I recently learned about the first ever sale of a non-fungible token (NFT) based purely on a digital work of art. It was sold by auction house Christie’s for a shockingly high total of US$69,346,250. That, quite frankly, is astounding.
This first digital artwork with a unique NFT is called EVERYDAYS: THE FIRST 5000 DAYS. It is a collage of digital pictures taken every single day for 13-and-a-half years by a digital artist known as Beeple.
I’ll briefly explain NFTs (yes, I also had to look them up). They’re a bit like one-of-a-kind trading cards on the blockchain. Every NFT is a unique token on the blockchain, and in the case of digital art, they’re designed to assign exclusive ownership of the work. The hope, for collectors, is that NFT art, like more traditional physical assets, will increase in value over time, and can one day be sold for a profit.
While I appreciate art, I’m no expert. What I find tricky to get my head around is how unique ownership of the EVERYDAYS NFT could be worth US$69 million. I’m not questioning the quality of Beeple’s work. Rather, I’m astonished by the value attributed to the NFT.
And given the distinct lack of insurance options available for NFT art at the moment, I’d hazard a guess that underwriters are also struggling to wrap their arms around the value of these crypto assets and the best ways to manage NFT risks.
As the blockchain is decentralised, by nature, figuring out the appropriate insured value of sold NFT artwork is immensely challenging. You can’t touch it. It’s totally intangible. No fine art markets are even entertaining insuring NFT artwork at this point, unless there is a physical item associated with the asset.
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Back to Beeple – he seems to know what he’s doing. In June 2020, THE COMPLETE MF COLLECTION by Beeple, was sold on Nifty Gateway for US$777,777.77. This NFT was unique in that it contained a “physical artifact of the NFT featuring a signed, numbered titanium backplate,” as well as a lock of Beeple’s hair. The lock of hair, in this case, was eligible for coverage. Once again … mind blown!
Technically, the owner of an NFT is the only person with the private encryption key for the asset, and as the blockchain is well-known for its strong security, really the only foreseeable threat would be a very sophisticated cyber incident, where a criminal somehow gains access to the encryption key and monetises the NFT for their own gain.
While there are potential coverage options for NFTs on cyber policies today, there are still a million questions that need answering, including how and where collectors, galleries and auction houses are actually placing custody of their NFT art, as well as multiple third-party liability grey areas.
Now, you might be wondering, why the spiel about NFT art? Apart from it being super cool, this trend raises interesting questions for the insurance industry.
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What other insurable assets will suddenly find their way on to the blockchain? Is the insurance industry keeping pace with the evolution of blockchain technology and cryptocurrencies? Or has the industry already fallen behind? What other intangible assets will need to be covered next? And who is going to take on insuring these assets?
Those questions, although challenging, provide an exciting opportunity for the insurance industry to: 1) stay relevant, 2) exercise innovation and thought-leadership, and 3) shore up what’s looking like the next big thing in the digital asset landscape.
The fact that a piece of blockchain-based artwork has sold for US$69 million has placed NFTs well and truly on the radar. Now, the race is on for insurers to deliver solutions that will drive the digital asset wave.