Why NFT Sales in the Music Business Are Still the Wild West — and How It Might Be Tamed
When the music industry’s NFT craze hit its fever pitch earlier this year, it seemed nearly everyone was rushing to mint the crypto collectibles in one form or another. The non-fungible tokens, known colloquially as their acronym “NFT,” have captured the industry’s fascination in 2021 for their promise of fan engagement and a new source of income. After an already difficult moment for musicians, with nearly all touring canceled or at limited capacity due to COVID-19, this use of cryptocurrency became a welcomed and fast-growing opportunity.
As Lee Parsons, CEO of Bluebox, a blockchain-based music company, puts it, the space is the “wild west.” And although he believes it is an exciting time to be working with NFTs, there are risks, too. For the music industry in particular, NFT sales are testing the boundaries of intellectual property rights and copyright law.
For the uninitiated: Non-fungible tokens are digital collectibles which are created (“minted”) and sold using the security of blockchain, a publicly accessible ledger which tracks and records transactions. NFTs can be artwork, tickets, music, trading cards, or other assets which are unique and not easily exchanged. In contrast, fungible forms of cryptocurrency — like Etherium, Bitcoin or Dogecoin — are not unique. Just like paper money, fungible cryptocurrencies are easily exchanged with something of equal value. In order to purchase an NFT, most marketplaces require payment in fungible cryptocurrencies, but there are a few exceptions which offer payment with traditional cash or credit as well.
NFTs have been around since the creation of Crypto Kitties (one-of-a-kind digital pets that came around in late 2017), and a few experimental musicians like 3LAU and RAC were minting them before the current craze. But the music industry at large did not catch on until the last six months. By April 2021, according to data collected by Water + Music, musicians had earned $70.5 million in NFT sales to date, the vast majority of which was made from February 2021 up to now. It seems that every day a new use case for NFTs is being advertised, or a new record is broken, but because of its quick ascent from something traded among crypto-nerds to its use in the mainstream populace, many folks in the music industry rushed to join in quickly.
So far, one of the most popular forms of NFTs has been audio-visual — meaning a graphic paired with an audio recording — but these can easily become a copyright mess, because these sorts of NFTs likely contain the work of multiple artists (visual artists, songwriters, producers, etc.).
Dina LaPolt, an entertainment attorney and the founder of LaPolt Law, warns that minting these “becomes murky, because there’s other owners and controllers [of copyright] with you in the NFT.” In order to do this safely and legally, you must ask permission from each copyright holder involved and determine royalty splits for the NFT in advance. For a major-label pop star whose liner notes contain a laundry list of co-writers and producers (each of which could be signed to their own labels and/or publishers), clearing the music within an audio-visual or even a simply audio-based NFT often becomes a lengthy, expensive process.
This might explain why, to date, 57.1% of music-related NFT sales have been made by independent artists and brands. Independent artists tend to have less collaborators to settle with and less middlemen to gate-keep their decisions. But even though it may take major label stars more time to catch up with minting NFTs, this paradigm could stand to flip in the coming months.
LaPolt urges artists to beware of using the intellectual property of someone else who is not involved in the process of minting the NFT. “I’ve seen some NFTs that have Disney or Marvel characters in there. That is going to be a disaster,” she says. “You don’t have the rights to that stuff.” In fact, in Section 106 of the United States Copyright Act, visual artists are protected under the Visual Artist Rights Act, also known as VARA. As stated in VARA, artists are protected from the attribution of their work, their art being attributed to work they did not create, and the mutation of their work, among other protections. “You’re going to see litigation in this area,” LaPolt warns.
When minting an NFT, it is also crucial that the creators are clear about what exactly is being bought and sold. Unless otherwise stated, NFTs do not transfer the ownership of the copyrighted material therein, so if a song is featured in an audio-visual NFT, the composition and sound recording itself still belongs to the original owner.
“It’s like when you buy a CD. You don’t own the intellectual property just by buying, but you own that unique physical copy of the record,” explains Karl Fowlkes, entertainment attorney and founder of the Fowlkes Firm. “It works very similarly in the NFT space. You don’t own any of the intellectual property unless [the smart contract] says so.”
That’s rapidly changing, however, with help from new companies dedicated to expanding the use of NFTs to safely and quickly transfer the ownership of copyrighted material. With Bluebox and Vezt, two startups lying at the intersection of music and cryptocurrency, artists are now selling fractional ownership of their sound recording copyrights as a way to raise capital in a new way. Much like buying a stock in a company, Vezt and Bluebox are selling tiny pieces of their sound recordings to fans in a process that Vezt has nicknamed an “Initial Song Offering (ISO),” a process that was virtually impossible prior to blockchain.
“If you were to try and buy a small piece of copyright before, you’re talking about $50,000 to $200,000 in legal fees just to start the process of buying it,” explains Parsons, the Bluebox CEO. “Now, we can set this up to record on the blockchain easily.”
Taylor Bennett, the independent Chicago emcee and brother of Chance the Rapper, counts himself as one of the recent adopters of fractional ownership. Last month, he teamed up with Bluebox to sell 75% of the ownership of an upcoming single release in bite-sized quantities directly to fans, retaining the 25% majority ownership stake for himself. With the purchase, fans are able to collect royalties based on the success of the track, but according to this specific sale, Bennett continues to retain full exclusive rights of the copyrighted work: the right to distribute, the right to prepare derivative works based on the copyrighted material, and more.
Fractional ownership poses an exciting alternative source of funding which could become more common in the future, but it comes with its own limitations. Unfortunately, fractional ownership still remains unrealistic for most artists who are signed to a label or only hold fractions of their copyrights themselves, sharing the ownership with many other collaborators already, and it could also pose difficulties with the SEC which may deem these fractional sales as a form of “security,” according to existing law, and thus could be subject to regulation.
Although NFT sales as a whole still remains largely a wild frontier, LaPolt argues that there are some major advantages to that. “The beauty of NFTs [is that] it’s in a free market right now,” she says. A longtime advocate for songwriters’ rights, LaPolt sees this as a beneficial emerging space for the music industry, if conducted properly, noting: “75% of songwriters’ income is regulated by the government through antiquated copyright provisions and the consent decrees that govern ASCAP and BMI for performance royalties… Right now, there’s no rules — which is really good for creators.”
As the use of NFTs continues to grow in the music business, minting will become less of a guessing game. Record labels are already creating protocols to make more sense of the space. Now, when an artist clears the sound recording for an audio-visual NFT with a label, the company treats it as a sync license. “It’s already developing some industry customs,” says LaPolt. Of course, with customs come some regulation — but it will also provide some much-needed clarity, helping artists legally mint NFTs with security.