Podcast Episode 1: Interview With Caroline Taylor, CEO & Founder of Appraisal Bureau & Isabela Bagi of the BIR
So, let’s just cut right into it: What is Appraisal Bureau and what is your background?
Sure! Appraisal Bureau is a data and analytics firm that specializes in valuations, particularly of Fine Art and NFTs. But that is not how Appraisal Bureau was born, it came about in a very different way. My background is exclusively in Contemporary Art. I studied to be a painter and had internships at the Metropolitan Museum of Art, Philips Auction House, and the Felix Gonzalez-Torres Foundation. I then became a curator for the Deutsche Bank Collection for about 5 years, which at the time was the largest corporate art collection in the world. I left in 2013 to become a private adviser, working with clients to build their art portfolios, buying and selling art, managing collections, and over the course of that time I was hiring appraisers for my clients. The system of appraisals seemed, well, a bit archaic and so I decided to become one and see if I could do it a little bit differently.
I am Certified, which is the highest level at the Appraisers' Association of America, specifically in Contemporary Art. Then in July 2021, right around the time when I founded Appraisal Bureau, I had a client donate an NFT to a museum (the Institute of Contemporary Art, Miami). It was a CryptoPunk and was the first NFT to enter a museum collection. I was holding the NFT in my own wallet, figuring out how to transfer it, but the museum has a policy that anything they have in their collection must be insured. I was calling anyone I could find and eventually was connected with the head of digital assets of a major insurance brokerage. They introduced me to a bullion vaulting facility who already had a practice of storing a hardware wallet in their vaults to secure and insure cryptocurrency, however they lacked the valuation piece for NFTs. I ended up writing a valuation methodology for NFTs, which was accepted by the Lloyds of London markets which began my current practice! And now we’re also building distributed ledger technology products around traditional appraising that just make for more secure and easier transfers of traditional documents.
We touched on a lot of things there. Let’s start at the beginning. I am a wealthy donor, I have an NFT, and I am donating it to the museum because quite frankly I am feeling magnanimous. What is an NFT? What did I just donate?
An NFT is a token that sits on a blockchain and points to a file. The file may be an image, a video, a song, it can be virtually anything and that’s what has made NFTs so broad. It is a way of owning this digital file no matter what it is. And so it translates really easily into the art world because digital art is already very common practice and the art world is already very visual. NFTs also are very effective in music and film licensing.
With art, if you have a digital image that is an artwork, but then you have a[n NFT] token behind it that is unique, and no one can replicate that token, then you can prove that you own that file through that token. You can’t just right-click and save that file and claim to own that piece because you don’t have that token.
So, let’s talk about that for a second. The current method of digital files is doing just that: right-clicking and hitting save, correct?
Right, and you can do that. But what’s reverse with NFTs is that the more that image is out there, the more your NFT lives. So, it’s looking at it a little more in an opposite way from traditional art because NFT artists want their image to be out there. As opposed to traditional art, this would be what we would call, overexposure or burning. But NFTs function in the opposite way, and this is great for the person who owns the token. This is free advertising! Everyone can see it, but only one person owns the actual image.
Now let’s say I am a museum-goer. What can I expect to see? I think most people think of an NFT as an arbitrary file existing on the cloud. Can you talk about how they have been presented in museums?
That’s a really interesting topic because at the end of the day, what do you present? It’s a digital file on a screen when you get down to it. Some companies have done really interesting things such as creating screens that could act as the wallet to hold the NFT as well. A purist in crypto assets would probably want the token present to show the artwork, but that’s not always the case because you can store the private keys completely offline, in maximum storage, and the NFT digital file can still be viewed and presented.
I know ICA Miami has recently shown CryptoPunk #305, which they received last year through a donation from Yuga Labs. They showed it alongside an Andy Warhol. And what an interesting conversation between those two pieces - what Warhol was doing in his lifetime with mass production of art has an interesting conversation to the way NFTs exist. And I think Andy Warhol would have made NFTs in his lifetime, frankly. ICA showed the CryptoPunk on a screen hanging alongside the painting, which is one way of doing it. Some artists actually create physical pieces or components to go along with those files. It really comes down to the artist. But also, if the artist has released their license to that work, and you own that NFT, you could do whatever you want with it. You can make a sculpture of the NFT. That sets up a new conversation around what is the piece itself?
Let’s talk about what you did. You got this NFT. Your client sent it to you, did the sign of the cross as they did and hoped it landed in the right wallet. As someone who was traditionally trained, what were the decisions you had to make on how you were going to value it?
The original format of the valuation methodology was a 3-page paper. It was very manual. I never dreamed this would be something I did professionally after, honestly. It was a paper that basically looked at the different weighted variables of what you must consider when valuing an NFT. In the case of NFTs in a Contemporary Art Museum, you frame that as art. It is hanging in a museum and it’s on public display alongside traditional art. There is very little ground here, and I cross-checked this with the IRS, to say that it’s not art.
There are some similar factors which includes sales comparables. This is actually a lot easier to do with NFTs because it’s on the blockchain and every transaction is recorded. So, we can just pull sales off the ledger there. You do get a lot of noise, there are a lot of white washes or people trading amongst themselves and a lot of fraud that can occur. But we eliminate those transactions as our system automatically detects outliers and removes them from consideration. We pull 50 comps, whereas traditional art takes 3, remove the top and the bottom and look at the median as a starting point. It’s much more mathematically driven than a traditional appraisal would be and that’s because we have those specifications on the transactions.
You just brought up a great point that we should highlight. A lot of people think traditional art could be a way to move funds between borders. I think blockchain and NFTs are getting a little bit of a bad rep and it is being assumed that a lot of nefarious activities occur in this space. But what you’ve just said is the opposite because you can track every transaction that NFT ever did. It’s all recorded.
Exactly. And even the transactions that happen off-chain. So, Christie’s and Sotheby’s have built blockchain departments, or NFT departments, that only transact in digital art. Their sales can be more expensive for the buyer because there is a premium, but it is pretty widely known that artists like to give their best pieces to the auction houses, so you’re getting a better quality piece. But even these are recorded publicly because they publish all transactions to different databases and it’s even on their websites. One way or another, there is a way to see all transactions.
Let’s talk some more about valuation methodology. As you touched on earlier, NFTs can come in many different shapes and sizes. And one thing I don’t think people realize is that NFTs can have utility value. A painting, you know maybe you can crack a beer on the corner of it, but it doesn’t exactly do anything. The NFT can actually accomplish things, so why don’t you touch on that and how that impacts methodology.
Yeah, exactly. Separate from Art, Ticketmaster, is finally going to start doing NFT tickets. I think this is absolutely the best use case for NFTs. I know I’m guilty of this, but let’s say you bought a ticket on a secondary marketplace to a concert and it was fake. There’s no way to recoup that money, it doesn’t scan, it could even be just a photocopy of the actual ticket. NFTs can completely eliminate the black market for ticketing, it’s just so obvious because there can only be one. You have to actually own that one token to get into the event. This is the best example of utility.
But back to art, there’s different types of utilities. Artists who sell NFTs are directly connected to their audience. They don’t have to go through a gallery, there’s no middleman. They are direct. The fan and the audience also get direct connection to the artist. Artists can build communities, things like setting up private discord channels for their super-fans that only NFT holders can access. Bored Apes have Ape Fest every year and you need to own a Bored Ape to get access to the event. So, it’s pretty endless in terms of what the utility can be. You just have to be a little creative. Whether its entry to a club or an event or something totally different.
Airdrops are another big thing. If you’re holding an NFT, the artist can airdrop you something in the future that may be a new edition, a discount on something etc.
You entered this space in July 2021, which somehow feels 10 years ago but also like this year. It may seem premature to ask this question, but you and I both know it’s not. Crypto and blockchain is moving at breakneck speed. How has this space changed since you entered? NFTs were hot in 2021 and every celebrity was talking about their Bored Apes, from Justin Bieber to Jimmy Fallon.
2021 was definitely the bubble. It burst, which is healthy. This is something that happens all the time in art or other industries too. It brought the attention back to what are these things? What are the utilities? How can they be used? How can the blockchain be used? The conversation from July 2021 to today, is a night and day difference.
Now, they are not going away. The Art Market Report that I contributed to, had all the data on wallet usage. 2022 saw 70 times more activity than in 2020. Less than 2021 (the bubble), but we’re still at around a $1.5 billion dollar market in only NFT art and collectibles alone. That’s still significant and it’s at a more organic level. And I think it’s only going to grow because also, the younger generation is coming into it. They’ve grown up being online and being digital, and so it’s a very natural transition or, you know, progression. Web2 was social media, streaming, Facebook, all of that, and everyone loved to post pictures, but you don’t own the pictures. Facebook owns them. It’s only natural you’d want to own your digital files and you can do that through the blockchain.
I just think we’re going to see so many interesting use cases pouring out of it this year that just changes the conversation from expensive CryptoPunks, to this entirely other use case or world of blockchain basically. Obviously, crypto winter isn’t exactly great, but it has brought us back to healthier levels of it all.
A common trope is the struggling artist who has no money and once they’re dead their pieces sell for millions. But you can program an NFT that every time it gets traded, the original artist can make an income from that, correct?
Royalties. That is one of the biggest perks of doing this whole thing for artists. How the traditional art sector works now is that if an artist sells an artwork for $10,000, they would maybe make around $5,000. But if it shoots up and gets traded in the secondary market, it may get sold in 5 years for $1 million and the artist won’t see a penny. Some laws have tried to help with artist resale rights, but it’s hardly enforced.
NFTs can have a built in royalty that whatever percentage was chosen goes straight back to the artist from each sale. That’s income in perpetuity, which is incredible for the artist.
Right, and even then, if you really want to get into it, there’s a marketplace for that too. Say the artist wants to fund something, they could possibly sell those royalty rights on that.
A popular example is Taylor Swift and Ticketmaster. One ticket was being sold for resale at $72,000 and Taylor Swift is likely making $0 of that $72,000. Not that she wants it sold so high or even wants some of that $72,000, but many artists are getting really fed up with these middle-market sellers because they’re being sold for such high premiums and resold at such high premiums. Ticketmaster or SeatGeek gets cuts of that, but the artist often gets 0% of the cut.
Royalties would totally change that. And you can even think of it from a philanthropic point of view as royalties can be paid out to any selected wallet. So, say it was a favorite charity of Taylor Swift. Every time that ticket gets sold, it pours money to that charity. There’s a lot to be done with just the concept of royalties itself.
And let’s end with something a little more fun here. What has been your favorite NFT so far? I think you’ve probably seen more than most people.
Well first, I do not advise clients on what to buy! We are a data company. This is not investment advice! You heard it people, this is not investment advice.
I like Tom Sachs' Rocket Factory a lot. I think he is really interesting, he's a traditional artist who started working on the NFT side. He has pretty seamlessly been able to, rather than just translate his traditional practice into NFTs, build a new practice using NFTs as the medium.
On the more digitally native side, I really like Tyler Hobbs, he’s a generative artist. His main collection is called Fidenza. It’s a collection of 10,000 NFTs with a programmed set number of traits that are algorithmically generated when a collector mints an NFT. So, no one knows what it will look like in the end. It looks kind of scrambled and then it becomes the Fidenza. Generative art is one of the most interesting things in the space, which also has history going back that you can weave through different sectors of art history.