NFTs: Is there a potential insurance solution?

NFTs: Is there a potential insurance solution?

The art market has seen a monumental shift in the last year. As museums, galleries and auction houses lie virtually dormant, the market has pivoted to online spaces. This is not confined to the lower levels where we have seen a surge of sales over social media platforms like Instagram; established galleries are now holding virtual exhibitions, and auction houses have been hosting online bidding.

However, a few weeks ago a watershed moment sent a ripple through the art market. Christie’s sold an NFT (‘Non-Fungible Tokens’) attached to a digital artwork for just over USD 69,346,250[1]. The work is by digital artist and self-proclaimed ‘political cartoonist’ Beeple, titled ‘The First 5000 Days’. For the first time, Christie’s accepted payment in the cryptocurrency Ethereum, expanding its outreach to a whole new group of online buyers. In the last two minutes of auction, the price jumped from USD 30 million to USD 69 million (worth of Ethereum) after a flurry of tense online bidding.

NFTs can be attached to a piece of digital art (or other digital media like a tweet or a video clip) to provide proof of authenticity and original ownership. They exist online within a blockchain, the same technology that holds cryptocurrencies. Of course this digital artwork can be copied and reproduced, but the NFT that attaches to the original proves authenticity, and can be bought and sold as the original. NFTs give power to the artist as they can keep a track on the sale of their art. Every time Beeple’s NFT gets sold on, he earns a commission.

This is not a new phenomenon; trading of NFTs attached to artworks has already been happening through websites like ‘Makersplace’ and ‘Nifty Gateway’. However the involvement of Christie’s, a major auction house, and the unprecedented price, has caused considerable comment. No one knows the longevity of this or whether NFTs will hold their value in the future, but with big name artists like Damien Hirst reportedly planning to use them, this could take on a new dimension.

The big question is; is an NFT insurable? The NFT market is immature and possibly very volatile. The Insurance market is only just starting to form views around the potential exposure. Cyber insurance policies are commonly based around securing stolen data; some of the biggest claims recently have been for ransomware (the policies covering PR and legal costs, recovery etc.), not Cryptocurrencies. The predominant Cryptocurrency insurance product currently available in the market is for third party professional cold storage insurance, which is the insurance of digital assets held by custodian centres. These centres store code on behalf of cryptocurrency owners. The perils these insurance policies protect against include physical loss of the codes, (i.e. if the hard drive suffers damage in a fire), and collusion, (i.e. if an employee works with a third party to hack the system). Nevertheless, even though these policies exist, they are unlikely to cover the full value of the currency attached to the codes held by the custodian centre, partly due to insurers’ lack of appetite. This type of crypto exposure has only come into the market in the past few years, and there are only a few capacity providers who are beginning to feel comfortable offering coverage.

An NFT is separate to the artwork, and so debatably could fall into the category of a Specie risk as an item of high value. However, from this standpoint there are complications. Firstly, without a trading history or grounding institutional representation, there would be issues over its valuation. Are all Beeple’s NFT artworks inflated in value just because one sold for that price, and if so, to what extent? Who is to say that someone else will pay USD 69 million for that piece? If the market for NFT artwork is transient, will it hold its value?

Who would need the insurance? Commercial dealers like Christie’s, or digital marketplaces like ‘Makersplace’ don’t hold the token, they just provide a platform for its sale, so they wouldn’t need insurance in the same way as if they were holding the physical art, and taking liability for damage while in their custody.  Currently a personal collector seeking insurance on a first loss basis may struggle to insure their NFT. The volatility and infancy of the NFT market means it is unlikely there is an established insurance solution yet.

Ultimately all this becomes academic if the buyer of the NFT believes the blockchain to be not hackable, which questions the need for insurance at all. If this is the case then the work cannot be stolen, and within the crypto world it is safe from physical loss or damage in the form of fire, flood etc. Unless there is a piece of physical hardware needed to access the NFT that can be lost or stolen, what is the potential risk of loss? And even if it is possible to hack into the blockchain (a theory heavily debated) is it possible to steal an NFT undetected and sell it within the blockchain when it has a digital footprint back to the artist?

At the moment there are a lot more questions then there are answers surrounding NFTs and their future. Do they change the fundamental meaning of art and the value of the digital world over the real one? Will we see an emergence of new millennial online buyers? Will this new internet culture make a meaningful contribution to an intellectual art historical discourse, or will it just be a fad.

From an insurance perspective, is there a market to insure something without a risk of loss?  Arguably if you are not insuring a tangible piece of art, it may not be the Fine Art and Specie Market’s responsibility in the first place. That being said, usually clients who spend USD 69 million on assets, want some sort of insurance in place.

Although insurers are not yet in a position to be writing an NFT sublimit into your private collector policy, that doesn’t mean they won’t be in the future. We are keeping a keen eye on how the insurance market adapts, and are working with the market to drive this into the future. If an insurance solution becomes available, you will hear about it from us.

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Honor Palmer-Tomkinson

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