, and the personal identities of signers are never revealed.

Another token that has recently become popular is Non-Transferable Tokens (NTT). NTT, as the name suggests, is non-transferable. Bound to a specific wallet, these tokens act as identity verification for the holder. NTT can also be used as a verification of identity credentials. NTT can also replace resumes to verify employment history. These tokens are an upgrade to NFTs, supporting authenticity within the web community. NTT can only be transferred one way, from creator to owner. These tokens have no market value, so they do not appear on marketplaces. The use case for NTT is obvious in the art market. A non-transferable identity tied to an asset solves many problems, including anti-money laundering and ownership tracking.

 

Finally, we will discuss Blockweave, a cousin of blockchain. In Blockweave, data in a block is linked to multiple blocks, not a single block. Rather than relying on the energy-intensive PoW (Proof of Work) or PoS (Proof of Stake) consensus mechanisms, Blockweave relies on the much more environmentally friendly PoA (Proof of Access). Blockweave miners provide spare disk space to store data and provide cryptographic PoA in what are called "recallblocks", in return for rewards in tokens native to the protocol. PoA encourages long-term storage, which has led to the "permaweb". With many applications already in use, permaweb has the potential to provide extremely cost-effective digital storage for centuries to come. permaweb and Blockweave are valuable tools for archives in any sector, but especially for museums and galleries.

As digital art and blockchain use in the art industry grows and evolves, it is important to understand the surrounding landscape from a legal and regulatory perspective to ensure best practices and responsible ownership. The technology is already facilitating groundbreaking innovation, providing new tools and mediums to assist artists, gallerists and collectors, and will undoubtedly continue to do so for the foreseeable future.

P46 - P52: Exhibit 2. Legal Overview of NFTs

Vejay Lalla, Peter Hart, Kevin Kirby and Monica Kim*

Art: Technology Innovators

During the period when NFTs have risen to the top of the market, beginning with Christie's sale of Beeple's Everydays. the First 5000 Days in March 2021 and Sotheby's sale of Bored Ape Yacht Club #8817 in October 2021, NFTs have found sales markets across a variety of industries. Video games, sports memorabilia, celebrity/fan experiences, real estate, and more continue to identify and expand applications for unique digital assets on the blockchain. However, as in 2021, the art world remains the primary driver of NFT interest and innovation today. In the first half of 2022, high-net-worth collectors are spending an average of $46,000 on art-based NFTs, more than they did in the previous two years combined.

As blockchain usage continues to evolve and the traditional offline space of art galleries expands into online arenas such as virtual galleries, gamified metaverses, and online museums hosting unique digital properties, ownership, intellectual property (IP), and regulatory issues become necessary for sellers and art galleries entering or further developing their activities in the NFT space.

NFTs are ownership, not copyright

By way of background, an NFT is a digital certificate that proves ownership of an asset through blockchain technology. An NFT contains a unique identifier and metadata about the asset that cannot be copied, substituted, or exchanged for other tokens or fungible assets. The metadata typically contains links to digital art/multimedia content, and the art is commonly stored in a multimedia file storage and sharing system. When a seller sells an NFT (for USD or cryptocurrency), the seller transfers to the buyer the right to claim ownership of the NFT itself (ownership rights like private property), precluding any claims of ownership by others. However, this right does not necessarily include ownership of the digital art associated with the NFT, which ownership rights typically belong to the original creator of the artwork by default.

Buyers and sellers of NFTs are becoming accustomed to this concept - that tokens are separate assets from copyrights (although token holders are often granted certain rights to use the copyrighted work non-commercially for as long as they own it). In response, and as a natural progression, some art galleries are commissioning artists to create art to be associated with NFTs, and through these commissions, the gallery owns the associated art, not the artist. Thus, ownership of intellectual property rights in digital art associated with NFTs is a primarily commercial issue for creators and art galleries to consider.

What rights in the actual work do NFT buyers get? When an art gallery sells a painting to a buyer, the buyer typically owns the physical painting but not its copyright. Similarly, when the original owner of an NFT (the creator or art gallery) sells an NFT, the buyer typically does not own the copyright in the art (and therefore the right to commercially license or exclude others from using it). Rather, the copyright holder often licenses the intellectual property rights in the art to the token holder. Therefore, buyers should review the NFT's license or terms of use (which are usually included in the NFT's metadata or posted on the NFT project's website if it's part of the project) to understand the scope of their licensing rights. The types of licenses chosen by the original creators and/or sellers of the NFTs range from (1) allowing only personal non-commercial use of the art (e.g., NBA Top Shot), (2) allowing both personal non-commercial and commercial use (e.g., Bored Ape Yacht Club, CryptoPunks), to (3) waiving all legal rights to the art under a Creative Commons Zero license (e.g., Cryp Toadz, Moonbirds). In rare cases, such as the World of Women NFT project, which transfers all rights to the art (except for moral rights of authorship, which cannot be transferred in certain jurisdictions) to the NFT holder through an IP transfer.

Recently, to address the proliferation of separate and opaque NFT licenses encompassing various NFT projects, a Silicon Valley venture capital firm released six Can't Be Evil NFT license terms and conditions, similar in scope of rights granted to NFT holders, and made them available to NFT creators. Their hope is that these licenses will become widespread and serve as a standard that can be more easily interpreted by users without a legal background (similar to common open source software licenses in the technology industry). Although these NFT licenses are generally accepted as a legal mechanism granting rights in art to NFT buyers, these NFT licenses may raise enforceability issues, especially related to whether holders accept the terms and the governing law (which varies depending on where the buyers and sellers are located). This can be further complicated when parties across different jurisdictions have different intellectual property protection frameworks and enforceability standards.

Marketplaces and the Metaverse – New Spaces for Dealers, Same Problems

Today, sellers can sell NFTs on NFT marketplaces such as OpenSea, Magic Eden, Blur, Rarible, Nifty Gateway, and SuperRare. This is the most common way for individuals to buy and sell NFTs using digital wallets. Typically, these NFT marketplaces charge a transaction fee for users to buy and sell on their platform, but increasing competitive pressures have led many marketplaces to reduce or eliminate their fees. Creators also turn to NFT marketplaces to help enforce secondary transaction fees (or “royalty fees” that can reach 5% to 10% of the gross value of each transaction) paid to creators. However, royalty payments have proven difficult to enforce among token holders, so many NFT marketplaces have begun to offer more options for royalty payment arrangements between creators and collectors, while at the same time helping develop NFT technical standards that allow for limiting royalty payment evasion through blockchain-based code. As marketplace fees and royalties are evolving, sellers and art galleries should be aware of an NFT marketplace’s royalty policies when choosing whether to sell on a particular platform.

Meanwhile, some art galleries have opened separate galleries in different metaverses to showcase digital art associated with NFTs for virtual visitors. For example, in June 2021, Sotheby's opened its first virtual art gallery on Decentraland (a famous 3D virtual world, browser-based platform). Other virtual NFT galleries include KnownOrigin and Narra Gallery on Decentraland, B.20 Gallery and Async Gallery on the Voxels metaverse, oncyber, Spatial, Museum of Crypto Art (MOCA), and others. For these virtual NFT art galleries, sellers and art galleries alike should be aware of the various transaction fees and royalty payments.

Infringing NFTs – An Evolving Frontier

Because NFTs are in their own digital space, they are vulnerable to copyright and trademark infringement lawsuits under U.S. law. This is because the ownership of the token and the ownership of the artwork are separated, so the artwork rights are not yet well tracked and understood, and because digital art based on "transformative uses" of existing designs and objects is prevalent. Sellers of NFTs should not only ensure that the digital art is original or that they have obtained the appropriate rights from the digital art creator, but should also be aware of marketplaces that are obligated to comply with copyright law. U.S. art galleries creating their own metaverses to display NFTs should be aware of the safe harbors under the U.S. Digital Copyright Millennium Act (DMCA). The safe harbors limit the liability that service providers may incur due to copyright infringement or unauthorized use of copyrighted works.

Although this is a new and evolving area, traditional legal and regulatory principles apply. A handful of notable IP infringement cases related to NFT sales have recently been brought before the courts and continue to be heard, and as these cases make their way through the courts, judgments and lines will likely become clearer. Thus far, IP holders have not had to rely solely on copyright law, but have often sued under U.S. trademark principles, relying on the likelihood of confusion standard or alleging false advertising or association. Although still in its infancy, U.S. courts have thus far used the “Rogers test,” an analysis created in the Second Circuit’s landmark Rogers v. Grimaldi case, to balance trademark rights with speech protected by the First Amendment. Specifically, they apply a two-factor approach to determine whether the use of a trademark in an artistic work is actionable (if the use of the trademark is (1) artistically unrelated to the underlying work or (2) patently misleading as to the source or content of the work).

Hermes vs. Mason Rothschild (2022)

Hermes alleged that Rothschild infringed the trademark rights of the company’s famous Birkin luxury handbags by creating and selling 100 MetaBirkin NFTs. On February 8, 2023, the Court found Rothschild guilty of infringing and diluting Hermes’ trademark rights in the iconic Birkin handbag, as well as illegally cybersquatting the MetaBirkins.com domain name. Rothschild’s First Amendment defense was not helped by his use of the name “Birkin” in promotional materials, which went far beyond a “digital version” of the handbag and caused real confusion among both consumers and the media. The ruling serves as a cautionary tale for brand owners, signaling that trademark rights can extend beyond physical products to digital products, even in NFT form.

Yuga Labs vs. Ryder Lips (2022)

Yuga Labs alleged that Lips misused its trademarks to deceive consumers into purchasing RR/BAYC NFTs, and then created and sold NFTs using the very trademarks that Yuga Labs uses to promote and sell genuine BAYC NFTs. The litigation is ongoing, but courts have ruled in favor of Yuga Labs thus far, noting that Lips' RR/BAYC NFTs at issue "do not express ideas or views that are protected under free speech principles."

Other lawsuits alleging IP infringement related to NFT sales in the United States have been settled, and others are expected to go to trial in the near future, including a lawsuit filed by Nike against StockX alleging trademark infringement for offering NFTs linked to images and physical versions of Nike shoes without Nike's authorization.

Regulatory obstacles

In addition to the IP issues that have been brought before the courts in the United States, the rise of NFTs, particularly in the art world, has raised new issues as regulators have struggled to fit NFTs into existing regulatory regimes. Again, using the United States as an example, the main issues include:

• Bank Secrecy Act/Anti-Money Laundering Act (BSA/AML) Regulation One of the attractions of NFTs is their easy transferability, but this feature may also pose a risk of financial crimes such as money laundering. The U.S. BSA/AML regulatory regime aims to detect and prevent such illegal activity by imposing compliance obligations on financial services intermediaries. The Financial Crimes Enforcement Network, the Treasury Department division responsible for rulemaking and enforcement of BSA/AML, has long argued that virtual currencies may be considered a “substitute of value for currency” for purposes of money transmission regulations. In its 2022 report on illicit finance in the art market, the U.S. Treasury Department stated that NFTs that are not interchangeable like currency (such as those used as collectors’ items or that represent unique works of art) are not subject to the BSA/AML regulatory regime. However, the report noted that NFTs that can actually be used for payment purposes may pose a risk of money laundering and illicit finance that the regulatory regime must address. Creators, galleries, and dealers collaborating on NFT projects should consider potential BSA/AML liability associated with the distribution, exchange, transfer, storage, and other intermediation activities involving tokens to ensure that NFTs are not interpreted as a "substitute for currency," or if there is a risk of such an interpretation. In the art world context, custom artworks are unlikely to fit the definition of currency or a substitute for currency described above. However, NFT projects where thousands of nearly identical NFTs are created and the market is deep and liquid, with identical or at least predictable prices for each, are much more likely to be subject to oversight.

• Securities Law: Could NFTs be classified as securities rather than currencies? The U.S. Securities and Exchange Commission (SEC) and some state regulators have determined that certain digital assets are sold as investment contracts. An investment contract is a type of security for which state and federal law require the offering to be registered. Under the "Howey test," named after a 1946 Supreme Court decision, regulators or private plaintiffs can argue that there is an investment contract when there is all of the following: (1) a contribution of money; (2) a contribution to a common enterprise; and (3) a reasonable expectation of profit resulting solely from the efforts of another. (4) This test is highly case-dependent, but is more likely to be met when NFTs are sold to fund ongoing entrepreneurial endeavors that benefit NFT holders, even the creation of works of art. In early 2023, a New York judge allowed a class action lawsuit against the creators of the NBA Top Shots NFT collection to proceed, ruling that the class action had a reasonable chance of recovering damages from an unregistered securities offering. Galleries and dealers may therefore need to work with sophisticated advisors to avoid such pitfalls that could result in classifying NFTs as securities.

• Other fraud issues: Even if NFTs are not classified as securities, dealers and galleries should be wary of bad actors influencing sales. In 2022, U.S. prosecutors charged a former employee of one NFT marketplace with "insider trading." He was responsible for selecting NFTs to feature on the marketplace's homepage, which tended to increase their value. He allegedly purchased certain NFTs just before featuring them and profited from them. Rather than alleging that these NFTs were securities in a securities fraud scheme, prosecutors charged him with federal wire fraud.

The U.S. Department of Justice continues to closely monitor similar fraudulent activity in digital asset sales, and it remains to be seen whether regulators will issue further guidance or use enforcement as a guidance tool.

As digital art attracts capital, artists, and finds new uses and sales channels within the traditional art world, NFT sellers and the galleries who promote them must navigate the direct and indirect risks inherent in an emerging industry. As the infrastructure for the NFT market develops, these businesses must not only stay up-to-date with traditional art world issues, but also understand and track the latest developments in legal, valuation, security, storage, insurance, and more in the world of digital assets.