Fake or fortune? Why blockchain is necessary to reduce fraud and money laundering in the art world
Imagine a future in which an art investor does not trust the authenticity of a painting unless it has been verified and registered to a secure blockchain. That future is going to arrive sooner than some people think. Louisa Bartoszek explains how blockchain could reduce art fraud, money laundering, all the while safeguarding the privacy of investors.
When two antiquities dealers, Erdal Dere and Faisal Khan, were charged by the US justice department for using fraudulent provenance in September 2020, the importance of confirming the validity of an artwork’s history was once again highlighted. According to reports, they allegedly used the identities of deceased collectors to construct a false history for antiquities they sold between 2015 and 2020.
This is sadly not a unique tale. There has long been concerns over fraud in the art world, whether that be forgeries of physical artwork through to the origin of the funds used to purchase them.
In January 2020, we saw the start of a concerted attempt to try and tackle the issue with the European Union’s fifth Anti-Money Laundering Directive expanding to include the art market. But it is clear that much more needs to be done, regardless of the notable resistance and wariness from art participants who want to protect the identities of their valuable clients.
Firstly, it is a huge market. Looking through the latest statistics from Art Basel and UBS in their Global Art Market Report 2020, global art sales totalled $64.1billion in 2019. An easing of 5% year-on-year but with the number of transactions hitting a decade-high of 40.5 million.
Second, as the Financial Times wrote earlier this year, the art trade seems almost ridiculously tailor-made for money-laundering. Pieces are usually easily portable, and transactions are generally cloaked in secrecy. Privacy is fiercely protected with the identity of buyers and sellers often guarded to the grave. Not that there is inherently anything wrong with secretiveness, but there is clearly room for subterfuge when there is a black hole of identity data.
Perhaps most significantly of all is that there is no registration of ownership of artworks. Say compared with buying shares or a house. We don’t know for certain where even some of the most famous pictures are held, let alone who owns them.
This is where blockchain can help, specifically decentralized identity technology.
In my view, there are three keys benefits:
1. Prove provenance of works, reducing forgeries
Through digitizing all the relevant documentation and information of an artwork and securing it through the use of a private, permissioned blockchain, such as Corda’s R3 network, both buyers and sellers would have upmost trust that a piece is authentic.
This digital identity data could be linked to a tamper-proof chip, seal or QR code, physically attached to the piece to prove a connection between the real-world art and its digital data. Or alternatively, through a Radio Frequency Identification (RFiD) scan of the artwork, creating a unique ‘digital fingerprint’.
“Know Your Object” records secured through a blockchain are time-stamped and encrypted. They are also immutable, which means tamper-proof. They are permanent and thus extremely difficult to fake.
By issuing a blockchain-based certificate of authenticity for a piece of art, it would introduce an extraordinary level of trust for both the art owner and prospective buyer.
A single living source of provenance.
2. Prove identity of investors, reducing money laundering
Decentralized identity is not just limited to the physical pieces of art too. It can apply to both the buyers and sellers. Through utilising blockchain, art galleries, auction houses and dealers, would be able to insist that all buyers and sellers have their identities verified and registered prior to a transaction.
Once verified, galleries and auction houses could be confident the origin of the funds for a piece of art are genuine, saving time and money on future necessary “Know your Client” style compliance checks. Not to mention alleviating the pressure on front of house employees who need to conduct these checks and feel the weight of legal responsibility. More so as AML, KYC and other data protection legislations potential come into play.
As soon as a sale has completed, the piece’s digital record, or certificate, would be automatically updated. Providing a truthful “chain” of ownership and digital history of a piece.
If AML and KYC regulation does increase in the coming years, those art dealers who have already invested in blockchain technology to conduct their transactions will be able to quickly, easily and cost effectively, ensure they meet the requirements of any heightened identity compliance requirements.
3. Protect identities, allowing investors to remain anonymous
And this is important for the notoriously secretive art world where privacy is fiercely protected. Buyers and sellers of art would need to be verified and secured to a blockchain in order to participate in a sale. Ensuring utmost trust and provenance in a transaction. However, this does not mean transactions become public knowledge.
Sales can remain private in that participants on either side of a transaction would be fully in control of the data they reveal in order to complete a sale. Privacy can be fully sustained. There would be no change. In public at least. The most important element is the verification process of the seller, buyer and the physical artwork.
Neither the seller nor buyer would need to know who the other party is. They would just know that their identity has been verified and the artwork has proven provenance. Unless either party chose to reveal this personal information to the other.
Blockchain — the new global standard in art investing?
Imagine a time in the near future when a critical mass of artworks are verified and registered with a secure blockchain.
Now imagine a future in which a buyer does not trust the authenticity of a work unless it has been verified and registered to a secure blockchain.
That’s the future we see coming, and quickly.
It will only take some of the largest auction houses or galleries to get ahead of the regulators and implement their own checks and balances. To prove to their high-net-worth clients that they take protecting their client interests very seriously.
Once a new global art identity standard is set, it would be hard for other players to not quickly follow suit. They would risk looking like “dealers of the dark arts”, for want of a better phrase, if they did not. Not to mention explaining their business practices to the regulators and legal authorities should anything happen.
Blockchain has the potential to completely transform the art world through enhanced transparency, accountability and trust. All whilst protecting investor privacy, so highly treasured by all.
The technology exists.
If art businesses want to avoid further scrutiny from regulators around the world and risk large fines for failure to comply.
They need to invest in blockchain.