The ‘buzz’ around NFTs has been ongoing for several years. At its most basic, an NFT is a unique and identifiable digital asset. The owner of an NFT holds a token that correlates to a digital file of some kind (normally an image). While the visual aspect of an NFT may be simple to replicate and copy, the holder essentially owns a digital certificate (by virtue of that token) that is recorded on a public blockchain (meaning that it cannot be easily amended or edited). The underlying smart contract in relation to the NFT governs some of the broader rights that a holder may have.
Some organisations have seen NFTs as an opportunity to reach out to and interact with their ecosystem or community. In that regard, and for some projects, the ownership of the NFT may also grant additional ‘real world’ rights such as entry to an event, or membership to a club. In some circumstances, the NFT may even relate to or give ownership in part of a real-life asset.
Music NFTs operate in a similar manner. The biggest difference is that the underlying NFT relates to music (or the artist) in some form and is not purely a visual asset. The token could, for example, be in the form of a song, album cover, music video, or even a piece of music randomly generated by a computer or artificial intelligence. Some bands are now releasing their music by both NFT and conventional methods.
The benefits to music NFTs are numerous and fundamentally offer a new channel for artists to identify new revenue streams and connect with their fan base (although any offering would likely not be confined to that fan base). Ultimately, it allows a holder to own something unique related to that artist. The power of the smart contract which governs the NFT (combined with the visual or audio element of the NFT) enables a huge amount of versatility for what an artist could do (without getting into the IP or regulatory issues which are connected with this kind of project). The smart contract could confer additional rights on a holder which might mean that the holder of a token becomes entitled to receive a proportion of royalty payments. It is also likely that there will only be a finite number of NFTs concerning that specific artist’s project—which, for some, may drive value in the hope that the NFT will itself become a collectable. For the artist, the initial minting and sale (and likely onward sales via royalty payments) of each NFT will generate a new and potentially lucrative income stream for them.
But how does an artist really engage with their fans with an NFT? An NFT can be purchased and traded by almost anyone from any location in the world with an internet connection. The NFT could be used to confer the holder with the right to: a ticket to a show (perhaps seats that would not be available on general sale); access to exclusive merchandise; or even to meet and greet events. There are lots of questions that spin off from this—how does an artist actually go about tokenising or creating an NFT of something? How does a fan prove that ownership or prove that they control the address that holds the NFT? What happens if an artist does not follow through on their promise (for example, in relation to the tickets or meet and greet?). This is without even considering the underlying regulatory position or any related IP issues.
IP—Whose Property?
Ultimately, and at its most basic, the IP rights which are transferred with an NFT are dependent on the terms of the underlying smart contract that relates to the NFT. Some token standards make provision for the transfer of IP rights. Others (for example ERC-1155 or ERC-721) do not confer the transfer of IP rights (and so the rights that a holder has could be limited to the subsequent onward transmission of the token).
Music NFTs add an additional dimension to this because the underlying registered and unregistered rights that connect to that NFT can be significantly broader in scope. In many cases, an artist may not actually own all IP rights to some of their music (they may be owned by a record label or various other interested parties). Therefore, and behind the scenes, we expect that contractual documentation will need to be in place to deal with these issues to avoid a situation where an artist infringes one of these rights.
Further, a purchaser of a music NFT will only have rights to use the NFT itself and have no rights to the underlying asset (the music) unless these rights have also been transferred to the purchaser—which would require the IP in the underlying asset (not just the NFT) to be assigned, or licensed, in writing. This requirement for explicit written terms detailing that the rights in the underlying asset are also to be assigned or licensed should provide comfort for sellers of music NFTs, yet it may confuse buyers who may believe (incorrectly) that they are purchasing rights to the music/underlying asset without explicit, written terms to that effect. Smart contracts should therefore detail exactly which rights are, and which rights are not, being sold.
Whereas music NFTs can represent an exciting new income stream or marketing strategy for artists/copyright owners in music tracks, it should be noted that they also bring with them the risk for the copyright holders that their IP may be misused by copyright infringers through the minting of unauthorised NFTs. This particular area of copyright infringement is presently untested in an English court, but theoretically there could be grounds that unauthorised minting of music NFTs could amount to infringement of the reproduction right of the copyright holder, in addition to infringement of the communication right.
Given the potential for NFTs to cause infringement issues for artists/copyright holders, there are several steps artists and/or IP owners can take to monitor the new world of NFTs and enforce their IP rights. These steps can involve monitoring NFT marketplaces. Given that music NFTs utilise blockchain technology, there is difficulty in ascertaining the creator of an NFT; however, monitoring an NFT marketplace can still be useful as once a potential infringing NFT is identified, there are steps to have the NFT removed from the marketplace, thus protecting the owner of the underlying IP rights.
Regulation
The regulatory position is an interesting and fast developing one. In England, for example, the Financial Conduct Authority (FCA) regulatory perimeter is generally focussed on how a token is classified and how that token is then interacted with. If a token looks like a security (ie a share) or is electronic money, then it is likely going to be regulated and various authorisations and permissions will be needed to deal with it. In addition, the FCA requires certain virtual asset businesses to register with it for anti-money laundering supervision. This can be the case even where the underlying token is not regulated. That can include, for example, where a business is running a form of exchange or selling a new token. There are many overlapping multi-jurisdictional regulatory issues that could apply here—especially if someone is intending to market and sell an NFT across borders.
Ultimately, an artist considering going down this road needs to take advice and make sure that they are addressing these issues to avoid any adverse consequences.
Conclusion
Putting to one side the practical barriers to entry, the development of music NFTs is a welcome one. The regulatory position (and also the IP position) will continue to develop and progress all over the world—and we expect that organisations and individuals will continue to innovate and find new use cases. This will inevitably lead to disputes concerning the rights attributable to NFTs and the regulatory treatment of them. The courts of various jurisdictions are frequently dealing with digital asset-related issues, and so we expect that they will become adept at dealing with these disputes. NFTs will continue to make noise across a variety of industries.
