Morgan Stanley
  • Wealth Management
  • Jun 27, 2022

Democratizing Art: How NFTs Are Reshaping the Art World

Nonfungible tokens are disrupting the traditional art market, creating new communities of collectors and giving artists more access to their fans and buyers.

Sarah D. McDaniel, Head of Art Resources Team (ART) and UHNW Content & Analytics, Private Wealth Management 
Denny Galindo, Market Strategist, Global Investment Office, Wealth Management

In the past couple of years, NFTs, or non-fungible tokens, have captured the imaginations of global artists and collectors, spurring new economic activity. But lost in much of the conversation is how NFTs are reshaping the traditional art market. The implications for buying and selling are interesting not only for artists but also for collectors, galleries, museums and auction houses.

NFTs are a new type of crypto asset, but unlike Bitcoin, which is fungible or interchangeable, NFTs are unique. In the context of art and collectibles, an NFT is typically a unique digital representation of a good, such as a work of art. It’s akin to a certificate of authenticity and gets recorded on a “blockchain,” a digital database that often serves as a decentralized public ledger. NFTs can be based on physical or digital artwork, music, collectibles or other digital assets. So how do NFTs fit within the existing art market landscape? Some may think that NFTs are a fad, but there are interesting implications for existing art and the future of the digital art world. 

NFTs and their marketplaces allow more artists to go straight to market and sell directly to buyers.

Players and Profits

For decades, there has been a well-worn path that artists and their artwork take, starting with galleries, which place the art with museums and collectors, followed by the secondary market, centered around auction houses. Art galleries and auction houses have been the market makers of the art world: where museums, collectors and artists go to buy and sell art. NFTs and their marketplaces disrupt this process by allowing more artists to go straight to market and sell directly to buyers.

NFTs also disrupt pricing of artwork and how galleries and artists get paid. Generally, the gallerist sets the price for works of art by new and emerging artists as art is created and initially sold. Then, after time, a secondary market may grow for a mature and seasoned artist’s work, enhancing liquidity. Under the traditional model, each time an artwork sells in the secondary market, the proceeds go to the then current owner. Thus, after the initial sale, the artist does not benefit from potential subsequent price increases. NFTs change this. NFT contracts may include clauses so artists get paid a royalty on each subsequent transaction, getting a piece of any potential upside. Big NFT exchanges, such as the OpenSea, typically honor these clauses while private sales between individuals are more of a gray area. The potential for a collapse of primary and secondary markets, given the fact that NFTs are freely launched and tradeable, likely means purchasers have greater impact in driving market prices.  

This democratization of the art marketplace means that more buyers and sellers from within and outside the traditional art world are transacting across multiple and distinct platforms, so it is more important than ever to be careful and informed before getting involved. 

Access and Affordability

NFTs and blockchain are already changing how people think about art and art ownership. NFTs typically reference some piece of artwork, either physical or digital. But ownership of an NFT does not also mean ownership of the physical art.  NFTs are sometimes sold with the physical art and sometimes not.

British artist Damien Hirst explored this question of ownership with his collection of 10,000 NFTs, "The Currency," in which each NFT corresponded to a unique physical artwork. Buyers first receive NFTs and then decide between the digital NFT or physical artwork. The other is destroyed.  Museums are also assessing how to utilize NFTs. Some museums have created NFTs of masterworks of art in their collections to generate proceeds for the restoration of the same masterworks. Museums are also contemplating NFTs as forms of art in their own right, bringing up new questions about how to buy, store and curate them.

NFTs may introduce a new class of art buyer. While ownership of art through art funds is not new, blockchain adds to these capabilities by making fractionalized art ownership more common and easier to buy and sell. Traditional art funds give each investor a proportional interest in a portfolio of art through a larger minimum investment. Blockchain helps facilitate the process of fractional art ownership, for one or more works, making it freely tradable on the secondary market for a smaller minimum investment.  

Blockchain helps facilitate the process of fractional art ownership, for one or more works, making it freely tradable on the secondary market for a smaller minimum investment.

Collectibles and Communities

NFTs are not just impacting fine art. Collectibles, like baseball cards or sentimental artifacts, lend themselves well to minting NFTs. The result can be a unique profile picture, online gaming items or sporting clips. An example of an early NFT in this category is NBA Top Shots, which allows fans to collect highlight basketball clips, like your favorite athlete dunking or making a jump shot.

An interesting characteristic of this category of NFTs is how they may also derive value from a large community of fans or collectors who reinforce one another’s tastes. NFTs are in effect creating new art communities and giving artists new, more direct ways to interact with their supporters. The Bored Ape Yacht Club, a collection of NFTs of cartoon apes that was launched by startup Yuga Labs in 2021, has made a splash in the worlds of art and business, raising millions and counting celebrities among its fans.  The “Club” allows members to access exclusive chat rooms and offers “airdropped” (new NFTs sent directly to a user’s wallet), and the ape pictures even act as a digital coat of arms for online profiles on social media.  Traditionally, galleries have created art communities; now NFTs facilitate the growth of virtual and online communities as well.  

Information Is Learned and Experience Is Earned

As with any new market or product, caution and prudence are warranted. The art market is not regulated and some may try to garner outsized gains at the expense of others. Also, with the rapid proliferation of competing platforms, it is wise to consider the limitations of siloed platforms, currencies and offerings. An art expert or art attorney can help navigate pricing and legal issues.

NFTs may be disrupting the art market, but the economics of taste and passion assets are alive and thriving in this new era of digital assets. Like in the traditional art market, new collectors are reinforcing values and tastes for artists, images, events and communities. 

This article appears in Insights & Outcomes, a magazine from Morgan Stanley Private Wealth Management providing industry insights, analysis and thinking from our Firm’s leading specialists.

Morgan Stanley Private Wealth Management