Tokenization of artworks and collectibles

A famous painting costs more than almost anyone can pay. The idea behind tokenization is to split that painting into thousands of digital parts and sell each part separately. You do not take the work home, but you hold, in theory, a slice of its value.

The idea also applies to collectibles: watches, classic cars, rare wines, trading cards, stickers, design pieces. This article explains what such a token legally represents, who regulates the offering and which risks are specific to this type of asset.

If you are not yet familiar with the general concept, start with what asset tokenization is and the logic of fractional ownership.

Two different products with the same name

When people talk about “tokenizing art”, there are at least two distinct things.

The first is digital-native art: a work that exists as a file and is registered on a blockchain through an NFT. An NFT (non-fungible token) is a unique token that is not interchangeable with another identical one, unlike a currency. The NFT works as a record of who holds that item on the network.

The second is tokenized physical art: a real painting, sculpture or collectible, stored somewhere, whose economic rights are divided into tokens. Here the token is only the representation. The value lies in an object that continues to exist outside the blockchain.

This article deals mainly with the second case, which is closest to an investment. But both share one rule: what the token is worth depends on the rights it actually confers.

What you buy when you buy the token

In a typical fractional physical art model, a company acquires the work, hires storage, issues the tokens and promises to distribute to holders the proceeds of a future sale of the piece. The holder does not have the work. They have a claim against whoever structured the deal.

This has practical consequences. In Brazil, ownership of movable property does not transfer through the contract alone: the Civil Code (art. 1,267) says it transfers by tradição, that is, by delivery of the thing. The law allows forms of delivery without physical handover, such as when the seller assigns to the buyer the right to claim the thing from a third party who holds it. This kind of arrangement is what usually underpins the custody of an artwork.

That is why the question that matters is not “which blockchain is the token on”, but:

• who the registered owner of the work is (the company, a separate vehicle, a fund);
• who stores it, where, with what insurance and under what contract;
• what happens to the piece if the company that issued the tokens goes bankrupt;
• who decides when and for how much the work will be sold;
• how the sale proceeds reach the token holders.

If these answers are not in a clear document, the token gives no security at all over the object. The difference between the digital record and the property right is the same one discussed in token versus property title, applied to movable property.

Copyright does not come with it

A point rarely explained in offerings: owning a work, or a fraction of it, is not owning the copyright.

Brazil’s Copyright Law (Law No. 9,610/1998, art. 77) provides that, unless otherwise agreed, the author of a work of visual art who sells the object transfers the right to exhibit it, but not the right to reproduce it. In other words, whoever buys the painting cannot, on that basis, print T-shirts, license the image or create derivative products.

The same law provides, in art. 38, for the resale right (direito de sequência): the author has an inalienable right to receive at least 5% of the price increase on each resale of an original work of art. In a model in which the work is bought and sold, this goes into the calculation of the result.

With digital art NFTs, the confusion is even more common. Holding the NFT does not mean having the right to reproduce the image, unless the project’s license expressly says so.

When the token becomes a security

The Brazilian rule looks at the token’s function, not its name. CVM Guidance Opinion No. 40, from 2022, places NFTs in the category of “asset-referenced token” and states that this type of token “may or may not be a security”, depending on the economic substance of the rights it confers. (The CVM is Brazil’s securities regulator.)

The central criterion is the collective investment contract, provided for in art. 2, item IX, of Law No. 6,385/1976: securities or contracts offered to the public that generate a right of participation, partnership or remuneration, with returns that come from the efforts of the entrepreneur or third parties.

Applied to art, the reasoning goes like this:

• An NFT sold as a collectible, with no promise of return, tends to fall outside the capital markets. It looks more like buying an object.
• A fraction of a physical work sold with the idea of profiting when the managing company resells the piece has the elements of a collective investment: many people, pooled money, expectation of gain and a result that depends on someone else’s work (choosing the work, storing it, deciding on the sale).

Opinion 40 also notes that classification as a security does not depend on a prior statement by the CVM. Whoever makes the offering must carry out this analysis beforehand. If the token is a security, the offering must follow the registration or exemption rules, such as the crowdfunding regime. This general framework is detailed in regulatory limits of tokenization.

What other regulators say

United States. In August 2023, the SEC, the US capital markets regulator, charged the company Impact Theory with making an unregistered offering of NFTs. According to the SEC, the company sold about US$ 30 million in NFTs and encouraged buyers to see them as an investment that would appreciate with the success of the business. The company agreed to the settlement without admitting or denying the findings. The case did not involve physical art, but it shows the same criterion: what counts is the promise made to the buyer.

European Union. The European crypto-asset regulation, MiCA (see what MiCA is), excludes from its scope crypto-assets that are “unique and not fungible”, as well as those that qualify as financial instruments, which follow other legislation. But the regulation’s recitals make two caveats: fractions of a unique asset should not be considered unique, and issuance in a large series indicates fungibility. In practice, splitting a work into identical tokens takes the product out of the exception granted to NFTs.

Money laundering: a market already under watch

Art is one of the sectors traditionally flagged as a money laundering risk, because prices are subjective and transactions can be private. In Brazil, Law No. 9,613/1998 (art. 9, XI) includes among those required to identify customers and report suspicious transactions the people who trade in art objects and antiques.

Putting the work on a blockchain does not remove this obligation. Serious platforms ask for buyer identification. Be wary of offerings that skip any verification. The rules on the crypto side are in anti-money laundering on crypto platforms.

Risks specific to tokenized art

In addition to the risks of any tokenization, explained in why tokenizing an asset does not eliminate risk, there are those specific to this market:

• Subjective valuation. An artwork does not generate income or have a daily price. The price depends on appraisals, comparable auctions and market taste. The token’s issue price may not match what someone would pay for the piece.
• Liquidity. The token can only be resold if there is an interested buyer and an environment that allows trading. The return generally depends on the whole work being sold, on a timeline you do not control.
• Authenticity and provenance. Forgery, dubious origin or ownership disputes destroy the value of the piece. The token does not solve this; the work’s documentation does.
• Physical custody. Theft, damage, lack of insurance or the custodian’s bankruptcy affect the object, not the record on the network.
• Costs. Storage, insurance, restoration, platform fees and the resale right reduce what is left to distribute.
• Total loss. If the legal structure fails or the work turns out to be fake, the token may be worth nothing.

Questions to ask before any offering

• Does the offering document say who the legal owner of the work is and whether it is separate from the company’s assets?
• Is there an authenticity and valuation report, by whom and when?
• Where is the work stored, with what insurance, and who pays these costs?
• What rights does the token give: part of the sale price, a vote on the decision to sell, nothing beyond a record?
• Is the offering registered with or exempt from registration at the CVM, and under which rule?
• Are image reproduction rights included? Normally, they are not.

What to take from this article

An artwork token is a record of rights, not the work. What gives it value is the legal chain behind it: who owns it, who stores it, who sells it and how the money comes back. The copyright stays with the artist, unless a contract says otherwise. And when the offering promises profit coming from someone else’s management, it enters the CVM’s field. In an asset with a subjective price and little liquidity, the right question is not how much the work might be worth, but what you will have in hand if things go wrong.