As more artists explore the sale of their music rights and royalty streams as NFTs, Eamonn Forde examines the potential benefits and current limitations of the space.

At the very start of 2021, few people in the music business knew what NFTs (non-fungible tokens) were; but blockbuster NFT sales by acts like Grimes, 3LAU, Steve Aoki, The Weeknd, ODESZA and more in the first half of this year showed that there were phenomenal sums of money to be made here as artwork, music rights and “experiences” were all bundled up and sold.

Everyone now, it seems, has an NFT strategy.

Inevitably concerns grew about just how, where and if music rights (or shares of music rights (or shares of the earnings from music rights)) could be sold as NFTs.

In a piece I wrote for The Guardian in April, one songwriter told me how they had been fobbed off with the offer of a cash gift when an album they had written on was sold as part of an NFT package for a, frankly, jaw-dropping amount of money. What they were being offered worked out at 0.07% of the reported money the NFT sale raised. They were also told that, in accepting the “gift”, they waived the right to a claim on any future earnings if the NFT was re-sold.

“I haven’t had much work for the past year [due to the pandemic] and this felt like the universe finally delivering something,” they said of the original offer when it came through. “There are people, who are naive or new to the industry, who would sign immediately. The sellers are playing on that mentality – that they just need to sign this bit of paper to get paid.”

While there is great excitement around music and NFTs, Karl Fowlkes, entertainment and business attorney and founder of The Fowlkes Firm, warns that IP and copyright laws still have to be respected. It might be a new world, but it should not follow we scrap all the old rules of doing business and controlling/protecting rights.

“Although this is a new space, the issues feel quite the same as it relates to copyright and selling music rights,” he says. “NFTs aren’t and shouldn’t be used as a way to shirk copyright law. You have to make sure you actually have the ability to sell the music rights and royalty shares that you are looking to sell. It’s also important to monitor how labels will react to third parties receiving royalties who are not in contractual privity to them.”

The fact that the new rules of engagement here have still to be defined is taken by some as a green light to race in and carve out a bold new future; but it is taken by others as an amber or red light where extreme caution needs to be exercised.

On the effusive side is music producer Yuri Beats who is auctioning off some of the publishing rights to the Lil Dicky track ‘Molly’, which he produced.

“The NFT will be presented to the winner of the auction and this share of royalties will be distributed to the owner of the NFT,” he says of the sales process here and how speed bumps will be navigated. “There’s a lot of this transaction that must happen off-chain; there is publishing admin that will occur in the traditional ways publishing admin always has. This makes it even more important that I partner with a group that has experience with publishing admin and crypto auctions. That makes the Royalty Exchange an ideal partner here.”

He adds, “The world of publishing admin can handle a handful of writers on a track and the way that the royalty distribution is structured will make the transfer of my share seamless. If anything, increasing the number of stakeholders around this asset has the potential to have more invested parties pitching it for commercials or trying to help it sync, so I really see expanding the stakeholders as a positive.”

“The problem is that the collecting societies do not operate in the world of blockchain; therefore to have an NFT for music royalties is still early days.”

– Edvin Pauza, Royalty.Finance

On the more circumspect side is Edvin Pauza, the founder and MD of Royalty.Finance.

“The problem is that the collecting societies do not operate in the world of blockchain; therefore to have an NFT for music royalties is still early days and it does not function on blockchain as a transaction of every stream which is registered and paid to the royalties NFT owner,” he says. “All the current platforms are centralised and take in data from collecting societies and other channels globally. While some do a better job than others, and some are a lot more sophisticated and digital than their analogue predecessors, the whole industry requires a new infrastructure.”

Fowlkes, for now at least, argues against selling music rights or royalty shares as NFTs.

“Quite frankly, there really isn’t any tangible benefit at this point in time,” he says. “It doesn’t speed up payment or make the accounting process better. It really just creates a chain of ownership. It’s something to monitor, though; if bigger institutions and royalty distributors adopt blockchain and crypto infrastructure, it could be a game changer.”

Part of this hesitation is down to the fact that the NFTs live on-chain (i.e. on the blockchain) whereas the royalty administration and payment processes are, out of necessity, happening off-chain.

“That disconnect makes a lot of music NFTs fairly useless at this point,” says Fowlkes.

“If bigger institutions and royalty distributors adopt blockchain and crypto infrastructure, it could be a game changer.”

– Karl Fowlkes, The Fowlkes Firm

The rights and admin complexities around NFTs are, for now, dominating the conversations in the music business, but another huge consideration at the top of discussions has to be their environmental impact. All technologies come with an ecological cost, but NFTs, tied to cryptocurrencies and the blockchain, are seen as being among the worst offenders.

There are no simple answers here about what the environmental toll has been or what is being done about it; but overall none of the findings are exactly great.

Matt Black, one half of Coldcut and co-founder of Ninja Tune, has blogged about his ethical and existential crisis as he tried to resolve the twin dynamics of NFTs as a creative outlet and NFTs as being potentially environmentally catastrophic.

“Not content with our trashing the planet, our culture will be 100% commodified into further vain, pointless, expensive pollution,” he wrote. “Fucking ugly.”

The arrival of NFT marketplace OneOf, however, is pushing its significantly greener credentials as a reason for musicians to use it rather than its competitors. Big-name musicians are backing it and this shows that not everyone in the music industry is closing their eyes and ears to the environmental worries here. Hopefully this movement – like the wider awareness of music’s carbon footprint – will gather pace in the coming months and shape how (or, rather, where) music NFT sales happen in the future.

To NFT or not to NFT? Their place in music’s future

Music companies are increasingly coming out and making it explicit that NFTs are part of their future business models. For example, in its annual report, published in early July 2021, Hipgnosis had this to say on where its business could go next.

“The NFT space is also a focus and we aim to ensure our artists are collaborating with some of the leading creators in the crypto art space. This includes not only the potentially lucrative NFT landscape but also increased activity in the production and release of personalised digitally focused merchandise and collectibles utilising our copyrights which will lead to significant upside in revenues.”

Yuri Beats argues that we are in an important transition period here, but he remains a utopian with regard to NFTs and the sale of copyright shares.

“The NFT functions as a bridge between the old world of publishing admin and the new world of crypto,” he proposes. “The bridge isn’t fully built yet, but I’m hoping this is one small step to seeing royalty and publishing administration handled on-chain.”

“The NFT functions as a bridge between the old world of publishing admin and the new world of crypto.”

– Yuri Beats, music producer

He continues, “I want to see NFTs become tools for other creators and empower entire networks to circumvent the traditional structures that, while being very sophisticated at extracting capital, often hamper creativity, experimentation and growth.”

This issue of the old world and new world crashing together was made explicit in a Billboard piece in May which suggested that Universal Music Group was “no longer accepting letters of direction for the sale of royalty streams” and this could have huge implications for the NFT sales of shares in royalties.

This may be a temporary measure until the business properly recalibrates around NFTs, but the fact that the biggest music rights company in the world is pulling the brakes here will have enormous repercussions for the rest of the business and how quickly it can make the leap into the world of NFTs.

NFTs: hyped or heroes?

Given just how quickly NFTs have impacted at the heart of the music business and how swiftly – from the good and the bad to the mediocre and the pointless – many were to go all in on NFTs, there is a risk this could become a victim of its own hype.

Is it all going to explode in a fireball of hype and leave the ashes of apathy behind it?

“Similar to how Bitcoin or Ethereum was popularised, it will take time,” says Pauzza. “TraFi [Traditional Finance] is still yet to full accept and incorporate DeFi [Decentralised Finance]. We are still relying on central bodies to report on streaming, collect it and pay it out. There are a lot of inefficiencies along the way and it’s expensive to the actual royalties owner as everybody gets the cut along the way. There needs to be a transparent, automated process that is easily auditable, cheap and which build consensus with all the stakeholders and interested parties.”

He continues, “The first NFTs were – and some are still – a bit of a fad, a gimmick, a Pokémon card. But for some NFTs, especially the ones that produce cashflow […] no, it’s definitely not a fad. If it’s a good investment at the current price in Ethereum, that’s another question.”

“Right now the non-fungible token space works better for the art community than the music space because of the royalty admin and payment processes being offline in music.”

– Karl Fowlkes, The Fowlkes Firm

For Fowlkes, he feels there is a lot of potential in the space – but also a lot of issues that need to be ironed out before we can progress further. The music industry should not run here before it can walk: it should take its cues from other creative industries who are a little further down the path.

“I don’t think NFT’s are necessarily a fad,” he says, “I just think the media narrative confused the actual benefits. Right now the non-fungible token space works better for the art community than the music space because of the royalty admin and payment processes being offline in music. If the bigger players get serious about making the industry better for creators, the blockchain will transform digital rights.”