The sale of digital artwork represented by non-fungible tokens — essentially a point on a digital ledger or blockchain that confirms ownership of an original — is gaining traction in the art world, attracting the attention of regulators and posing unique risk management questions for auction houses, dealers and others involved in the transactions.
In March, Christie’s auction house sold the digital artwork “Everydays: The First 5000 Days,” by Mike Winkelmann, who goes by the name Beeple, for an eye-popping $69 million. The sale heightened the profile of the emerging art format.
Other NFT art includes videos and recordings. The assets are often bought and sold using the cryptocurrency ether on the Ethereum blockchain.
Uncertainties concerning the commercial exposures created by such digital art sales are rapidly becoming the subject of discussions in the insurance industry.
“I’ve been having discussions with one of our clients on NFTs and what that entails,” said David Ktshozyan, a Los Angeles-based senior associate with law firm Clyde & Co.
“One of the things that really spurred interest in it was the $69 million sale in March at Christie’s,” said Mr. Ktshozyan, who represents insurers.
Traditional art and auction houses face very different risks than are present with digital art, he said.
“Typically, in a traditional art setting, one is worried about physical damage to a physical piece of art,” in transit, at auction, possibly from mishandling, Mr. Ktshozyan said.
With NFTs “you don’t have those same concerns and you don’t have those same risks because everything is on the internet,” he said.
Jennifer Schipf, global chief underwriting officer of fine art and specie in New York for Axa XL, a unit of Axa SA, said she has had “a handful” of inquiries from customers seeking to insure digital assets, including NFTs and bitcoin collections.
Ms. Schipf said the specie segment of Axa XL’s business includes cryptocurrencies and a bit of cold storage involving bitcoin, “things that are not art-related but are more like valuable commodities.” Coverage for NFTs may ultimately involve some sort of hybrid product with cyber, fine art and potentially other components, she said.
Fine art insurance policies are designed to cover physical loss or damage only. If a work of art, such as an NFT, has no physical form, it cannot suffer such damage, said Joe Dunn, president and CEO, Huntington T. Block Insurance Agency Inc., a Washington-based fine art unit of Aon PLC. It could be “a bit of a stretch to come up with a hypothetical claim scenario to which a traditional fine art insurance policy would favorably respond,” he said.
For example, if a collector lost the encryption key or the password to a hard drive containing the NFT artwork, the digital file would still exist and the loss would therefore be financial and not physical, Mr. Dunn said.
There may, however, be significant risk management concerns for those involved in the sale of NFTs.
“The first place you’re going to look, but not the only place, is your errors and omissions insurance — is there anything from a coverage exclusion standpoint that would preclude coverage?” said Paul King, senior vice president, executive and professional risk solutions national advisor, for USI Insurance Services Inc., based in Dallas.
“I think there’s certainly an E&O component to it,” but policyholders should confirm if their existing policy language is broad enough or doesn’t directly or indirectly exclude advising on the sale of digital assets, said Jackie Quintal, who heads up Marsh LLC’s U.S. digital asset group in New York.