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Why NFT Sales in the Music Industry Are Still the Wild West — and What Can Be Done About It

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It took the music business until the final six months to catch on to the NFT trend. Major players are now hoping to follow small players into the industry, but the more stakeholders there are, the higher the barriers become.

When the NFT mania in the music business reached a fever pitch earlier this year, it seemed like everyone was racing to manufacture the crypto-collectibles in some way. The non-fungible tokens, abbreviated as “NFT,” have piqued the industry’s interest in 2021 due to their promise of increased fan interaction and a new source of revenue. After a tough period for musicians, with virtually all tours canceled or curtailed due to COVID-19, the usage of cryptocurrencies has become a welcome and rapidly-growing option.

The space is the “wild west,” as Lee Parsons, CEO of Bluebox, a blockchain-based music startup, puts it. And, while he thinks it’s an exciting moment to be working with NFTs, he also sees hazards. NFT sales, in particular, are pushing the boundaries of intellectual property rights and copyright law in the music business.

Non-fungible tokens, for the uninitiated, are digital valuables that are generated (“minted”) and sold utilising the security of blockchain, a publicly accessible database that tracks and records transactions. Artwork, tickets, music, trading cards, and other assets that are unique and difficult to trade are examples of NFTs. Fungible cryptocurrency, on the other hand, such as Etherium, Bitcoin, and Dogecoin, are not one-of-a-kind. Fungible cryptocurrencies, like conventional money, may be readily swapped for something of equivalent worth. Most markets demand payment in fungible cryptocurrencies to acquire an NFT, however there are a few outliers that accept payment in fiat currency.

NFTs have been around since the release of Crypto Kitties (one-of-a-kind digital pets in late 2017), and a few experimental musicians such as 3LAU and RAC were minting them prior to the current frenzy. However, it took the music business as a whole until the past six months to catch on. According to statistics compiled by Water + Music, musicians have earned $70.5 million in NFT sales by April 2021, with the great bulk of those purchases occurring between February 2021 and today. Every day, it seems, a new use case for NFTs is announced, or a new record is broken, but this is due to its rapid ascension from a crypto-hobby nerd’s to a popular use.

So far, one of the most popular types of NFTs has been audio-visual, which combines a graphic with an audio recording. However, because these types of NFTs are likely to incorporate the work of numerous artists, they may quickly become a copyright problem (visual artists, songwriters, producers, etc.).

Minting them “becomes tricky, since there are other owners and controllers [of copyright] alongside you in the NFT,” says Dina LaPolt, an entertainment attorney and the founder of LaPolt Law. To achieve this securely and legally, you’ll need to obtain permission from each copyright holder involved and plan ahead for royalty splits for the NFT. Clearing the music inside an audio-visual or even a simple audio-based NFT for a major-label pop artist whose liner notes feature a laundry list of co-writers and producers (each of whom might be tied to their own labels and/or publishers) can be a lengthy and expensive procedure.

This might explain why independent artists and brands have accounted for 57.1 percent of music-related NFT sales to date. Independent artists have fewer partners to deal with and fewer gatekeepers to keep their decisions out of.

Despite the fact that big label stars may take longer to catch up with NFT production, this paradigm might shift in the coming months.

LaPolt warns artists against plagiarising the intellectual property of those who were not engaged in the creation of the NFT. “I’ve seen several NFTs with Disney or Marvel characters in them,” says the author. “That’ll be a disaster,” she predicts. “You don’t have permission to use that.” In truth, the Visual Artist Rights Act, often known as VARA, is protected by Section 106 of the United States Copyright Act. Artists are protected from having their work attributed to them, as mentioned in VARA.

When minting an NFT, it’s also critical that the producers understand exactly what they’re buying and selling. NFTs do not transfer ownership of copyrighted content unless otherwise specified, thus if a song is used in an audio-visual NFT, the composition and sound recording remain the property of the original owner.

“It’s the same as when you buy a CD. “You don’t own the intellectual property merely by buying the album, but you do own that one-of-a-kind physical copy,” says Karl Fowlkes, entertainment attorney and founder of the Fowlkes Firm. “It operates in the NFT space in a similar way. Unless [the smart contract] specifies otherwise, you don’t possess any intellectual property.”

With the aid of new firms devoted to extending the use of NFTs to safely and swiftly transfer the ownership of intellectual work, this is fast changing. Artists are now selling fractional ownership of their sound recording copyrights as a new method to earn cash, according to Bluebox and Vezt, two businesses at the confluence of music and cryptocurrencies. Vezt and Bluebox are selling little bits of their sound recordings to fans in a technique Vezt has dubbed a “Initial Song Offering (ISO),” which was nearly impossible before blockchain.

“If you tried to acquire a tiny bit of copyright earlier, you were talking about $50,000 to $200,000 in legal expenses simply to start the process of buying it,” says Bluebox CEO Parsons. “We can now easily set this up to record on the blockchain.”

Taylor Bennett, an independent Chicago rapper and sibling of Chance the Rapper, is one of the newest fractional ownership converts. He joined up with Bluebox last month to sell 75 percent of a forthcoming single release in bite-sized quantities straight to fans, while keeping a 25 percent controlling ownership interest. With the purchase, fans will be able to receive royalties based on the track’s popularity, but Bennett will maintain complete exclusive rights to the copyrighted work, including the ability to distribute, create derivative works based on the copyrighted content, and more.

Fractional ownership is an intriguing alternate source of finance that may become more widespread in the future, but it has its own set of drawbacks. Unfortunately, fractional ownership remains unattainable for most artists who are signed to a label or only own a fraction of their copyrights, already sharing ownership with many other collaborators, and it could also cause problems with the SEC, which may view fractional sales as a form of “security,” and thus be subject to regulation, under existing law.

Although NFT sales as a whole remain mostly uncharted territory, LaPolt contends that there are some significant benefits. “The beauty of NFTs right now is that they’re in a free market,” she explains. “75 percent of songwriters’ income is regulated by the government thru the antiquated copyright provisions and the noncompete agreements that govern ASCAP and BMI for quality royalties,” LaPolt, a longtime advocate for songwriters’ rights, sees this one as a beneficial emerging space for the music industry if conducted properly. There are no restrictions right now, which is great for creators.”

Minting will become less of a guessing game as the usage of NFTs grows in the music industry. Record companies are already developing guidelines to help them make sense of the situation. When an artist clears the sound recording for an audio-visual NFT with a label, the firm now considers it a sync licence. “Some industry traditions are already emerging,” adds LaPolt. Of sure, customs will bring some restriction, but it will also bring much-needed clarity, allowing artists to lawfully mint NFTs with security.

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