In the 17th century, the Dutch Republic (present day Netherlands) was one of the world’s leading economies. The country ranked among the top financial powerhouses of the day, boasting of the highest per capita income in the entire world from about 120 years, from 1600 to 1720. (The Dutch financial system was, in fact, the most advanced of its time.)
Then, circa 1630, something odd happened. The price of a now common flower, the tulip, began to rise dramatically, far beyond what would be considered its intrinsic (or real) value. Dutch people, known for their solid and advanced financial system, suddenly found themselves caught up in a frenzy of buying and selling tulip bulbs, in the hope of turning a massive profit.
The hysteria spread rapidly around the country. Tulips became coveted items, and symbols of status. Growers began cultivating tulips apace. Some of the more exotic varieties, the ones with the wildest color patterns, could fetch as much as 10 times the yearly salary of a skilled worker. Some accounts speak of people selling land and prized possessions just to speculate on the tulip market. The general feeling was that the passion for tulips would last forever.
It didn’t. The end, when it came, was as swift as the beginning. By the end of the year 1637, people could no longer afford to pay the extravagant asking prices for some of most sought-after tulips. (One such variety, the rare ‘broken tulip’ variation, with a multicolored pattern caused by specific strain of the mosaic virus, could fetch thousands of guilders.) Prices quickly fell off a financial cliff. People who had bought tulips on credit were left holding literally a bunch of flowers with the face value of, well, flowers. Financial ruin became a stark reality for many.
Many analysts believe that the current hype surrounding non-fungible tokens (NFTs) bears more than a passing resemblance to the tulip mania. It is easy to see why. An NFT is a digital file with no intrinsic value in and of itself. NFTs do not even exist in physical form. Owners have intangible pieces of digital information stored on a blockchain. Yet, the NFT Everydays: The First 5000 Days, by digital artist Beeple, fetched almost $70m when it was auctioned at Christie’s earlier this year. The race to the NFT top (or bottom, depending on your point of view, had begun.)
When identity fails: The Rosales affair
Buying a tulip (or any other flower, for that matter) is relatively straightforward. You see what you get. There is no authorship, or certification of provenance. Buying art -digital art, in this case-, is quite another.
Art lovers, and collectors in particular, face constant uncertainty about the true origin of their most coveted pieces. Counterfeit art is rife. The FBI even has a dedicated branch, the Art Crimes Unit, specifically tasked with dealing with this type of fraud.
Identity has been a pervasive issue in the art world for decades. Determining the authenticity of a piece of art is quite a challenge, and quite crucial, too, since the identity of the author often determines the price.
There have been some high-profile identity-related scams in recent decades. From 1994 to 2009, a former art dealer by the name of Glafira Rosales, conned collectors out of an astonishing $81m. Operating out of Long Island in New York, Rosales had been supplying dozens of paintings to the then renowned M. Knoedler & Co., an art dealership in New York. The paintings, purportedly from well-known artists, including Robert Motherwell, Jackson Pollock, and Mark Rothko, had in fact been done by a Chinese forger named Pei-Shen Qian. Qian, working inside a small garage in the borough of Queens in New York, imitated the true artist’s style (quite well, as it turned out), and then aged the pieces using tea or dirt. Qian sold the forged paintings to Rosales for a few thousand dollars, and she sold them on to Knoedler (and other buyers) for millions. The illusion worked for about 15 years. In total, Rosales sold 63 pieces. Rosales was indicted in 2014 on charges of wire fraud, money laundering, and tax evasion. She did some jail time and was sentenced to pay back the $81m she conned out of art collectors. (Rosales was, in fact, the only person charged in the whole affair. The forger, Qian, is believed to have fled to China and his whereabouts remain unknown.)
Safeguarding the NFT marketplace with digital identity
The Rosales fraud case, while almost epic in terms of the money involved and the length of time that it went on undetected, is hardly isolated. The NFT marketplace is awash with digital representations of pretty much anything. The sheer amount of NFTs being produced has become a magnet for people looking to strike it rich, some by legal means, some on the wrong side of the law.
In this burgeoning market, the requirement to verify the authenticity of a particular art token is paramount. In this context, let’s see how NFT marketplaces can benefit from the implementation of digital identity.
Provenance, as we have seen, is one of the most difficult aspects of the art world. NFTs raise even further doubts about authenticity, because in the digital world, who can really tell who’s behind the keyboard, or if the link to a particular internet address is the real piece, or a copy of it. The solution to this conundrum is the integration of NFTs with Self-sovereign identity (SSI). By linking NFTs with a digital ID, it becomes possible to trace any one art piece, and verify the piece’s authenticity and legitimate author. This could be done through QR codes or NFC labels, for example. Any of these tamper-proof methods would certify a piece and prevent its cloning. Art dealerships checking these codes as part of their Know-your-customer (KYC) process would be able to immediately determine provenance and authorship. The Glafira Rosales fraud could never happen again.
NFTs remain hard to classify with any degree of accuracy. Are they just a craze, a fad, a bunch of fashionable items that, just like the tulips in 1737, will vanish from the public eye as quickly as they appeared? Or could they perhaps represent the start of an entirely new trend of modern art? No one can be quite sure just yet. Give it another year or so, perhaps, and the answer might have become apparent by then.
For now, NFTs -and the technology that supports them- remain in the public eye, and when combined with digital identity, we might just see the establishment of a solid, secure, and vibrant marketplace where everyone can trade with confidence.