TL;DR

• Exchanges exist for trading assets other than traditional securities such as stock, the most notable example perhaps being exchanges dedicated to trading digital assets (i.e. crypto).
• Art is a well established asset class amongst a certain audience of investors.
• Existing options for trading art shares exist, but hardly inspire speculation or active trading.
• A specialised exchange that makes it easy to both list, as well as trade art could perhaps see enough volume to sustain itself.

The Cheap Idea: an Art Exchange

The biggest problems with sensible investing are that it is excruciatingly boring, takes discipline, and is a terribly slow way to get rich. To sell investment products, you first have to convince people to think in terms of decades, that bubbles will pop, and that saving works. Speculation on the other hand is infinitely more exciting; to get people to speculate, you just have to show them one example of a twenty-year-old in a Ferrari, and masses will flock your way. Why not provide one more speculative instrument to the masses?

One solution exists for trading exposure to artworks' value on a financial exchange: Masterworks, a somewhat complicated operation that purchases artworks at auction, secures them in a Cayman Islands portfolio company, and creates a Delaware LLC issuer filing an offering of ordinary shares, which can then be traded. Naturally, any endeavour mentioning Cayman Islands and Delaware LLC in the same sentence is a recipe for greatness, but this particular setup has drawbacks when it comes to our ambition to inspire speculation. While the shares in Masterworks' LLCs can technically be traded, the only real reason to do so is when a holder is experiencing cash flow issues, and needs to liquidate. In all other cases, blue chip art ownership is a buy and hold activity, until the arwork itself is sold. To inspire more speculation, we have to offer shares that can be sold as "high growth" opportunities. Upcoming artists, social media famous amateurs, AI artists, etc. Anything that has to be judged on non-financial metrics, for lack of solid foundations makes for great speculative instruments. The challenge with these, is that they are more tricky to get onto a reputable exchange (for all the right reasons).

But, instead, we could just be the exchange. Our big idea is to create a digital financial exchange for speculating in art.

How Would This Work?

On our exchange:

• Any owner of art pieces can offer publicly traded shares to revenue generated by the art piece, including but not limited to revenue from its eventual sale.
• Members of the general public can buy or sell these shares on a digital exchange after registration and depositing a cash balance.

This is similar to how most cryptocurrency exchanges work, where individuals deal with the exchange directly to place their orders (as opposed to most stock exchanges where a broker is involved). Needless to say, being the exchange is much more interesting than just listing the art pieces, because instead of just a mangement fee, our exchange profits from any trading whatsoever. And there are good reasons for individuals to trade on our exchange, such as:

• support upcoming artists or galleries
• make bets on the near term public popularity of art pieces, showcasing your talent as a true art connoisseur
• the underwriting art is real; this is an important departure from the premise of many crypto instruments
• art is nice to look at; users can have a portfolio page showing their well-rounded art investment taste (each image size adjusted to the share in their portfolio)

If you do not believe any of the above would be reasons for people to trade art shares, remember that people also pay real money for Pokémon cards, for the sake of showing them to others.

Why Is It Hard?

Exchanges have an annoying cold start problem, because a certain level of trading volume is required in order to attract more trading volume, both from institutions as well as retail traders. The biggest challenge with launching this, is marketing, funding initial trading, recruiting artists or galleries willing to list their pieces, and getting the general public excited about yet another speculative instrument.

On top of that, there are some additional minor hurdles.

Art IPO

When listing pieces on the exchange, offering an initial block of shares, a somewhat reassuring legal framework has to be established. New pieces would need to come with a lightweight form of prospectus dealing with concerns like current established title to the artwork, shareholders priority in case of liquidity events, what constitutes revenue generated by the art piece (if any other than the final sale), possible shareholder voting rights (e.g. can shareholders veto a sale if they deem the price too low), etc. The exchange would require a transparent, and publicly verifiable due dilligence process for accepting new listings, which inspires confidence in the orderly, and fair execution of the proposed transactions down the line. But other than that, the exchange would not concern itself with the quality of the work itself; that is a matter of taste, and ideally a matter of speculation… Let the market figure it out.

Traders Trading

Exchanges require ongoing retail trading volume, which comes from speculation. Speculation is inspired by events or expected events related to shares, or even just by plain hype. Which is why our exchange must provide users with plenty of easy to use tools to showcase, and share their portfolio with their online networks and friends. This may even make for attractive content for them, since, you know, art is pretty. Or intriguing. Or funny. Or conveys a deeper message. And what better way to let your online following know you support said message, than by showcasing your portfolio that you paid real money for. It would be especially useful if one or more celebrities did such a thing.

Liquidity

There can be no suitable exchange for speculation without market makers. To bootstrap this successfully, there is a need for a trading function adjacent to the exchange to provide liquidity for people either craving, or dumping their - potentially celebrity endorsed - art shares. This may start small, but grows as retail traffic grows. Luckily, with the growth of retail volume, the opportunity to profit from the market making function also improves.

Regulation

Offering digital certificates, or tokens representing value in exchange for fiat currency is a licensed activity, which is minimally covered by the EMI license. While not impossible, it takes effort, money, and time to obtain such a license.

Why Don't I Do This?

I have a hard time estimating the required funding to actually launch the above, but apart from the money, I expect making a success out of this idea requires a diverse network of individuals willing to help in various areas, such as building the legal framework, committing to an initial supply of listed artworks, providing endorsements for art speculation targeted at easily distracted audiences, and committing to an initial series of high growth transactions. Remember we need a twenty-something with a Ferrari for this to fly.