⚖️ Owning and Minting Music NFTs: Legal Issues to be Considered

🔍Backdrop:

Despite the ongoing bear market, we still see a lot of web3 builders who are untainted by its ripple effect, indefatigably building and experimenting with novel ideas. Web3 music industry is no stranger to persisting growth — every day, we see founders announcing their projects’ launch and musicians and fans advocating the fast-evolving new forms of music distribution and engagement.

Here, we are not trying to sheer ourselves in a carapace of bravado, but just to pin-spot the niche area that has been quietly building from its bedrock. The industry is still very nascent, but major press like Forbes, Billboard, and Bloomberg has started to take note of what impacts NFTs and other blockchain technologies can bring to the artists’ career and fan communities. And according to Billboard, the total trade volume of the top 10 music NFTs reached 1000 ETH in June. It seems like the industry is now entering its sprouting phase.

Against this backdrop, I would like to shed light on the legal issues that can arise from dropping and trading music NFTs, for the artists and fans who are seeking to enter this growing industry.

Everyone knows that minting an object as an NFT can provide the opportunity to easily and transparently raise money and track their ownership history, and purchasing the NFT enables them to financially support their favorite artists, in a more direct way. However, what has been insufficiently discussed is what ‘ownership’ really means in legal terms, and what rights and liabilities are applied to the musicians and the fans(or buyers/owners) upon their trades. In most cases, they are vaguely or barely communicated between the two parties. Even when they are clearly specified in the Terms and Conditions of NFT collections, buyers often overlook the documents.

But failure to provide or review the legal documents can beget disputes and impact their outcomes

These are the reasons why I decided to pen this article explaining the legal context of minting, purchasing, and owning music NFTs. Of course, it is impossible to provide answers to all of the legal issues surrounding music NFTs with a single article. Further discussion will be necessary to build an international legal framework that actually works for the coordination between people with different needs and nationalities. Instead, I would like to deepen your understanding of what music NFTs really are and elaborate on the scope and the limitations of the rights they confer.

🧐 What Are NFTs Exactly?

Let’s touch on the term NFT first. NFT stands for non-fungible token. “Non-fungible” means that each token is unique and irreplaceable, and therefore, it can be paired with a media file like a painting, photograph, video, song, and even an AI virtual human to represent your ownership of the underlying asset. Unlike real-life trades, you can prove your ownership without any notary or middleman, thanks to the open, decentralized ledger.

However, you must understand that NFTs are just on-chain representations of their underlying media files. Usually (but not always), the media files are stored off-chain or in IPFS, due to the high cost of processing and verifying the large amount of data across the blockchain network. Each NFT contains a URI(Universal Resource Identifier), a link that points to a file that contains metadata of it. That being said, you can simply think of an NFT as a token that contains a link to its original file. So, let me put it in an easier way: to mint an NFT, you upload your media file to an off-chain storage system, create a link to it, and contain the link in your NFT’s smart contract.

Of course, there can be potential risks aroused from this practice — What if the original file is deleted and the link points to nothing? What if someone just downloads the original file and uses it in every online space? To clarify, the former question exactly explains why decentralized storage systems like IPFS were first brought to life. And the answer to the latter question is — that is exactly how NFTs accrue their value.

In short, once deployed, NFTs are indeed immutable and will work as an on-chain certificate of ownership of a unique digital item, but their underlying media files are easily accessible and replicable by any online user. It is considered a tacitly accepted principle by the crypto and web3 industries unless otherwise specified. This can conflict with your copyrights, so please read through the terms and conditions of the platforms you’d like to use and consult with the teams before actually minting NFTs.

😯 Then What is Music NFT?

‘Music’ usually refers to a vocal or instrumental sound that we can listen to, but when we use the word as a premodifier for NFT then it may refer to your ‘ownership’ of any rights and assets that can be produced by the music industry. So, their underlying items can be any form of artwork that has musical components, like songs and tracks, music/dance videos, or generative sounds. They can also carry a share in the streaming revenues or royalty incomes of a track/an album, or offer your membership into a fan community or a ticket to a concert.

There is an infinite variety of potential use cases for music NFTs. It really depends on how the issuer wants to structure his/her NFTs. The thing is, buyers usually do not check or read the legal documents to review what rights and obligations are set forth by their provisions, and artists overlook the importance of providing a clear legal basis. Even though the blockchain technologies’ inherent decentralized and open nature makes them difficult to fit in a traditional regulatory regime and will thus need a new legal framework to be built, it is those legal provisions that will protect you when disputes arise.

😰 But What Should We Look Out For?

First of all, you need to keep in mind that in most cases buying a song or a track as an NFT does not grant you royalty, IP, or copyright claims.

The concept of ownership or copyright is very complicated to explain, especially when it comes to digital work, but let us unpack the basics for you:

There is no such thing called ‘international copyright law’. That means every country has its own IP laws. However, the rise of the Internet era had accelerated the establishment and settlement of several international treaties to handle and manage the copyright issues of artworks created all over the world.

In many countries, especially if your country is a member of the Berne Copyright Convention (see the full list of the members here), copyright is an IP right that is automatically vested to a creator. It means that once someone creates a tangible form of work (i.e. writes a song or makes a recording), it is automatically copyrighted. The duration of the protection may vary depending on the form of your work, please check the details here.

Even so, creators are encouraged to register their work through an authorized institution (i.e. U.S. copyright office) to get public records and entitlement to certain benefits, especially for cases of bringing an infringement action in the federal court.

Besides, the copyright owner also enjoys a “bundle of rights” related to the work. The “bundle of rights” may refer to the rights of:

• reproduction
• preparation of derivative works
• distribution
• public performance and display of the work

The legal interpretation of trading NFTs can be tricky when it comes to copyright issues. There are some platforms and artists that intend to offer an actual transfer of copyright ownership of their original work. However, you need to keep in mind that it would be difficult to assess if this practice is compliant with the legal formalities that are required for copyright transfers.

In some countries, the rights mentioned above may be transferred to another party either in whole or in part only when the authorized person of the rights (usually the creator of the work) writes and signs an assignment (i.e. the UK’s Copyright Designs and Patents Act(CDPA)). Regulations regarding the transfer of moral rights can also vary in different countries; under U.S. laws, moral rights can be transferred or waived to another party, while the EU recognizes that moral rights are “inalienable and cannot be transferred or waived.

So if you are going to mint an NFT that shares some or all of your rights with the holders of different nationalities, or if you are going to buy one that belongs to such collections, then it would be much safer to check what laws will be applied to your case. Please also double-check if there are any contradictory terms and conditions, even when the legal documents are provided.

What if you are planning to mint an NFT of a co-created artwork

Of course, you should get approvals from your collaborators — anyone who was involved in the creation of your work including a songwriter, lyrics writer, song cover designer, and label. If you already have signed a contract with a label and assigned your copyright to them then you will need to consult with qualified legal counsel and gain permission from your label before minting an NFT. In other words, an artist who has not yet signed with a label or is no longer subject to the terms of a label agreement would have maximum flexibility when minting NFTs.

And this is an additional piece of FYI advice: If you are offered financial benefits other than its copyrights via purchasing NFTs, i.e. royalty dividends, it can be considered a ‘security’ by the SEC, and the buyers will be required to comply with the relevant laws. Be sure to check if a platform or an NFT collection clearly addresses the issue and abides by the regulations before being engaged with it.

I’m not saying that we need to be ‘overcautious’ and limit our experiments to settle in the existing legal framework. We always say ‘we are still early’ and the earliness means that there is ample room for growth and innovation, but it also means that there is no clear legal guidance and consensus across a variety of jurisdictions. In near future, regulators will likely call for more stringent obligations and increased scrutiny on digital asset transactions — and drawing attention from legislators is not necessarily bad in the long-term, as it will also provide some basis for protecting the rights of the investors and creators and foster global business activities.

It will take a substantial amount of time for the industry to mature and for an international legal framework to be emerged to be applied to daily use cases. Until then, please DYOR and protect your rights and guard against exploits; I hope everyone stays safe amid this new wave of innovation in the music industry.

✍ Author: Clara Chung. Head of Growth at Ooh La La. Member of ColorsxDAO. Founder of Holy Crypto (curating & translating crypto articles to Korean).

✨Deepest thanks to Tiffany Zhao (Finance, Ooh La La) for the feedback and legal review while developing this essay.

Also published here.