NFTs and Wine: the Pros and Cons

The new technology platform which has already taken the art world by storm, is changing the way wine is traded. Will it open a path to new consumers? Robert Joseph reports.

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Are you looking for more background information? For a Long Read that offers a deeper dive, click here (reading time 16m).

Non-fungible token (Photo: denisismagilov/AdobeStock)
Non-fungible token (Photo: denisismagilov/AdobeStock)

 

  • A non-fungible token (NFT) is a piece of unalterable data, that can be sold and traded online.
  • Global sales were worth $24.9bn in 2021.
  • NFTs can be used as a guarantee of wine for wine authentificity.
  • Producers including Napa producer Yao Ming, Constellation and Château Angelus have adopted NFTs.
  • By removing the middle man and including commissions on subsequent sale, NFTs may give producers extra ongoing income.
  • New options are opening for would-be wine investors, but these come with risks.
  • Producers believe that NFTs may attract new wine buyers.
  • The huge environmental cost of ‘minting’ – producing – NFTs remains a major concern.
  • The link with unregulated cryptocurrencies remains a worry for some, despite their adoption by major financial institutions.

 

 

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 in support of 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 tweeted that it had already received in crypto by March 1st

Economic Importance of 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 – 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.

What is an NFT?

So, what is an NFT?. Fungible’ is a term used by economists to describe interchangeable ‘goods or commodities – like two barrels of crude oil or two bottles of the same wine. A pair of vineyards, diamonds or theatre seats, would have identifiably different characteristics, and are thus ‘non fungible’. Each digital NFT has its own unique set of letters and numbers - the 'identifier' - that make it a non-interchangeable is a unit of data that can be sold and traded on digital markets.

Blockchain Technology (Photo: fotomek/AdobeStock)
Blockchain Technology (Photo: fotomek/AdobeStock)

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 – 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, bringing the technology into the mainstream economy.

On a larger scale, companies such as Barclays, Deutsche Bank, IBM, Accenture and Microsoft have adopted it, for example for product traceability or provenance. 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.

Pioneering NFT Wine

In April 2021, 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. In December, and a few miles down the road, the Constellation-owned Robert Mondavi winery offered another 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.

 

To Kalon Vineyard
To Kalon Vineyard

Limited Rights

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.”

Reselling NFT Wines

In case a 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.”

Dollars or Crypto?

These words were well-chosen. Mondavi will have been happy with the publicity its NFT launch generated, but 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. 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  bought that much crypto would have been worth when the NFTs were launched.

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 that is pegged to the US Dollar and, in January of this year, had a market capitalization value of $34.7bn. 

Extra Income for the Producer

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. Artists can make a commission for themselves every time one of their works changes owners. Beeple’s will receive a 10% commission on subsequent transactions, on top of the initial $69m

What would work for him could be just as applicable to a winery with a thousand or so bottles of a specific wine.

Fighting Forgery (Photo: waldemarus/AdobeStock)
Fighting Forgery (Photo: waldemarus/AdobeStock)

Fighting Forgeries

Linking each bottle to a single immutable NFT would not, of course, prevent a skilled crook from drinking its contents, replacing them with another liquid and reselling it and the token. But that bottle and token could only be sold as a pair of individual entities as bound together as Siamese twins. So, unlike Rudy Kurniawan, today’s forger couldn’t fake a dozen bottles of 2020 la Tâche, with the same or invented numbers. And, of course, if a forgery is detected, the digital paper chain of transactions through the exchange will facilitate 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 fine wine-NFT investment companies. One of these, wIV, with offices in London, Oslo and Singapore claims to offer “blockchain-based unique asset technology designed for the wine industry, turning investable wines into high-yielding NFTs". The hallmark of many of these startups is the financial. gaming and software background of their teams, and the enthusiasm they have for wine - and NFTs - as an investment. Given the unregulated nature of the market, this trend needs to be treated wih caution.

Environmental Costs

Blockchain creation depends on huge energy use.

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.

Newer forms of so-called ‘Layer 2 blockchain’ such as Polygon are supposed to be much less energy-intensive, but doubts still remain about these. The World Wildlife Fund halted a fund-raising NFT campaign using Polygon after a day, following criticism from its members. 

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.

 

The reasons why wine is proving such an attractive honeypot for NFTs are in any case controversial, and unpalatable for those in the industry who like to think wine is for drinking.

Investible Goods

Some, of course, quite rationally, see wine as an investible good – like gold or art – whose value rises and falls and is thus appropriate for speculation. Interest in, or love for, the contents of the bottles may be no more relevant to these people than a passion for sport is for some of those who profitably trade in rare baseball cards. (In case this phenomenon has passed you by, it is a multi-billion dollar market whose value is rising annually by 13-23% depending on the source of the estimate).

Showing off an Online Cellar

Mondavi is expecting the NFT buyers to take delivery of their collectible bottles, but logically estates might offer to store the wine in its own cellars over the long term – even for a succession of owners - while allowing its owners to store the NFT in a virtual cellar in the Metaverse. If Mark Zuckerberg is correct in believing that we will all soon be living parts of our lives as avatars why shouldn't wine collector's invite their friends; avatars to wander around their digital wine racks. Showing off – or ‘bragging rights’ – is a motive for buying wine that many prefer to overlook. But it’s real, and the Metaverse will offer an easy way to do it.

 

 

Rob McMillan, State of the US Wine Industry 2022
Rob McMillan, State of the US Wine Industry 2022

A New Audience

But who are those friends? This may be the most crucial part of the picture. Wine, as Rob McMillan of the Silicon Valley Bank, an 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…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.”

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.”

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.

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