Music Rights and NFTs: What should we (realistically) expect?

For the purposes of this article, we will assume that you already have a basic understanding of what NFTs are. If not, we recommend you check out Verge’s NFTs, explained first, and come back to this article once you’re familiar with the basics. 

Since artists like 3LAU, Grimes, and Deadmau5 auctioned off digital music, merchandise, tickets, and experiences worth millions of dollars, NFTs — the digital tokens authenticated using blockchain technology — have become the single hottest topic in the music business. 

Right now, most buyers are crypto-savvy investors, and most NFT offerings can be described as simple digital collectibles. However, there’s an undeniable potential for NFTs in music to become so, so much more. It’s easy to imagine that as the market matures, more music-first audiences will enter the space — and if the NFT offers turn from digital memorabilia into real financial assets supported by music copyrights, we might be looking at a radically new way for artists to fund their careers and establish the value of their art. This NFT-powered future seems like a breath of fresh air for a lot of people in the post-streaming, post-COVID industry — but is it at all realistic? Let’s find out. 

https://twitter.com/elonmusk/status/1371549960030842893

So, what is the actual promise of NFTs (and blockchain in general) when it comes to the music business? Outside of making stacks on stacks on stacks (just kidding, don’t expect that), NFT technology enables artists to easily and quickly transfer ownership of an asset — whether it’s a piece of digital art or your entire publishing catalogue. In theory, NFT can make every single music copyright instantly tradable and transferable.

The potential benefits of the wide adoption of NFTs in the music business are numerous — to name just a few:

• Increasing licensing efficiency: making licensing easier, facilitating the exchange of music rights and creating a public record of ownership that can be used to resolve overlapping royalty claims.
• New forms of investment: opening the music rights market to the general public. With the help of NFTs, artists can allow their fans to invest in their copyrights directly. There’s a good reason labels and publishers are a part of the artist's careers — and the point is not to bypass them completely, but to enable other sources of investments.
• New ways to monetize music: Most NFTs marketplaces automatically pay out royalties to the creators whenever the NFTs are bought and sold. Hence, artists can earn a bit of royalty every time their digital art piece is flipped.

However, in the real world the complexities of music licensing and royalty processing mean that this dream of an “open market for music rights” can’t come true — at least not just yet.

In most cases, music rights are not readily transferable

Imagine you want to put your copyrights on this open, NFT-powered market. Well, first you’ll need to make sure you actually own them. In most cases, artists transfer parts of their music rights to their partners across the industry — to labels, publishers, producers, songwriters, and so on. To establish another, NFT-powered contract transferring those rights, artists would have to acquire permission from all of the parties who already own a piece of the pie. They will need permission from their label or publisher, with an agreement in place to determine how those royalties are collected and paid. 

Right now, most distributors and labels are simply not equipped to deal with that — nor are the publishers or collecting societies. That is why thus far NFT sales have only involved newly produced music, owned solely by the artists. An NFT auction for the previous catalog, where rights are already divvied up between several parties, is simply not possible, at least yet. 

The NFT marketplaces are still underdeveloped 

Besides, it’s not only the music industry. The NFT platforms are not ready either. Right now, there is no authentication to verify that the creator of a token actually is the owner of the underlying copyright — technically speaking, nothing prevents me from trying to sell a token for the entire Drake’s catalogue, even though I don’t own any of it. 

Then, to make things even more problematic, while the blockchain database under the hood of NFTs is permanent, any content attached to the NFT has to be hosted on an ordinary website — which means that if anything were to happen to it, the NFT would become completely worthless. I mean, blockchain would still confirm that you own the NFT, but what’s the point if the NFT itself is attached to a 404 page? And that is not such an unlikely scenario: according to the CheckMyNFT project, some of the most valuable music NFTs were failing to load consistently just a few days after they were auctioned off.

NFTs owners have to collect royalties by themselves

Here’s how the royalty dividends for the NFT-mediated investor would work today. The day after an NFT purchase, the newly-born copyright holder will have to contact a relevant collection society or a distributor. To recognize them as the rightful owner, the middlemen will require proof of ownership, i.e. an IP agreement with the autor(s) of the composition re-assigning appropriate copyrights.

Here’s how Canadian electronic music producer Jacques Greene who has auctioned the publishing rights to a new single via an NFT, describes the process of transferring the rights: “LuckyMe holds the master, I still hold the artist/performer side, and now, Trevor McFedries owns the publishing. In the document that was transferred to him at the end of the auction, I retained permission rights, so the song can't be used in a Raytheon or US military commercial tomorrow. It is up to the token holder to register as a publisher, and it's not my job to chase down whoever owns this token. Once they're registered, then they can get residuals on streams, and if it gets synced or used on a TV show or something like that, they will get the publishing cut.”

Okay, so I was emailed this PDF stating that I own some of the publishing copyright — but what can I do with it? How do I find the right collection society? Would I need to register my own publishing company to get paid? Be sure that those thoughts would be racing through the head of any music NFT investor.

The point is, NFT buyers have to understand how music licensing works and what they need to do to get set up and start collecting royalties. This creates a massive entry barrier for any potential music fan turned micro-investor. First, they will need to figure out the ins and outs of crypto-trading with its gas fees, minting, cold/warm/hot storage, and all that. Then, they’ll need to figure out how the music copyrights actually work.

The structure of the music rights, especially on the publishing side, can be confusing even for the seasoned music pros, let alone an average music fan. To make the system work, someone will have to educate the potential buyers on the intricacies of music licensing, or set up a separate process to validate NFT-mediated copyrights. So, for the foreseeable future collecting the actual royalties following an NFT purchase won’t be easily accessible to fans — as this Twitter thread clearly shows, the process of buying music copyright NFTs is anything but solid and tractionless.

https://twitter.com/MintRoyale/status/1374313911336505346?s=20

A possible way forward can already be found in companies like Bluebox, aiming to make music rights accessible to fans by building a complete royalty chain from licensing to royalty allocation on top of an NFT marketplace. However, such an approach might also limit the NFT’s liquidity by restricting the market to a single platform, which can undermine the final value of the tokens themselves. 

At the end of the day, NFTs are just a tool — a tool that helps people transfer ownership of an asset and determine ownership agreements between different parties. The barriers that a potential token buyer will face when it comes to purchasing master or publishing rights are the same as any industry player would’ve faced. The challenges of NFT-powered copyright exchange are not about the underlying technology — instead, they are about how the systems of music rights management and royalty collection/distribution are set up across the board. 

Want to learn more? Check out Vanessa Magos’ live audio interview later today on NFTs, artist management and new tech for indie artists on Water & Music.

Written by Julie Knibbe, edited by Dmitry Pastukhov