Bitcoin and Basquiat: A Lesson In Perspective

The striking similarities between the markets for art and crypto, and the decidedly different approaches to regulating them.

Picture an asset with no real intrinsic value. This asset is both highly speculative and highly volatile—its price can fluctuate widely, even from one day to the next. The asset is susceptible to market frenzies, manias, and bubbles. Because of its particular characteristics, proponents of the asset tout its utility as a store of value. Detractors, on the other hand, argue that the market for this asset is devoid of transparency and proper regulatory oversight, which results in the asset being exploited by corrupt foreign actors and criminals to commit crimes like money laundering.

If you ventured to guess the identity of this mystery asset, in light of the well-covered events that have unfolded in recent memory, you might have concluded that it was cryptocurrency. If you did, you’d be half right. The other correct answer, the one that isn’t so immediately obvious, is art—specifically, fine art, like paintings.

While the art market hasn’t received nearly as much media attention as crypto in the last few years, it really should. Take the most recent scandal to rock the world of high-class art:

A dramatic legal battle between two billionaires—Swiss dealer Yves Bouvier and Russian oligarch Dmitry Rybolovlev—that played out in jurisdictions across the world has finally come to an end.

According to statements from representatives for each man, and confirmed by a statement from Swiss prosecutors, the claims that stem from an alleged $1 billion overcharge on 38 blue-chip art transactions worth over $2 billion, have finally been settled. […]

At the center of the dispute, which began eight years ago after Rybolovlev accused Bouvier of flipping the art in the purchases to him at a mark up, despite Rybolovlev’s belief that Bouvier was acting as his agent and advisor, is the question of what disclosures art dealers must make to clients. Bouvier has said in court papers he was not an agent or advisor in the deals and was free to charge clients what he wanted. 

Bouvier was arrested on criminal charges in Monaco in early 2015.

But Rybolovlev’s efforts to prosecute Bouvier there devolved into a scandal dubbed “Monaco-gate,” when it emerged that Rybolovlev had allegedly bribed police officials with lavish gifts in exchange for pursuing criminal charges against Bouvier. Similar attempts to detain or prosecute Bouvier in Singapore were also unsuccessful.

Even though Bouvier and Rybolovlev have now settled their decade-long legal battle, Rybolovlev is still going after the auction house Sotheby’s for their role in (allegedly) aiding Bouvier in defrauding him.

Basically, Bouvier, who is considered one of the world’s preeminent art dealers, blurred the line between serving as an art “broker”—an agent acting as an intermediary to facilitate a transaction between a buyer and a seller—and an art “dealer”—buying and selling art on his own account. In the heavily regulated financial industry, the difference is clear and there are well-established rules that govern how brokers and dealers must operate and, most importantly, how they should disclose their status as a broker or dealer. And while Bouvier was certainly blurring the line between the two, it’s fairly clear that he wasn’t doing much of anything different than the rest of the art world.

One of the more jarring examples of Bouvier’s conduct was when he sold Leonardo da Vinci’s Salvatore Mundi to Rybolovlev:

Bouvier acquired the work for $83 million in 2013 and then immediately sold it to Rybolovlev for $127 million. In 2017, Rybolovlev auctioned the work at Christie’s, where it went for a stunning $450 million—becoming the most expensive work ever sold at auction. (It was reportedly bought by Saudi Arabian royal Mohammed bin Salman Al Saud.)

Talk about the Greater Fool.

But this wasn’t just a careless lapse in disclosure, either. Bouvier would sometimes concoct fake third-party purchasers to drive up the price of art he was trying to sell to Rybolovlev:

For example, in 2012, Bouvier told Rybolovlev’s aide that the sellers of a Klimt, “Water Serpents II,” were looking for $190 million, but that he thought he could “twist them to get 185,” according to court papers.

“These negotiations did not happen,” Judge Furman wrote in his March opinion.

On the same day in 2012 that Bouvier wrote that email, one of his companies bought the painting for $126 million. Two days later, he invoiced Rybolovlev for $183.8 million.

The case highlights the sort of nefarious conduct that occurs even amongst the most elite and “reputable” players in the art industry—an industry now worth more than half a trillion dollars globally. It also bears a striking resemblance to one of SEC Commissioner Caroline Crenshaw’s primary concerns about crypto, which she recently expressed in her dissent from the SEC’s January 10th approval of eleven Bitcoin ETFs:

One form of manipulation that appears to be pervasive in the crypto markets (and specifically bitcoin markets), is wash trading, a practice whereby traders seek to increase the appearance of high trading interest by both selling and buying the same products at the same time, often driving up prices, and then selling to unwitting third party market participants at inflated values.

Developed art markets date back to the 17th century. But, despite the longstanding prevalence of buying and selling art, the amount of money being exchanged, and the historical significance that some pieces can carry, there’s surprisingly little regulatory oversight in today’s art market:

When you sell your home the paperwork details the sale, including your name, and the title search lists the names of the people who owned the property before you. But when someone sells an artwork at auction — even something worth $100 million — the identity is typically concealed.

Oh, the paperwork might identify the work as coming from “a European collection.” But the buyer usually has no clue with whom he or she is really dealing. Sometimes, surprisingly, even the auction house may not know who the seller is.

Secrecy has long been central to the art world. Anonymity protects privacy, adds mystique and cuts the taint of crass commerce from such transactions. […]

“The art market is an ideal playing ground for money laundering,” said Thomas Christ, a board member of the Basel Institute on Governance, a Swiss nonprofit that has studied the issue.

This reality was brought to the fore back in 2018, when Malaysian financier Jho Lo was indicted for his role in embezzling billions from Malaysia’s economic development fund, 1MDB, and using $137 million of it to buy high-end paintings by artists like Van Gogh, Basquiat, and Monet.

Short of the blatantly illegal, the art market is also rife with morally dubious conduct that toes the line of legality. Take the use of freeports, which Bouvier himself is a leading provider of. Fundamentally, freeports are storage facilities. But, in the art world, freeports are leveraged by wealthy art owners and dealers to take advantage of international tax laws that were established to avoid repeat taxation on items being shipped around the world. These laws exempt items “in transit” from being taxed each time they enter a new country until they reach their final destination. By parking multi-million dollar pieces in a freeport in Geneva or Singapore and claiming that the item remains “in transit” for what is effectively an indefinite period of time, art investors can save millions in taxes before flipping the pieces to someone else for more money.

In fact, in 2022, the US Treasury Department even commissioned a study on crime in the art market, which (after substantially lobbying from major players in the art world) concluded, “We have found that while certain aspects of the high-value art market are vulnerable to money laundering, it’s often the case that there are larger underlying issues at play, like the abuse of shell companies or the participation of complicit professionals, so we are tackling those first.”

Given the characteristics of art as an asset (no intrinsic value, prone to speculation, bubbles, fads, and market frenzy, etc.) and its propensity to attract about $6 billion worth of criminal activity annually, why do industry leaders like JP Morgan’s Jamie Dimon slam crypto as an asset that “doesn't have value” with the only “actual use cases [being] sex trafficking, tax avoidance, money laundering, terrorism financing,” while also boasting an art collection worth nearly $1 billion? When SEC Chair Gary Gensler says, “[It’s] primarily a speculative, volatile asset that’s also used for illicit activity including . . . money laundering, sanction evasion, and terrorist financing,” is he talking about MonaCoin or the Mona Lisa?

One possible answer to the question of why art and crypto are treated so differently from a regulatory standpoint is that there’s some material difference between crypto and art—that the former generates substantially less positive (or maybe even negative) yield on a social good-to-crime-basis than the latter. And indeed, the amount of criminal activity in crypto on a dollarized-basis was estimated to be about $20 billion last year. But, with a total market cap of anywhere between $1 trillion to $2 trillion depending on the day, that’s still less than 1% of the total crypto market. It’s also not entirely obvious which of the two assets generates more social good (or utility, or net positive externalities, if those are your preferred metrics). Traditionalists will surely point to the historical and cultural significance of art. But with a growing number of pieces winding up in storage in perpetuity and an atrophying population of museum-goers, crypto bulls at least have a leg to stand on when arguing that a public, decentralized, and immutable alternative peer-to-peer payments system that has the ability to cut out industries-worth of middle men and agents has greater “intrinsic value” than a canvas with a vase on painted on it.

Another, maybe more pragmatic, answer, is that crypto is easily accessible to, and widely used by, retail investors, while art is reserved for the likes of Nicolas Cage and Russian oligarchs. And even though Nick Cage—of all people—may be the one to benefit the most from greater regulation of art purchases, the mass adoption of crypto by everyday investors is certainly a valid reason to make it a regulatory priority over art. But that doesn’t explain:

1. The outsized focus on crypto as a tool for crime and on its “speculative” nature.

2. Why most legislators, regulators, and business leaders concerned with regulating crypto are intent on regulating it out of existence rather than regulating it to ensure it’s safely used by everyday investors who want to use it.

Maybe the simplest and most honest answer, then, is that while there may indeed be very little difference between a Bitcoin and a Basquiat from an economic standpoint, the former is the new kid on the block disrupting the status quo, while the latter has long since been adopted as a cultural norm. The old guard resists coming to grips with a shiny new asset attracting people’s money that, beneath the surface, possess common and recurring features, just in a different wrapper—and so cognitive dissonance ensues. It’s how the late great Charlie Munger could say that he only invests in businesses that are “net positive and win-win for both sides” and that he’d never invest in crypto—dubbing it a “scumball activity”—while making the bulk of his money off of investments in Coca-Cola and McDonald’s.

Recent events suggest that the tide is shifting within mainstream circles towards a greater acceptance of crypto. With that shifting tide may also come a shift in the Overton window, such that reasonable and pragmatic regulation becomes more widely adopted as a politically acceptable policy stance. That certainly seems to be where we’re headed, but the jury’s still out.

Regardless of the regulatory fate of crypto, it shouldn’t be too much to ask to treat like goods alike. Unleash the HODLers and Russian oligarchs of the world to participate in some sort of extravagant Keynesian beauty contest by allowing them free rein to throw around obscene sums of money at Dogecoins and Da Vincis in the hopes that they will appreciate in price by orders of magnitude within a matter of months, weeks, or even days such that those people can dump their coins and canvases off on the next schmuck willing to pay a higher price.

Or, propose reasonable and sensible regulatory frameworks to ensure that the markets for each of the two assets has the potential to thrive while also minimizing related criminal activity.

Or, crack down on crypto and art as the valueless and crime-infested cons that they are.

Pick one—frankly, I don’t really care. Just don’t tell me there’s any real difference between an NFT and a Newman.