As anyone who works in insurance knows, technology is powerful enough to transform any industry. And the fine art market is no exception.

“I think it’s the nature of the art world to constantly be looking to the next thing,” says Mary Pontillo, senior vice president of the Dewitt Stern Fine Arts Practice at Risk Strategies, in this episode of the Insuring Cyber Podcast. “I think that’s the nature of artists – just constantly pushing boundaries.”

With this in mind, Pontillo says it makes sense that a shift to buying and selling digital art through NFTs, or non-fungible tokens, would be the next frontier that artists would look toward, particularly in an increasingly tech-oriented world.

Non-fungible means something that is unique or unable to be replicated. These NFTs act as a form of cryptocurrency that allow intellectual property ownership of digital items to be bought and sold and that ownership to be tracked via blockchain technology. They’ve become particularly popular in the fine art world with new works being created by artists as NFTs, but they have also popped up in sports and pop culture, where famous tweets and images for example are being sold as NFTs.

While some are optimistic about the future of NFTs in the fine art market, others have concerns about their volatility. And perhaps just as important as the question of whether they’re here to stay is the question of how NFTs for fine art can be insured.

Although ownership exists in the sense that buyers receive an exclusive private key to the NFT, the item itself can still be viewed by others, and there lies the first challenge.

“It’s a little different mindset than the traditional collector who might have a work that they own, that’s hanging on the wall in their private home, that doesn’t necessarily feel ownership to the same degree,” says Rob Rosenzweig, national cyber risk practice leader for Risk Strategies, speaking along with Pontillo on this episode.

It could also potentially lead to issues of theft and vandalism, Rosenzweig says.

“There’s the ability that somebody who doesn’t have the authority in some way alters the image, thereby decreasing the monetary value that’s been assigned to this NFT as a piece of art or as a collectible,” he said.

This challenge is one that can be easily solved by a commercial insurance policy, however, if the digital work is damaged and devalued, he says. But theft of the private key for the work is a tougher challenge for insurers to tackle.

“Just generally speaking, NFTs aside, for the crime fidelity underwriters in the marketplace in cyber – underwriters that provides some level of crime coverage – it’s always been a challenge when the loss that we’re trying to adjust is that of a collectible as opposed to money, securities or other tangible property,” Rosenzweig says.

Pontillo says one possible solution still in the works is that a custodian or storage company could store physical key access to the NFT and insure it for the client, even if the third-party storage company doesn’t own the work itself.

“This could actually potentially be extended to a dealer or a gallery and art warehouse,” she says. “If they want to store the key that’s owned by their customer or a museum, et cetera, because they’re selling or storing the art – the NFTs – then the dealer or the gallery could potentially buy the policy but just for the loss of the actual key.”

This also presents its own challenges, however, she adds.

“You can see how there’s a moral hazard there,” she says. “If the market crashes, it’d be easy for me to destroy my own key and then make a claim for the full value of the NFT. Whereas if someone else is storing it for me, underwriters are more comfortable with this.”

Given all of the potential risks and unanswered questions, how likely is it that NFTs will stick around and that insurers will become more comfortable with providing coverage?

“Our main focus every day is to make sure we’re providing solutions for our clients,” Pontillo says. “So we want to make sure that we do have some options for clients that come forth with NFT exposures and that we can have a conversation with them and tailor some sort of coverage. So I think as long as there are people that are looking for coverage, there’ll be some developments. I’m just not exactly sure how comprehensive the coverages will be moving forward.”

Rosenzweig agrees.

“I think we’ll see it stay to some degree,” he says. “Will the popularity wane a little bit, and some of the price points that these are trading for calm down? Probably. But it’s still fairly early days.”

Check out the rest of this episode to see what else Rob and Mary have to say, and be sure to check back next week for part two of the Insuring Cyber Podcast’s NFT series. Thanks for listening.