Just over a year ago, Michael Winkelmann—better known as Beeple—shook the art world when an NFT of his work, a digital collage titled “Everydays: The First 5000 Days, sold for $69 million through an auction at Christie’s. Some would say this is the eye-popping sale that cemented the NFT craze that continues to make headlines.
Since then, NFTs have expanded well beyond fine arts. In fact, non-fungible tokens have exploded, creating new business models across industries. This includes the music space, which has joined the chorus of NFT innovation.
With the steady stream of NFTs now disrupting the music scene, those creating and investing in these digital assets must be aware of the dangers that come with the territory. In fact, legal landmines associated with NFTs are already beginning to surface, as is litigation arising from less-than-diligent NFT practices.
But before diving into their potential pitfalls, let’s begin with an overview of how NFTs are starting to change the face of the music biz as we know it.
An Enhanced Relationship Between Artists and Fans
NFTs are digital assets stored on a blockchain used to record ownership. Among so many other things, songs, albums, album art, lyrics, soundbites and most anything else music related can all be tokenized. And musicians in the know are doing just that—creating and selling NFTs, which is decentralizing the business away from streaming services and record companies and, at the same time, markedly changing the way artists and fans interact.
Kings of Leon was the first band to directly release a complete album as an NFT. In addition to the group’s music, purchasers were able to unlock special perks, such as a limited edition vinyl, and secure front row seats to upcoming concerts. Kings of Leon also released a separate NFT which included exclusive audiovisual artwork.
The NFT options for acts like Kings of Leon are many. Blockchain technology allows musical artists to offer NFTs that include access to audio files, alternate mixes, and PDFs that deliver lyrics, album art or even personalized messages. Remember, the NFT itself is simply a token—or key—to gain access to any type of digital file or provide authentication for off-chain physical items; say, Kings of Leon merch, tickets for entry to exclusive shows, or the chance to hang backstage with the band.
NFTs can also be minted to be upgradeable. This means that songs can be released that fans or collaborators can build upon—an offering that bypasses the legal firewall normally in play when music is sampled or remixes are created. Parenthetically, these NFTs allow original creators to maintain a modicum of control and even profit directly when their works are “upgraded” (more on the pros of NFTs for artists in just a moment).
As NFTs become more mainstream within the world of music, it’ll become abundantly clear that, for fans, NFT purchases will far exceed the streaming experience or other methods of music listening.
A Potential Windfall for Musical Acts
NFTs can be a boon for musicians as well.
Artists typically earn a minority percentage from the sale or licensing of their music, regardless of the distribution channel. Music streaming to paying subscribers pays very low rates—rates that are significantly worse for ad-based streaming. It’s concert tours that provide the primary revenue source for many musical acts, but live events were an impossibility during most of the COVID-19 pandemic. This lack of touring income highlighted the low rates paid for streaming consumption and negatively impacted artist earnings over the past two years.
By selling music, collectibles, limited access events and similar items as NFTs, musicians are in the driver’s seat, able to increase revenues without relinquishing ownership or control to content platforms. In fact, when minting NFTs, musical acts can use smart contracts to decide the scope of rights to release, if any, and to whom those rights should flow. For instance, a performer who sells an NFT can continue to receive royalties automatically, even after the original buyer decides to sell the digital asset at a later date. Better yet, this process can continue each time the NFT is sold or re-sold—all because of the blockchain and the NFT’s own metadata that record and store transfers of ownership. And to the extent these offerings are sold directly by artists, they realize an additional income source not subject to recoupment by labels or publishers.
Artists can leverage NFTs to sell royalty streams along with their music too. That’s right, available technology can be used to embed rights into NFTs so that buyers can receive royalties from the songs or albums they purchase. However, allowing fans to become financial stakeholders in their favorite bands’ music can be a dicey proposition given the federal securities issues that may arise.
To be sure, selling music royalties to the general public by way of NFTs is a revolutionary strategy, though the scheme could be seen as soliciting investments to those expecting to turn a profit through no direct work of their own. This is risky and requires legal counsel, especially when federal regulators may be chomping at the bit to police NFTs and reprimand artists who knowingly or unknowingly attempt to skirt federal law.
The Perils of the NFT Trade
Without question, there are plenty of reasons why fans, investors and musicians would want to jump on the NFT bandwagon. But they’d all be wise to do so with caution. Here are but some of the reasons why.
As mentioned, certain NFTs may be regulated as securities; specifically, those that include participation in royalty streams, which will likely be scrutinized by the SEC or other securities regulatory agencies. If NFTs like these aren’t compliant with applicable securities law and they lose value for market reasons, buyers may have claims for recission of their investments and creators could face regulatory actions to boot.
NFTs sometimes incorporate the works or rights of others, without having the rights associated with the underlying IP. This is a real problem because the failure to secure permission from a copyright or other IP owner before including the protected material in an NFT could subject the originator of the digital asset to legal action and financial exposure in the form of infringement litigation. This has already come up in a case involving Roc-A-Fella Records and Damon Dash, Quentin Tarantino’s proposed NFT involving the Pulp Fiction script, and a StockX NFT involving a pair of Nike sneakers.
Another red flag is waved when NFTs are issued based on opaque licensing language or vague disclosures. To say the least, music licensing is extremely complex and requires a sophisticated knowledge of royalty streams, overlapping rights and related issues. In the context of NFTs, some underlying licenses are—or will be—just too ambiguous and related disclosures unclear, a combination likely to wind up being litigated when investors believe their NFTs include certain rights but issuers have something different in mind.
A Whole New World
Many in the music space treat NFTs like something out of the Wild West. Carrying this metaphor a step further, artists and buyers may soon find themselves embroiled in courtroom shootouts.
The peril of lawsuits and regulatory actions aside, NFTs look to be a win-win for fans and musicians alike. Blockchain technology facilitates unique offerings that heighten the fan experience and fosters a never-before-seen level of interaction between collectors and creators. Contemporaneously, musical acts have at their disposal an entirely new method of monetizing their art, albeit in a manner that—once more universally adopted—could potentially have a fundamental impact on the economics of the music industry.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.
