CVA Tokenizer Series, Pt. 1: Fine Art Tokenization

Transcript

[Music] crypto valley western chapter my name is pablo hodar and today i'm honored to have here with me chris elvi from arcades and also nicola masaya from storm chris chris is uh running a startup focus on the tokenization of art and he will explain us in just a minute what is about and really looking forward to it and then nicola is an expert on the legal field he's based in switzerland greece is also based in switzerland and today the idea is to bring to experts and to explain what

blockchain is and the applicability of blockchain to real projects because in the past weeks we have heard about cryptocurrencies and also blockchain technology but sometimes i feel that we don't really know what the technology is and how can we apply it to real projects so with that i'll pass it to chris who will explain us what arcades is what are you doing and how you are gonna revolutize the art industry yeah thanks pablo um first of all uh congratulations on the idea for a tokenization channel i think that's really needed and a lot of people are asking me and in the community but also

more and more outside of the traditional community what uh you know what are tokens what are we doing there and so i think it's great to to do that so as you may know the art the art industry is a traditional industry it is art itself is a uh is an asset class that is very highly sought after in in many ways uh it's a it's a pretty big market we 2018 we're talking about 65 billion dollars but one thing about the art market is that it's highly liquid art as an as an asset class is not liquid yes it you can transport art it is certainly more liquid or more transportable than let's say real estate but still a lot of

the art that we have today is either in private collections or even here in geneva many people don't know that it's one of the biggest art collections in fact in the freeport here in in geneva and a lot of arts just sits there and cannot be really traded easily now arcades has as its goal and as this business uh the tokenization of art so what we're doing is we're creating uh custom token uh tokens for uh artwork uh so that this art can be become a liquid a more liquid asset class

and it has a number of other advantages that we can uh perhaps discuss as well but the primary uh the primary reason we're doing is really to want to we want to go into the art market and really be a disruptive force there and bring a lot of dynamism new dynamics into the art market with that and open up the market also for a lot of services on platforms and so on so forth but for that you really need to go into the digital world and that's what we're that's what we're trying to do bridge that gap thank you definitely it's a really impressive business and i'm impressed how the revolution

of the digital transformation is arriving to every sector even in art that traditionally has been a quite close industry so i think uh you have a lot of to add by implementing this tokenization of art and and giving exposure of these pieces of art to to the pro market and with that uh i would like to ask you how are you gonna articulate all this organization how does your token work and also what's the connection between the digital world and the traditional world that's a great question i think that specifically that last part right um when you talk about tokens

uh they're representing something uh in the physical world in this case uh but it's not quite clear how how that works right especially when you talk about art versus let's say real estate real estate you can't really move a house uh away and and you know you can say this really refers to that particular building however a piece of art you could maybe think of just switching it out right and and what does the token refer to so what's really important is actually in order to create a token that's credible and trusted um you have to first create a very good and solid uh cyber physical system or you know people call it digital twins um which is something that is coming

from the um the internet of things uh world and it's well established so there is there's a lot of technology there's a lot of there's technology stacks for that uh already available so what we're what we're doing really is we're taking um iot technology on one side and uh tokenization technology blockchain technology on the other side and we're bringing this together in order to create those uh unique um you would say like super highly non-fungible tokens right so uh to to really be sure that we have an a unique reference uh on the actual work and there are several ways to do that and some of that is actually our core uh you know protected technology as well

right you just mentioned a non-fungible token which is a concept that is quite new so maybe uh nikola can help us uh with the definition of a non-fungible token and what is the implication from uh from a legal perspective so uh if you take as example bitcoin or other other main crypto assets they are all functional tokens so one big joint of course is uh is like one another non-fungible tokens are completely different every token is unique and represent in this case represents a unicode this is not a date so what does it mean

it doesn't mean that you cannot fractionate this token and sell some fractions of it but the token itself the when you have the 100 of it should correspond to for example in this case a digital asset correspond to a physical asset and so if you have an art piece of course an art piece is different from one another and you can represent it as an unfinishable token good so if i understand well a non-functional token is something that represents a unique uh asset or or or thing and cannot be replaced

by another thing so it has its own identifier so in that sense uh chris i assume that you are designing these non-functional tokens in order to guarantee security and transparency to your customers so could you please uh elaborate more on the advantages and huddles that you have found during your journey because i think when you started the regulation was one thing but now things are changing we have the european union and the sec already regulating and issuing some documents saying that they wanna have these crypto assets uh

circulating so how do you what's your experience on that yeah so yeah you're you're touching on a very important uh point so the two big the two big challenges in the field really for us are on the one side is really the like you say it's regulatory aspects and uh you know we i think nikola can fill us in later maybe a little bit about that because that's really key aspect um and it is true that the acceptance in the last two or three years has really it has fundamentally changed i mean the discussions are completely different people have heard about it they're interested in it um there's a lot to do in terms of education but uh it is it is something that that really changes uh regulation for us and in fact is not

it's not a dirty word i mean it is sometimes it can be burdensome but in the other side you really need um a perspective you know you need to in order to invest in order to uh for us for ourselves but also for investors you need to have some kind of uh predictability in the field right uh and i need to have i need to know what i can do with uh with my with my assets with my digitized assets in the future so that's a really really important thing and i'm very happy to see that we're moving forward i'm not happy with every aspect of it and sometimes it's a little heavy and so on but still it's it's in principle a good thing the other side that you also mentioned of course is the technolo the technology and um there is no unique there's not one

technology that uh that we're using the main part is to design specifically for uh use cases right and uh it's not just about tokenizing art uh for the sake of tokenizing or even for fraction ownership that's one of the use cases but it can in terms of advantages like you mentioned it can go beyond that it's the transparency is the traceability um but you can even go beyond that and you can implement uh oracle's into those uh tokens you can have uh uh information come in for instance pricing information of let's say comparable works that are being auctioned uh you can so the token can know about itself for instance it's value you

can have um if the if the artwork is in a museum you can have views literally uh in the uh fed in there um and so on so forth um what we're really also aiming for is to have services uh that can be offered to those tokens like insurance uh for instance in this in this case a very important thing um and your service then they're also adaptable right in the sense that if the artwork sits in a in a bunker uh it's it's less at risk if it's in a if it's being loaned on an exhibit it is more at risk and you could you know those kinds of adjustments can be made easily in this way so creating a marketplace there is also like one of the long-term

aims this is a huge transformation because having this token with such with this information is something that right now we cannot have so i think arcades in this case is making the market more transparent um it's giving more information to customers when it comes to to buy the asset and hence more protection which i think a every investor wants when they are investing or buying this type of assets and in terms of regulation i'll go back to you nicola what's the current situation here in switzerland uh and also in all

the jurisdictions like like linchstein that recently approved the blockchain act how they are recognizing this this token was the classification of the token okay so it's not really an easy question because regulation when it comes to crypto asset is quite a complex topic let's say that at international level it all started with aml and kyc so basically the problem that all jurisdiction posed in the first place is to identify the people involved in these in this market it only in a second moment they started regulated crypto assets themselves and started defining what's

their economical function and so also their juridical qualification uh switzerland actually it was one of the first countries to do so but not with the law just with the i with the guidelines published by finma which divided the crypto assets into three main categories that are the well-known payment tokens utility tokens and security tokens liechtenstein did something step forward let's say in january 2020 it enacted this blockchain act that is actually made for the purpose of tokenic reduction so with this uh this law provide a quite consistent

ligand framework for that organization of assets and also i can explain more about it but the point is to build a legal framework dedicated only to it switzerland for example in this moment did a different thing in the last part of january it will enter into force this new law adapting this this uh refrigeratory framework like all the regulatory framework adapting it to dlt so introducing the possibility of having on dlt for example the equity of a company debit obligations lichensteiner's approach was completely different

we are not introducing dlt and blockchain in every aspect of our legal framework but we are designing a legal framework specific for realty okay understood so basically countries are still wandering or investigating what the the technology is and they are not agree yet on the category they are going to give to to these tokens right there is discussion in this regard in particular if you look at the united states but let's say that countries also in other matters they

follow different uh regulatory approach the lichtenstein approach is one could be seen uh as preferable or not in with regard to others but uh is a matter of choice yeah if you want to be more valuable or not to a specific huge usage of dlt technology and crypto okay understood and regarding the mika regulation that everyone is talking about on crowdfunding and that is meant to create a new milestone on the crowdfunding because it's going to incorporate

this tokenization process what's your view on that and when can we expect to have it approved and if it's going to uh allow companies like maybe arcades in the future can do a crowdfunding campaign to raise funds to acquire this pain for instance so what's your your opinion on that okay let's say two things the the regulation is part of a digital finance package published by the european commission which involves not only the micro regulation but the narrow regulation which is on a pallet regime for

micro infrastructures using dlt technologies why i say this because medical regulation does not involve all the crypto assets that are uh financial instruments so basically it involves payment tokens and utility tokens then there is a separate proposal for security tokens so it creates a quite uh sound regulatory regime let's say for but it's basically regulating icos is imposing some obligation from the publication of the white paper on the information that should be inside the white paper and on there of course for the protection of consumers and investors

although using the word investors in this regard is a bit tricky because they are not investors from a legal point of view they're investors only in the case of security tokens regarding equity credit funding and card funding in general there is another european regulation that will enter into for soon to pursue equity crowdfunding campaigns in which you award the participants with crypto assets is possible in some european countries indeed it depends on the implementation of the of the european current funding regulation it depends like on how these regulations are implemented by

by the countries and also with regard to their civil uh civil law legal framework okay um thank you for for your insight on that i think it's really important to to understand the different the difference between a security token an equity token a payment token and for those of the on the in the audience that maybe after this podcast want to start their own company on on tokenization what could be the the best way to do it in order not to have problems in the future because recently we saw that the sec is going after ripple and it was uh a big new it got by

surprise i think the the crypto atmosphere and the price went down and now ripple is saying that they have an army of lawyers and they are gonna turn around the situation but the reality is that right now everyone a ripple has a bad reputation in that sense so we could see that also here in in europe that maybe we start our company classifying our tokens of like arcades maybe you classify your token as a equity token or utility token and then the regulators come and say no this is a security token what's the the way to prevent that of course for example if a country

follows their project which lamp switzerland follows you can have a dialogue with the regulator and address in the first place's problem so you can also obtain a document of the regulator in which the regulator set some conditions that you must respect in order not to be qualified as a as a security but the point is really to select the jurisdiction in which your project is more consistent with the legal framework so you have really to do a regulatory assessment of your business model and understand which jurisdiction fits best for your needs okay so it's more case-by-case

thing rather than having a standard uh framework or jurisdiction where to to start the project no at the current point in time you you must do this basically to assess what jurisdiction is better for your needs maybe in future this will change as for example the european union is changing his regulatory framework and probably also the u.s will but for now yeah you have to do in legal uh matters is called forum shop that you go in the forum which is best for you yeah okay so i i asked you these questions because i think

there are many entrepreneurs right now like like craze that when they are developing or or planning the future of the startup they find this type of officials and i think it's good to be advised by a professional lawyer like unicola and always be collaborating with the regulators in order to prevent potential problems in the future that may uh tear down the whole project and the the whole energy you have investing in the project on chris yeah absolutely i couldn't agree more and uh i think we have a need i mean this is a huge business as well for for law firms or for even disruptive new service uh

firms like uh you know nikola is also in in as i understand in a like a multi-service firm it's it's hard to these days if you have to go to 25 different people for each aspect of your business you're that's that's really that takes so much time and energy and frankly also money that it's very hard so you need to have people understand these things out of the box and they're kind of grown up with this in their professional life um and understands of the logic of the whole thing in terms of the uh the regulatory uh you know like it's true that of course if you have you have to find sort of your jurisdiction where your stuff actually works and

where you uh don't encounter those kinds of like i said before you need to have a little bit of a perspective um because i mean honestly how you're going to attract investment as well right if you're if that's not an answer if that question's not answered uh you're really you can have the best business model in the world but uh you know you're gonna you're gonna have problems attracting investment as well so that's a really big issue and uh for us also i mean we're looking at uh you know where do we need to passport the uh the company or part of it or depending on the use case you know what can we do locally what can we what should we do somewhere else and um it can be it can be frustrating honestly let's do something regarding uh repo and also the regulatory framework

so ripple has been a pioneer it come in the early days of this history let's say and so of course they when they launched your initiative there was no legal framework for them now the situation is different but also uh you have to consider the approach of sec is not really based on dialogue like finma they are more about like punishing basically what they found not consistent with the securities law of the united states in in a matter like the ldn blockchain in which the innovation and technological development is really the core

of it you is really the treatment such an approach in which you basically want to punish everyone pursuing an innovation they approached pursued by finma in my opinion is the best approach because you enhance innovation in your country and you also have a dialogue with companies that they can understand what they want to do and what they want to do i think that in the end nobody wants to break the law for the purpose of breaking the law the the project of ripple is legitimate maybe they reached some provisions but for sure was not the intention of their business mode

yeah i completely agree with you i think the sec is more um they allow projects to to be born and after several years if they see that is getting traction and is getting out of control then they come and punish you and that's the difference i think from from europe that is more collaborative in the sense that at the beginning they say no you cannot do it but if you try to collaborate with them and explain them your project and the implications then they start studying it and and they eventually allow you to to pursue your your project so in that sense i think in europe we have more opportunity to to develop these projects and

and to to create uh these these companies like arcades and just last question nicole and the interest of time i would like to to hear from you um what really a token represents because i've heard many times on different and if you speak from lawyers from different countries at different answers so a token represents the ownership of this piece of art or it incorporates the right of ownership what what does it really represents that's a tricky question because actually depends not every token is the same so you can have a token that incorporates the right of ownership for that art piece you have in the

studio but a crypto asset like bitcoin does not incorporate a claim or a right against anything so it's probably a new digital asset so crypto assets actually are composed by different things some some crypto assets are really new types of assets some others are simple like digital representation of rights or claims that already exist in current regulation for example the right of ownership of course is more than 2 000 years old it's come from a roman law and you can have it in a digital form in this sense tokenization is kind of a

innovative form of securitization okay so for all the audience again it depends on each project and on it on its token so before starting the the project it's good to to have this legal advice from professionals like like nicola in order to develop the right smart contract that represents the the right or incorporate the right or whatever it is of the asset you're trying to to tokenize and just to to close up and and finish with the with the first episode i would like to ask you chris at which stage arcades what are you looking

for and what's the future how do you see the future of of tokenization of art all right so yeah and in terms of arcades uh we are uh at the beginning um we have pretty much bootstrapped is invested our own money and uh a lot of time honestly and um so i think we've built a couple of uh prototypes we have uh i think we know the technology stack pretty well um and we're starting to protect uh some things as well that's uh that's an important piece as well here um because obviously uh you know this the idea in principle is is not uh it's not something you want you can you can

protect but you can protect the technology um we are very interested in in working with partners at this point uh to develop use cases uh to demonstrate um how this can actually work in the real world whether it's auction houses museums collectors that's sort of a very important step as well but we're also starting to look for some serious investment and maybe this can be even a partnering type of investment where we're looking at somebody who wants to develop something like that with us and then uh move it more it from there but we would like to you know once we have a bit of a you

know a couple of use cases that we have demonstrated well i think we're looking to grow uh pretty pretty aggressively and and you know also use that disruptive force in the market and speaking of the art market i think uh this is it it is still i think it's not i wouldn't say lagging behind and i think it certainly has shown the art market as well to you know to adapt into a digital sort of space but what it hasn't really it so it basically transformed in a sense that you know uh viewings are being done virtual uh virtually auctions are done virtually etc but it hasn't really fundamentally changed the mechanics and i think uh the challenge for the art market and

the art world is going to be that and i think there are players out there already uh who securitize uh art fractional ownership but in general they're building companies around and sell the shares in the company which you could denounce of course you could tokenize that but we're looking for something a little bit more native in a sense and really working with art uh it has to be said also that a lot of art today of course is digital art um to begin with so there is another another strand another component in there that's uh interesting and we're also of course interested in the um in sort of in in those in this borderline between the physical and digital and i think there's a lot a lot of things are going to happen there

and uh there's there's a lot of opportunity we're as far as we know one of the first in the field but there are others and i think it's going to be healthy to have really an ecosystem and some some healthy competition as well in this area that seems really interesting for me was something new because i'm not an expert on the art industry i didn't know many things about it so i'm glad to to hear that blockchain has also arrived to this industry i'm glad to to having you here today explaining what are you doing and how are contributing to this digital

revolution and thank you also nicola for being here today with us uh it's i think um is really important as i already said to be advised but by a legal advisor like you in in these early days of of the technology so i hope we continue in this line of development in terms of regulation and i hope someday we live in a completely digitalized and tokenized world where everyone can invest and decide where to put their money to work cool thank you very much thanks very much

i was the best for all of you and chris good luck with your fundraising and also with the project and i hope to to invest soon rather either in this uh picture or in you know in another one thank you very much thanks pablo thanks for the initiative and thank you everyone that has been watching us today in this first episode and i hope you like it and more to come thank you thank you great