Fairs and Auctions Going Digital: How to Keep Transactions Secure

December 3, 2020

By SaBreigha Dixon.

On November 17, 2020, Art Basel announced postponement of its 2021 Hong Kong live edition, a further blow after the cancellation of its Miami and Switzerland annual fairs. Yet, Art Basel is adapting through Online Virtual Rooms: Miami Beach, with pricing rates much lower than that of the in-person event.^[1] The decision is unsurprising as more and more art auction houses and fairs continue to get pushed back shows due to COVID-19 travel restrictions. Against that backdrop, the art trade has been increasingly international, thanks to the digital advancements, wire transfer payments and general ease of travel. Top art collectors tend to be cosmopolitan with real and tangible property spread around the world, using freeports for storing their collections in favorable jurisdictions for the tax benefits.^[2]

In light of the current state of the world, and dealing with the effects of the COVID-19 global pandemic, the art world has been faced with a major dilemma – how does it continue to keep transactions and auctions secure? With much of the world still on lockdown, like many other industries and platforms, the art world has been forced to move online and conduct its business in virtual spaces. With that move has come a host of problems and fears regarding how customers’ data, privacy, and security will be protected.

While the demand is still there, buying high-value art has always been considered a risky venture. Around twenty-five to fifty percent of works currently circulated in the market are fakes, forgeries, misattributions and unknowns.^[3] And although high-value art typically goes through a rigorous research and appraisal process to be authenticated, studies show that about one out of ten artworks held in museums are deemed to be fake.^[4] So how then, can purchasers buy with confidence while not only being unable to see artworks in person beforehand, but also now being required to provide all their personal information and payments through online auction websites?

Survey of the Art Transactions: Pre and Post Covid-19

Pre-Covid, there were many ways in which art lovers could purchase and view art. The vast majority of transactions, which accounted for between 60 and 70 billion dollars annually, happened at galleries, art fairs, and through advisory services.^[5] The 2019 Art Basel and UBS Global Art Market Report showed that the global art market had reached it second highest level in 10 years.^[6] Sales in the dealer sector increased as well sales at public action.^[7] The top three markets – United States, United kingdom, and China accounted for over 80% of total sales by value.^[8] The remaining percentage of annual sales were generated through auctions.^[9] In addition, the UBS’s Art Market Report stated there were almost 300 international art shows in 2018.^[10] Some of the bigger annual events include Art Basel Miami, the Armory Show, TEFAF New York, Art Toronto, Frieze London, and countless others.^[11] Buying directly from an artist is a pretty self-explanatory process. The process for auctions is slightly different:

During an advertised auction, individuals or nonprofit organization members donate artwork or a portion of a transaction in exchange for either a tax benefit, commission, or simply give with no thought to direct benefit.^[12] The nonprofit or auction house then accepts the donation.^[13] The artwork is advertised through auction catalogs to buyers and potential buyers register to bid.^[14] These registration forms can ask for a significant amount of personal information including their name, address, job, bank and checking account information, credit card number, social security number, passport number.^[15] Finally, the art is sold either publicly or privately at auction.^[16]

While most auctions and transactions have moved online to virtual platforms, online auctions are not a purely new result of the Covid-19 pandemic. Online auctions have slowly began growing in popularity for several years now. Online auctions typically have a quicker turn around process and are more efficient compared to traditional auctions.^[17] To buy or sell at a traditional auction house you may have to wait at least seven months since the sales usually only take place in spring and fall.^[18] You have to get admitted to the auction. Then you wait to get paid.^[19] The transaction fees are usually over 30 percent and it’s a relatively time-consuming system.^[20] Online auctions also cut out the need for a middleman, typically the auctioneer, taking possession of the artwork.^[21]

Even with their growing popularity, online auction platforms still face a number of obstacles, mainly generating cash-flow.^[22] Following the merger of Auctionata and Paddle8 in DATE, in early March 2020, the online auctioneer Paddle8 filed for Chapter 11 bankruptcy in the Southern District of New York.^[23] Stemming from a 2016 lawsuit filed by the New American Cinema Group in New York State Supreme Court, it’s alleged that Paddle8 sold several works of art for the New American Cinema Group but had not accounted for the proceeds of that sale as well as fraudulent inducement and concealment regarding the proceeds.^[24] While Paddle8 was facing hardships long before the pandemic, Covid-19 seems to have solidified the fate of the auctioneer as it has done so many other art businesses these past few months.^[25]

Protecting Data and Security During Transactions

One of the main concerns with online auctions is that they would ruin the culture of auctions and continue to cripple the industry.^[26] For many art collectors, the thrill and appeal of buying at art auctions and fairs, is being able to see artwork in person, and as a result many dislike having to basing purchases solely on how art looks online.^[27] However, for the most part, virtual auctions have been surprisingly effective.^[28] The issue arises when the purchaser’s information is then stored in a computer file somewhere with the auctioneer, which then becomes vulnerable to hacking.^[29] The threat of hacking buyer’s data has been a progressing threat for years now and is now an ever-growing concern due to the sheer increase of online transactions.^[30]

In 2015, Leslie Hindman Auctioneers in Chicago had a general data breach where a “ransom trojan” locked their files and held them ransom in exchange for compensation in the form of Bitcoin.^[31] The auctioneers ultimately denied giving into the extortionists’ request and restored their files to an earlier backed up version.^[32] Fortunately, only little damage was done, and it only took about one business day to resolve.^[33] Auction bidders, however, are much more vulnerable to hackers because of the large amount of information they disclose to auction houses, and because their own employees, art dealers or consultants often complete transactions on their behalf.^[34] As a result, customer protection is progressively becoming more prioritized.

Abuses of the system can come from business to business engagements too. In a 2019 case, an arbitrator ordered sister company Collectrium of auction giant Christie’s to pay nearly $1.8 million in damages to Heritage Auctions, based on the latter’s claims related to alleged theft of its auction data.^[35] The complaint, which alleged not only copyright infringement, but also violations of the Computer Fraud and Abuse Act 18 U.S.C. §1030 and the Digital Millennium Copyright Act among other state law claims.^[36] The complaint alleged that “over the course of nine days, the Wise account accessed the HA.com website over 186,000 times.” Heritage initially, had difficulty identifying the source of the activity, but eventually traced this behavior as that of a “spider” that was associated to the Wise account.”^[37] Heritage also claimed that Christie’s and Collectrium “willfully, intentionally, and knowingly agreed and conspired with each other to engage in the alleged wrongful conduct.”^[38] The suit is a reminder and a warning to art businesses that there are legal implications and consequences that they need to consider when they set up these online platforms for their users to access.^[39]

A New York State law, which was updated in 2013, requires individuals and companies doing business in New York to disclose any breaches of computerized data to the state attorney general’s office, as well as to the state police and Division of Consumer Protection, and to notify affected customers.^[40] Unfortunately, that information on which companies have had data security breaches is not made publicly available.^[41]

Other steps that have been taken to help ensure security include outsourcing IT departments (where third-parties immediately delete or “dump” a user’s information after they register).^[42] Art businesses are also using stronger encrypted formats such as ChasePayment. This allows for client data to be “segmented” into different areas, so that “even if data were intercepted by a breach it would be difficult to access reassemble” for a hacker.^[43] Private cloud servers are also being implemented more frequently due to the fact that they are less susceptible to hacking than public cloud servers.^[44]

Looking Forward

Whenever free travel resumes, how will the members of the art trade change their behavior in light of the lessons learned during the 2020 lockdown? The adverse footprint that international auctions were leaving on the planet has been diminished, which is a silver lining. This has auctioneers wondering – will online auctions and virtual rooms remain the norm? Prices in online auctions are typically lower, and buyers now know and expect that. As a result, auctioneers are currently stumped on how to sell big-ticket works of art virtually.^[45] Even as the world begins to adapt to life after Covid-19 and digital sales in auctions houses has camped up, the prices are still relatively low in comparison to the pre-Covid market.

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Endnotes:

1. Ted Loos, As Another Fair Goes Virtual, Art Basel Finds Its Footing, The New York Times, Dec. 1, 2020. ↑
2. Milica Jovix, Why are Freeports an Increasingly Popular Choice for Storing Priceless Art, Art Acacia, Jun. 4, 2018. ↑
3. Dehlia Barman, Buying and Selling Art with Confidence Post COVID-19, ArtTactic Editorial, Oct. 2, 2020. ↑
4. Id. ↑
5. Steven murphy, Art Explained: How Do Art Auctions Really Work?, CNN Style, Aug. 30, 2018. ↑
6. Art Basel, The Art Basel and UBS Global Art Market Report 2019, Art Basel, Mar. 8, 2019. ↑
7. Id. ↑
8. Id. ↑
9. Id. ↑
10. Jacqueline Martinez, The World’s Most Prestigious Art Fairs, The Collector, Nov. 19, 2019, https://www.thecollector.com/the-worlds-most-prestigious-art-fairs/. ↑
11. Id. ↑
12. Bond Fine Art, Creating the Meaningful Transaction, Bond Fine Art. Nov. 19, 2019. ↑
13. Id, ↑
14. Id, ↑
15. Daniel Grant. As Auctions Go Digital, Hackers Set Their Sights on Buyer’s Data. Observer. May 20, 2015. ↑
16. Id, ↑
17. Jeff Haden. Price Transparency Makes a Market Grow: How Artnet Transformed the Art Industry. Inc. Sep. 19, 2019. ↑
18. Id. ↑
19. Id. ↑
20. Id. ↑
21. Id. ↑
22. In re P8H, Inc., No. 1:2020-bk-10809 (Bankr. S.D.N.Y. Mar. 16, 2020). ↑
23. Id. ↑
24. Id. ↑
25. Id. ↑
26. RelaxNews, How COVID-19 is Reshaping the Art Auction Market, Thailand Tatler. Apr. 14, 2020. ↑
27. Annie Armstrong, How Three Art Collectors Have Adapted Their Habits during Quarantine, Art Market, May. 21, 2020. ↑
28. Id. ↑
29. Grant, supra note 8. ↑
30. Id. ↑
31. Id. ↑
32. Id. ↑
33. Id. ↑
34. Id. ↑
35. Heritage Capital Corporation et al. v. Christie’s Inc et al., No. 3:16-CV-3404-D (N.D. Tex. Jan. 12, 2018). ↑
36. Id. ↑
37. Id. ↑
38. Id. ↑
39. Kate Lucas. Damages Awarded, but Both Sides Claim Victory, In Lawsuit Involving Allegedly “Scraped” Auction Data, Grossman LLP, Art Law Blog. Aug. 19, 2019. ↑
40. Grant, supra at note 8. ↑
41. Grant, supra at note 8. ↑
42. Grant, supra at note 8. ↑
43. Grant, supra at note 8. ↑
44. Grant, supra at note 8. ↑
45. Abby Schultz, Art Market Confidence Plummets Amid Covid-19. Barron’s Penta. May 21, 2020. ↑

About the Author: SaBreigha Dixon is a 3L at New York Law School. She has undergraduate degrees from the University of Akron in criminal justice and political science. SaBreigha is a current member of NYLS’S Media, Entertainment, Fashion Law Association and hopes to pursue a career in intellectual property, particularly copyrights and trademarks as it pertains to art, fashion, and beauty law.

Disclaimer: This article is for educational purposes only and is not meant to provide legal advice. Readers should not construe or rely on any comment or statement in this article as legal advice. Opinions expressed here are those of the author.