Table of contents:
Introduction
From their inception in 2014, Non-Fungible Tokens (NFTs) have become one of the fastest growing, blockchain based, asset classes. NFTs, as a technology class, have primarily evolved around the image file. However, this is beginning to change…
Music is arguably the single most unifying aspect of our lives, connecting people across borders and bringing our world so much closer. Here at NFTempo, we’re embracing this and are building it into the centre of Web3. Music represents one of the most exciting changes for both the music-sphere and NFT market. With this in mind, we believe 2023 is the year for the next generation of content creation with limitless possibilities!
NFTs are also representative of one of the biggest developments in digital ownership since the inception of distributed ledger technology. Music NFTs can come in many forms, from traditional NFTs, to tickets and fractional ownership of music royalties. The NFT market currently presents significant challenges to users within the existing legal frameworks. NFTs, like all things in the crypto space, follow existing laws. Music NFTs are no exception to this and must be sold with the relevant contracts and documentation in order to legally prove ownership.
Here, we will outline the key areas of legality within the music industry and NFT market.
An overview of music rights
Music from the legal perspective can seem daunting, however once broken down, it becomes much more digestible. Here's how it looks in practice.
Firstly, let's start by considering ‘what is a royalty?’.
A ‘royalty’ is simply a payment made to the owner of a particular asset, with the rights to use that particular asset. The ‘royalty interest’ is the right to collect future payments from the royalties. Royalty owners are paid first, before all other parties (i.e shareholders, companies etc..) these payments are made in specified intervals, this can be monthly, quarterly or annually.
The process begins when an artist creates a song, this is split into two categories each with their own set of properties and requirements -composition and sound recording rights. The composition copyright originates from the days of ‘composers’. They cover the underlying composition, meaning music with or without lyrics, this entails the melodies, arrangement of notes and the specific order of chords. Composition rights are held by the songwriter(s), lyricist(s) and sometimes, the record label. Sound recording copyrights (often called ‘Masters’) can simply be explained as the ‘master track’ or tracks.
Following the creation of the copyrights, we move on to the various rights these enable. Synchronisation rights cover the licensing for films, TV etc. Sync rights are agreements between the user (licensee) and rights owner, often negotiated upfront as the rights holder retains full control over whom they licence to and for how much.
The reproduction and mechanical rights cover the exclusive rights to reproduce and distribute the music. These cover streaming platforms, digital versions of the song (I.E. Apple Music), physical copies (I.E. CDs, Vinyls, DVDs and tapes) any any/other forms of reproduction of music.
Performance rights simply cover the performance of a song in a public space. So, let's define public performance: A performance is deemed as being ‘in a public space’ if the performance's audience is outside of family and friends. The performance rights cover performances at concerts, nightclubs, TV, radio, digital means (twitch, youtube live etc…).
Moving onto the rightsholders, they are the owners of the various copyrights and rights.In music right now, this is commonly split between the musician (who created the song and will perform it), the record label and the publishing company. The percentages can vary depending on a number of factors but commonly the label and distribution company/companies take 85%-95%.
To summarise this…. A song > generates copyright > which generates particular rights which permits > the rightsholder(s) to collect royalties.
What does this mean for NFTs?
NFTs are simply a unique, digital ‘proof’ mechanism. NFTs as a technology class enable users to digitally transfer the ownership of a non-fungible asset. Music NFTs represent the logical evolution of this technology and empower musicians to create new revenue, whilst providing value to fans. Music NFTs can come in many forms, from tickets to the commercial royalties themselves.
Music NFT collectables will usually be sold with a limited licence agreement (A type of copyright law which sets out what the user may or may not do with their NFT). Here at NFTempo, we will guide minters through the entire legal process to ensure the community remains the pinnacle of trust and safety.
NFTs on the royalties marketplace represent fractional ownership in the commercial rights of a song or album. These NFTs can be sold with a variety of rights/copyrights included. The percentages of commercial rights along with their duration is decided by the artists themselves.
In practice, this could be 25% of all commercial revenue from a new album for a duration of 3 years, with royalties being paid monthly. In this example, the artist fractionalises the rights as 25 NFTs (each NFT representing a 1% share of commercial rights). The NFT holders will receive 25% of all revenue generated by the album over the 3 year period (36 monthly payments). Following the conclusion of the royalties payments contract, the NFTs simply become traditional NFTs which can be sold on the NFT marketplace.
Musicians have complete control over how a royalty’s mint works. They could sell the rights to an individual song, an album or even their entire catalogue! Musicians could sell 1%-100% of their royalties and the duration could be as short as a month all the way up to a lifetime of rights.
NFTempo will offer its in-house legal services to musicians wishing to sell their rights and our third party royalty collection agencies will manage the revenue collection and holder distribution side. Musicians are of course free to use legal or collection services of their choosing, we simply request 48h to ensure all areas are fully compliant and safeguard users.
Conclusion
NFTempo is fully committed to our mission of democratising music for all. The combination of Web2 and Web3 infrastructure unlocks a wide range of possibilities for musicians, fans and investors alike. NFTempo uses blockchain technology since it offers a simpler, cheaper and more efficient way of doing things -benefits we directly pass on to our users. NFTs still present certain challenges, as they are currently unregulated in most jurisdictions, we believe that by creating a platform which builds upon the existing legal frameworks (rather than against) we negate several systemic challenges of the NFT market.
Disclaimer
The information discussed does not constitute legal or financial advice and should not be considered as such. All views expressed the personal opinions of the writer(s) and in no way constitute the views or opinions of NFTempo LTD.
