NFTs and Wine - The Long Read

Almost overnight, NFTs - Non-Fungible Tokens have come from nowhere in the art world to become a market worth more than a quarter of the value of the US wine trade. Now they are moving into wine. In this extensive article, Robert Joseph attempts to throw some light on a very complex picture.

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NFT Bottle
NFT Bottle

 

  • A non-fungible token (NFT) is a piece of unalterable data, that can be sold and traded on digital markets.

  • Global sales of NFT were worth $24.9bn in 2021.

  • NFTs can be used for authentification and sale of wine.

  • Producers ranging from Constellation to Château Angelus have adopted the idea.

  • In April 2021, former sportsman and Napa producer Yao Ming was a pioneer in auctioning its top wine as an NFT.  

  • As the middle man can be cut out of the initial transaction, and a commission paid on subsequent sale, NFT may create extra ongoing income for the producer.

  • For investors considering wine as an investible good, NFT may be attractive and easy to use.

  • Tech entrepreneurs are launching wine-NFT investment businesses

  • There are risks of fraudsters exploiting this trend

  • Producers believe that NFTs may attract  new wine buyers.

  • The huge environmental cost of ‘minting’ – producing – NFTs remains a major concern.

  • The link with relatively unregulated cryptocurrencies is another worry for some, despite their adoption by major financial institutions.

 

There have been many descriptions of the Russian invasion of Ukraine, but one of the most striking was coined by the Washington Post which dubbed it ‘the first crypto war’. For the first time, it is now possible to transfer money across the planet without the use of physical cash, traditional ‘fiat’ currency like dollars, euros or pounds, or banks. Oligarchs can avoid sanctions by transferring their wealth into crypto – cryptocurrencies - like Bitcoin and Ethereum, and individuals wanting to support charities or even the resistance in Ukraine can buy NFTs.

According to a March 1 report in Artnet, Nadya Tolokonnikova, the Russian-born Pussy Riot founder and artist, has created a digital artwork in the form of an NFT of the Ukrainian flag –priced in the cryptocurrency ETH. All proceeds go to Come Back Alive, a charitable organization that supports Ukraine’s military. Within days of its launch, the NFT had already raised over $4m, a sum that can be added to the $22m the Ukrainian government had apparently already received in crypto by March 1st.

What is an NFT?

In 2020, according to Dappradar, global sales of NFTs - Non Fungible Tokens – were worth nearly $95m.Last year, that figure had multiplied to $24.9bn, or the equivalent of over 28% of BusinessWire’s estimate of the value of the entire US wine industry.

For those who know little or nothing about NFTs – possibly beyond Christie’s auctioning a digital artwork by an artist called Beeple for $69m, and the first tweet by Twitter CEO Jack Dorsey being sold for $2.9m – the subject may, until now, have seemed too crazy to warrant much thought. For many readers of Meininger’s the link between this new phenomenon and wine may be even less obvious. But ignoring it may be a mistake.

Before going any further, we need to define what we are talking about. Until recently, ‘fungible’ was a relatively arcane term used by economists to describe ‘goods or commodities that are essentially interchangeable’ – like two barrels of crude oil, a couple of shares in Tesla, or two bottles or cases of the same vintage of the same wine.

A pair of vineyards, diamonds or theatre seats, each of which would have identifiably different characteristics, however, are ‘non fungible’.

Two banknotes with the same value have their own numbers, but these are irrelevant unless and until the police have to investigate theft or forgery.

On the other hand, the presence of a number on a baseball card, a wine label or a limited-edition print might be of crucial importance and value.

The Role of Blockchain

It was the invention of blockchain technology that, like one of those printed numbers, gives an item – any kind of item -  a ‘digital identifier’ in the form of  a set of letters and numbers. Unlike the printed numbers, however, the fact that it is hosted on a network of thousands of computers – the blockchain – makes the digital identifier. or NFT. unique, transparent and unalterable.

For many people, Blockchain is inextricably associated with digital currencies like Bitcoin, but this overlooks the way the technology has entered the mainstream through its adoption by companies such as Barclays, Deutsche Bank, IBM, Accenture and Microsoft. And just as those businesses have embraced Blockchain, their vinous counterparts like Constellation, Treasury Wine Estates and LVMH have all now bought into the idea of NFTs.

There are many ways to define an NFT, but ‘decentralised certification’ is among the most useful, but it’s not merely a matter of certifying authenticity. The Merriam Webster dictionary helpfully explains that the identifier is also used to certify “ownership (as of a specific digital asset and specific rights relating to it)”.

From the moment of its creation, every time an NFT changes hands, the details of the transaction have to be verified by the blockchain. And because the computers all operate independently, it is impossible to hide or alter the original item, or the details of the transactions.

NFTs You Can Touch

Until now, the digital nature of the token has led to NFTs being associated with items – like Beeple’s artwork and the torrent of cartoon-like images of monkeys with baseball caps, penguins and cats – that only exist online. Last year, Sotheby’s apparently sold $100m worth of these.

But, as its name implies, an NFT can also be used to ‘tokenise’ real-world items like paintings, real-estate, or wine – or experiences.

In April 2021 a real estate agent called Shane Dulgeroff tried to prove this by auctioning a house in Thousand Oaks, California along with an NFT in the form of a psychedelically colourful print image of the building. Dulgeroff hoped to sell a property worth around $750,000 for $2m. In the event, he failed to find a buyer, but he was simply ahead of his time. Since his attempt, a number of sales of physical-property-NFT transactions have taken place, alongside enough sales of digital ones to justify the Financial Times to recently devote the front page of one of its sections to ‘virtual property’.

Pioneering NFT Wine

Also in April, and also in California, NBA star and Napa Valley winery owner, Yao Ming auctioned 200 ‘Physical Twin’ NFTs, in the shape of online tokens and bottles of the 2016 vintage of his top wine, The Chop.

The Napa Valley Register reported that, while the auction was expected to raise more than the $450 retail price normally commanded by the wine, with some of the proceeds going to charity, Bemke declined to say how much it had raised. The sale, he said was ”in the spirit of experimentation… without any expectations.” There had, he admitted, been no competition among bidders. Like Dulgeroff, Yao Ming was a little premature in his enthusiasm. But maybe not much: today, those same NFT wines are on sale for prices several times higher than that $450. Whether they are finding buyers, however, is not certain.

The Mondavi Option

In December 2021, and a few miles down the road from Yao Ming, the Constellation-owned Robert Mondavi winery offered another good example of how NFTs can combine tangible asset and experiences with the launch of nearly 2,000 specially commissioned bottles of three unique blends. In return for paying the current price in ETH or ethers, – the ethereum cryptocurrency equivalent of Bitcoin – buyers receive a limited edition bottle designed and created by Bernardaud, and an invitation to a tasting for four people at the To Kalon vineyard where the grapes were grown.

The transaction comes under the terms of a 5,000-word legal document which refers to the wine, the bottle – described as ‘creative materials’ -  and the tasting experience. It also states – in capital letters “UNLESS STATED OTHERWISE IN THE DESCRIPTION OF THE APPLICABLE NFT, AN NFT THAT YOU OWN WILL BE TRANSFERABLE, BUT ANY TRANSFEREE WILL BE SUBJECT TO THESE NFT TERMS. NFTS THAT WE PROVIDE ARE UTILITY TOKENS TIED TO UNIQUE GOODS, SERVICES AND EXPERIENCES.”

Anyone wanting to resell their bottle could simply hand it over for cash as they might do with any wine now, but unless the sale is registered on the blockchain, the NFT would effectively cease to have any value.

And just in case that would-be reseller is hoping to make a profit out of the sale, the Mondavi terms include a clear warning: “YOU SHOULD NOT PURCHASE OUR NFTS WITH A VIEW TO INVESTMENT, RESALE OR SPECULATION. THERE CAN BE NO ASSURANCE AS TO THEIR PRESENT OR FUTURE VALUE, TRANSFERABILITY OR MARKETABILITY.”

These words may have been well-chosen. Mondavi will have been happy with the publicity it generated, but it is worth noting that only a third of the NFTs were sold on the first day and some buyers reportedly subsequently offered them for less than they had paid for them. In any case, anyone wanting one can still buy them from the Mondavi website for 1.39 ETH which is currently worth $2,500, rather than the $3,500  that much crypto would have been worth when the NFTs were launched.

Dollars or Crypto?

Cryptocurrencies are famously volatile. Bitcoin’s value, for example has roller-coasted from $5,000 in March 2020 to nearly $65,000 in April 2021 before tumbling to $30,000 in June 2021 and $41,000 as I write this. This, of course, is what makes cryptocurrencies so attractive to speculators ranging from savvy billionaires to teenagers.

Some NFTs, however, like the 300-bottle barrel of Angelus 2020 sold by Cult Wines in July with a token in the form of a 3D digital artwork to an anonymous bidder for $110,000, sidestep cryptocurrency volatility completely by using a ‘stablecoin’ like USDC. USD Coin, to give its full name is pegged to the US Dollar and, in January of this year, had a market capitalization value of $34.7bn. Tether (USDT), the third biggest cryptocurrency by market capitalisation is worth over twice as much. Stablecoins are also the model adopted by Minerva, a UK wine-NFT startup.

Chateau Angelus sold its barrel through a traditional wine merchant. Mondavi, like Penfolds when it offered a barrel of the 2021 vintage of its rare Magill Cellar 3 as an NFT, went directly to the consumer. This cutting-out of the middle man is an important part of the NFT story – for wine and art, and this can extend beyond the original sale.

Extra Income for the Producer

In a March 2021 online discussion hosted by the Art Newspaper, editor Georgina Adam and art market editor Anny Shaw talked about ways in which artists can make a small commission for themselves every time one of their works changed owners. Or a sizeable one. The contract covering Beeple’s $69m sale included him receiving a 10% commission on subsequent transactions.

What would work for a sculptor and a limited set of bronzes would be just as applicable to a winery with a thousand or so bottles of a very specific wine from the latest harvest.

Another interesting characteristic of NFTs is that they are ‘extensible’, meaning that it is possible to combine one NFT with another to ‘breed’ a third, unique NFT.  

This is the model applied by both Angelus and Penfolds. The contents of the 300-bottle cask of 2021 Magill Cellar 3 that was priced at $130,000 will be bottled in October 2022, and converted into 300 ‘bottle NFT’, each of which will be identifiable with its barrel and bottle identifier. So, potentially, a barrel sold as a single NFT for $100,000 could be transformed into 300 individual $1,000 NFT-bottles, yielding a three-fold profit – assuming there are buyers for all of those separate NFTs.

Having your cake and Eating It

One question that has been asked is whether it would be possible to drink one's bottle of NFT-wine while continuing to own and possibly trade the NFT token - effectively having one's cake and eating it. The answer would depend on the way the two are related. If the NFT is a digital image with a perceived value of its own, that might well be the case, but where the NFT is simply a certificate of ownership, it would normally only continue to be valid for as long as the wine remains in the safe keeping of a third party, normally the producer, or a merchant or possibly an auctioneer. As soon as the wine leaves their care, the NFT should, in theory be destroyed because it can no longer perform its role.

Alternatively, one could enter the world of NFT-wine via a business like Club d'Vin which specialises in combining fine wine ownership with experiences. In this case, one's 'ownership' NFT can be transformed into a 'Tasting Token that will serve as a permanent record of when, where and with whom the wine was consumed (at a Club d'Vin event).

Fighting Forgeries

Supporters of the concept claim that NFTs will help wine producers and merchants to combat the kind of forgeries that were made famous by Rudy Kurniawan. While linking each bottle to a single immutable NFT would not prevent a skilled crook from drinking its contents and then replacing them with another liquid and reselling it and the token, that bottle and token could only be sold as a pair of individual entities as bound together as Siamese twins. So, unlike Kurniawan, today’s forger couldn’t fake a dozen bottles of 2020 la Tache, with the same or invented numbers. And, of course, if a forgery is detected, the digital paper chain of transactions through the exchange should permit the identification of the person responsible.

This will all work well, provided that wary buyers take care to check that the chain leads back to the genuine producer or merchant and not a name that looks deceptively similar. And, if wine NFTs are to develop and maintain any kind of credibility, unless and until a a credible central registry is established, responsibility for encouraging this wariness will lie with those same producers and merchants.

NFTs and Fine Wine

Alongside the producers eager to exploit NFTs to promote their brands, there are now companies offering fine wines. A UK startup called Minerva, for example, says that its customers “will be able to use their NFTs as collateral, earning yield on wine as a primary market.”

A similar model has already been adopted by a business called wIV with offices in London, Oslo and Singapore which describes itself as a “blockchain-based unique asset technology designed for the wine industry, turning investable wines into high-yielding NFTs."

The company’s 13-member management team includes brand ambassador, Florencia Goméz who has “studied, made and traded wine internationally” for 12 years and is now an MW student, and ‘wine connoisseur' Armand Rønn whose professional background is in video games. Head of communications is Graeme Brandham, a ‘qualified character animator and  wine geek (WSET 3)’.

Wine does not feature in the biographies of any of the other 10 who include several serial entrepreneurs, software developers – and Levan Bodzashvilli, former security Minister for the Republic of Georgia.

Of the 11 advisors listed on the wIV website, one - Oriol Illa of Maquina&Tabla in Castilla Leon - is a winemaker. Another -  'Investor, advisor and NFT collector', Daniel Maegaard - is described as having 'exquisite taste in wine'. In the biographies of the remaining nine, the liquid product on which the wIV business would seem to rely, goes unmentioned. 

Its website promises a ‘Legacy Collection’ consisting of “456 wine-backed NFTs released weekly for our lucky collectors. Each NFT represents a real physical case of investment wine stored in a bonded warehouse.”

Despite their lack of wine industry background, the profile of wIV's investors suggest that theirs is a business with financial integrity, and the same may be true of many other high profile wine-NFT-investment-startups, but anyone who has watched the fine wine business over recent decades will be familiar with the number of fraudsters who have used ‘wine investment’ to swindle huge sums from unfortunate victims. The chances that this is already happening with NFT-linked wine investment schemes are high.

NFT Fraud

Fraud is, in any case, already rife in the world of NFT art. As the Guardian reported in January 2022, there is a growing trade in stolen NFTs - artists’ images that have been cut and pasted and offered for sale. A successful Dutch artist called Lois van Baarle apparently discovered over 100 of her artworks for sale on OpenSea, the leading NFT platform. Other artists quoted in the same article described similar experiences and OpenSea, which has been valued at $13bn and is heading towards a public flotation, revealingly admitted that half of its employees are engaged in ‘issues of plagiarism and content moderation’.

If van Baarle sees NFTs as “one huge mess of theft and fraud and inauthenticity”, shouldn’t wine companies tempted by the technology be just a little concerned?

Exchange Control?

Another rational cause for concern lies in the exchanges on which the blockchain and the NFTs rely. These enterprises may deal in billions, but they are essentially unregulated. When you use one to convert $1,000 into cryptocurrency – which you will have to do if you are to go beyond some of the initial wine NFTs - what guarantee do you have that your ETH or Bitcoin or whatever will have any real value at all. Even if their business models are sound and invulnerable to criminal intent or lax management, how will they react to a changing legal landscape?

 As Fortune reported in January 2022, nine nations, including most notably China, have banned cryptocurrencies and their use is limited in over 40 other countries. Focusing on their use by criminals, Gary Gensler, chairman of the US Securities and Exchange Commission, described digital currencies as the ‘Wild West’ and said he wants to increase regulations on them. If the US, EU and UK were to go down this path, what impact would that have?

Environmental Costs

By far the biggest accusation levelled at NFTs, however, is their obscenely high use of energy. In order to verify cryptocurrencies like Bitcoin, all of the computers used to ‘mine’ them have to compete to solve mathematical problems. The chances of them doing so instantly are one in trillions, so their efforts require a lot of electricity.

According to the Cambridge Center for Alternative Finance (CCAF), Bitcoin alone currently consumes an estimated 130 Terawatt Hours per year — more than Ukraine or Norway, or all the televisions and lighting in US homes.

The New York Times reported the dismay felt by Austrian artist and architect, Chris Precht, in learning that the creation the 300 pieces of digital art he had been planning to sell as NFTs “would have burned through the same amount of electricity that an average European would otherwise use in two decades.”

Certainly, the environmental impact of Blockchain and NFTs puts the arguments over heavy wine bottles in context, but companies like Treasury Wine Estates and Constellation – owners of Penfolds and Robert Mondavi – don’t seem to be too concerned about this aspect. And nor does NFT champion Gary Vaynerchuk who is familiar to the wine world as the the first Wine YouTuber, and one of the first influencers in any sector to use that platform. Or the growing number of Wine-NFT start-ups.

Green NFTs?

Could NFTs overcome the environmental issue? One organisation that believed so was the World Wildlife Fund which, in February 2022 created 13 of its own NFTs depicting endangered species in an attempt to raise funds. By working with Polygon, a ‘Layer 2 blockchain’ which operates in a different way to the original model, the WWF was confident that it had found a ‘clean’ version of the new technology.

Unfortunately, as The Verge reported, they were mistaken. The publication quoted Alex de Vries, founder of Digiconomist and creator of the Bitcoin Energy Consumption Index as saying that the WWF is “supposed to be all for sustainable innovations, and they’re getting involved with one of the least sustainable things on the planet.”

A day after the launch WWF recognised that de Vries was right, and halted the project.

The best way for NFTs to defend themselves against the charge of environmental recklessness will be for the computers behind them to be run on renewable energy, but critics will fairly argue that every watt of wind or solar power that is generated would be better employed heating and lighting houses than providing power for digital currencies and artifacts.

Storage Income

Mondavi is expecting the NFT buyers to take delivery of their collectible bottles, but logically, there is no reason why an estate might not offer to store the wine in its own cellars over the long term – even for a succession of owners. The old London merchant Berry Bros & Rudd does precisely this, selling a case of wine in bond to one of its customers who may then sell it to another through the company’s own trading platform. Berry’s is paid a storage charge, as well as a commission on the sale. Why should a Bordeaux chateau or Burgundy estate not do the same?

Bragging rights

At present, the owner of the case of wine in Berry’s store only has a letter or an email to prove what they own, or to support what are now widely known as ‘bragging rights’. The pleasure some people get out of telling others what they own (and have quite possibly paid dearly for) is intimately linked to NFTs – as is discussed in this podcast, but the world of wine collectors is far from immune from it.

If Mark Zuckerberg is correct in believing that we will all soon be living parts of our lives in the Metaverse it seems highly plausible to imagine a wine collector wanting to invite their friends to visit an online wine cellar packed with the avatars of the bottles they have bought, and that are now quietly maturing in the cellars of the estates where they were produced.

A New Audience

But who are those friends?

For some wine businesses, this may be the most crucial part of the picture. Wine, as Rob McMillan of the Silicon Valley Bank, the influential observer of the US wine scene, revealed in his latest report, is losing out to other beverages when it comes to attracting younger buyers.

“Today, wine isn’t the next generation’s preferred alcoholic beverage…The challenge of recruiting younger, health-conscious, multicultural consumers into the wine category, combined with the aging of the older core wine consumer, remains… These consumer groups have different values and spending patterns. The wine industry has done little to alter their marketing message to attract or retain either consumer cohort.” McMillan says. 

Traditional wine professionals may shake their heads in dismay or confusion at the idea of anyone preferring a cocktail with a well-prepared dish of food, but the cleverer members of the industry are preferring to meet the challenge head-on.

Describing the target audience for the Yao Ming NFT, Jay Behmke, president of Yao Family Wines includes wine collectors before going on to list “sports memorabilia collectors, NFT collectors, early adopters and anyone who appreciates the value of one-of-a-kind assets." People, in other words, who might not have been traditional customers.

When launching Château Angélus’s NFT, Stéphanie de Boüard-Rivoal, its co-owner and CEO, made the same point, explaining the move quite simply as “an opportunity for us to be connected with the new players in the market and explore new habits of consumption.”

Her St Emilion neighbour and another  Bordeaux NFT pioneer,  Flavien Darius Pommier, the flamboyant and owner of Chateau Darius was even more blunt in an interview with the crypto-currency publication Ultcoin365

“We didn’t want the NFT to be more expensive than the wine – the whole point of using NFTs is to reach a new audience.”

Maybe not yet

That aim makes sense, but so do all of the other concerns surrounding NFTs. If the market in these shiny new toys is already over a quarter of the size of the US wine industry - and likely to grow even larger – they shouldn’t be ignored. The potential for NFTs to help in the combat against wine fraud is certainly interesting, but there will be other ways to achieve this.

On balance, the innovative label designer Kevin Shaw is almost certainly right in suggesting that “we should probably be wary of supporting a medium until it’s cleaned up its act.” Maybe, in the short term, while keeping an eye on the way NFTs evolve, most wine people should limit their involvement to charitably buying a digital corner of Ukrainian flag.

 

For a well-explained two-hour demolition of NFTs, this video takes some beating

Note: The Having Your Cake and Eating It section was added on Tuesday March 8th after the original publication of this article. Further amendments may be made as this topic develops.

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