By NICOLE URBANOWICZ
Non-fungible tokens, the hot new digital asset, have been making headlines for months. But wealth managers in the family-office space remain on the fence about their value as a long-term investment, stressing that it depends on an investor’s risk appetite.
Their caution is primarily due to the recent fallout in the cryptocurrency markets, family-office professionals told Crain Currency.
A recent UBS study, titled the Global Family Office Report 2022, revealed that family offices are using strategic asset allocation to navigate the current economic environment. Over the next five years, 52 percent of offices plan to keep the same asset allocation for art and antiques in their portfolios as an alternative asset class. Although 13 percent of offices surveyed planned to increase investment in this asset, 32 percent didn’t plan to invest in art and antiques over the next five years.
When it comes to NFTs, many money managers and contractors who work with family offices told Crain Currency that although art-based NFTs are an interesting way to support artists, they are cautiously pushing pause on them as a long-term investment strategy due to the recent market events.
“This isn’t something that we recommended to our clients,” said Shannon Saccocia, chief investment officer at SVB Private Wealth Management in Boston. “It’s something we talked to our clients about because it’s a really good gauge of how interested they are in digital transformation for our society, but it is not something we recommend.”
To be sure, SVB’s family-office clients were never overly enthusiastic about investing in NFTs to begin with, Saccocia said.
“We have received some inquiries around NFTs generally from clients, but far less than the number of inquiries we have received about crypto, Web 3.0 and blockchain,” she said. “It is challenging to create a framework to value digital assets at this juncture, given the volatility in the space.”
That sentiment was echoed by Timothy D. O’Hara, co-head of the Rockefeller Global Family Office at Rockefeller Capital Management in New York. Regarding investing in digital assets, O’Hara told Crain Currency, “Our role is to separate fact from fiction and value from hype.”
NFTs were all the rage in 2020 and 2021 as many major consumer brands, musicians, athletes, influencers and celebrities began dropping them as a way to increase engagement. In March 2021, an artist known as Beeple sold an NFT-based work of art for a staggering $69 million.
NFT 101
In simplified terms, an NFT is a digital asset stored on the blockchain, which is a type of shared digital ledger that records transactions and tracks assets such as cryptocurrencies. It is different from a common .jpeg or .png file on your computer.
An NFT is a unique, noninterchangeable — nonfungible — digital asset tethered to external media that includes, but isn’t limited to, documentation on the creator/artist, copyright/rights ownership as well as current and past buyers.
NFTs can be used in various asset classes, including real estate, gems, music, collectibles and, in this case, art. Investors can purchase NFTs with a crypto-funded digital wallet through an NFT marketplace such as OpenSea, for example.
Part of the uncertainty stems from concern about fraud. Detecting copyright infringement in art NFTs presents some challenges, said Jordan Arnold, an executive vice president of K2 Integrity in Los Angeles who serves as global chair of the firm’s
Private Client Services practice. For instance, they can be fraudulently created in digital form from original artworks, all unbeknownst to the original artist.
Arnold specializes in identifying threats to family offices. His experience includes working as a former assistant district attorney in Manhattan focusing on high-profile investigations, one of which resulted in the return of a stolen Salvador Dali watercolor.
“How do you detect infringement in a limitless online environment?” said Arnold. “And then, if you detect it, how do you enforce any rights you may have? There are some significant questions that need to be answered, but I wouldn’t count the [NFT] market out by any measure.”
There have also been reports of NFT insider-trading schemes as well as the growing risk of cyber theft that must be evaluated. NFTs are not insured by the FDIC or the Securities Investor Protection Corp., unlike traditional financial and banking-type investments.
The most widely known NFTs are the Bored Ape Yacht Cub collection, which have sold for six figures and up in cryptocurrency converted into U.S. dollars. That particular NFT made headlines recently after an online hacker stole $2.5 million worth of the asset through an online phishing scam.
It’s important to keep in mind that no software solution offers complete data security when it comes to NFTs, said Arnold, whose firm deals with such threats.
“Our work involves both helping assess what their current posture is, identifying their vulnerabilities, helping them close those gaps,” he said. “That can be everything from the way they are architected in tools and technology they are using — but, again, focusing very carefully on the sort of human factor.”
BLUE-CHIP ART OR NFTS?
Several individuals in the family-office space whom Crain Currency interviewed and who hold art as a part of their hard-asset allocation said they would prefer to invest in unique and blue-chip works of art because of their predictability, rather than art NFTs.
The prices at auctions reflect that preference. In May 2021, Christie’s held a blockbuster auction where it sold nearly $3.38 million of art NFTs created through a collaboration with The Andy Warhol Foundation for the Visual Arts. But those numbers pale compared with the auction house’s May 2022 New York sale of Warhol’s tangible Marilyn Monroe portrait, called “Marilyn,” which sold for $195 million. This became the most expensive piece of 20th-century American artwork sold at auction.
Those kinds of numbers reflect the immaturity of the market for NFTs and the tentativeness of its future, said Kevin Sun, a managing partner of IBI Venture’s Beijing office and an avid collector of antiques and art. “It could be just a one- or two-year thing and then people get over it, or it could be something big,” Sun said. “Either way, if you’re going to understand NFTs, you have to understand the crypto world.
“Maybe the new generation is in love with NFTs, but just given the trajectory, you have to have a certain amount of money in crypto to appreciate it.”
Christie’s contacted IBI Venture about purchasing art NFTs, Sun said. However, he paused on investing in the asset class until it reaches MoMA status.
“There has to be a certain amount of traction,” he said.
That extends to cryptocurrency in general, an asset class in which Sun remains bullish but has taken a more “conservative perspective” on investing for the family office. He’s also currently investing with one of the largest asset managers in the world in a private placement and not a public offering.
“I like that sophistication and how safe it is.”
Nicole Urbanowicz has written about finance, business and insurance for publications including The Wall Street Journal, Dow Jones Newswires, The Associated Press, CNN Money, Yahoo Finance, WWD, Business.com and Travel Weekly.