Earlier this month, American rock band Kings of Leon released their eighth album as a non-fungible token ("NFT"), a novel kind of cryptocurrency that has recently become popular among musicians and other artists. This blog explains what an NFT is, and how they might impact contracts in the music industry and beyond.
What is an NFT?
An NFT, or non-fungible token, is a cryptocurrency where each unit is one of a kind. They are attached to digital assets, like a piece of digital art. Although the appearance or characteristics of the digital asset might be copied, the NFT and the underlying blockchain can be used to prove the authenticity and ownership of the piece. This creates a market for the sale and resale of NFTs and the associated assets.
NFTs differ from Bitcoin. They are "non-fungible" as they are clearly distinguishable from each other. They cannot be mutually interchanged like Bitcoin can.
As blockchain has become more popular, the use of NFTs has grown, particularly in the digital art industry. NFTs allow digital artists to sell their artwork at higher prices as they allow the buyer to prove originality and authenticity, in the same way that original paintings are usually worth more than mass-produced prints.
Legal issues with NFTs
Of course, unlike an original painting, possessing an NFT does not give you physical possession (or the ability to have exclusive enjoyment) of the art. Jack Dorsey, founder of Twitter, recently sold an NFT of the first ever tweet for $2.9million USD. Despite this huge price, that tweet still exists on Twitter, and can be read, retweeted or liked by others.
In addition, the intellectual property rights in the digital asset do not automatically transfer with the sale of the NFT. The creator of the asset or the third party seller can retain ownership and commercially exploit the IP.
NFTs also raise some interesting legal questions. What legal system governs your ability to sell or securitise the NFT? What happens to it on your death or insolvency? The law of property generally is determined by where the asset is located, not a legal system chosen through contract. What property laws apply to NFTs? As the NFT industry develops, these issues are likely to become more prominent.
NFTs in the music industry
When the live music industry stalled due to the COVID-19 pandemic, some musicians turned to NFTs to supplement their income. Several musicians have offered limited edition pieces of digital art for sale to their fans, like Canadian artist Grimes, who sold ten pieces depicting her digital avatar "War Nymph" for $6 million. Other artists have sold individual songs as NFTs.
The Kings of Leon's new album, When You See Yourself, was the first album ever to be released as an NFT, as well as in traditional formats. The band offered several NFT album packages for sale. The most basic of these contained the album and special digital artwork. However, they also auctioned 12 "golden tickets", which entitle the holder to a special VIP concert package including front-row tickets at each Kings of Leon concert tour for the rest of their life.
Smart contracts
The Kings of Leon's golden ticket packages are underpinned by smart contracts, which could have potentially significant legal consequences for the music industry.
Smart contracts are computer programmes with contracts in their code. On presentation of an NFT (or other crypto token), the smart contract automatically executes and documents the pre-programmed combination of events and actions. The underlying blockchain technology is used to verify the parties' identities and maintain the integrity of the transaction. NFTs can therefore be used to unlock smart contracts personalised in any number of ways, like Kings of Leon's VIP concert experiences.
NFTs and smart contracts can also be used by artists to exercise greater control over their work. They could, for example, be programmed to remit a portion of all future resales to the original artist. They can also remit future revenue to third parties, like musical collaborators owed royalties, or artists' fans, with the potential to create a unique referral scheme for music. They can also be used to cap future resale prices, to prevent ticket scalping and exploitative pricing.
How can we help?
Whether you are navigating contracts in the music industry (smart or otherwise), or considering the legal and compliance issues of blockchain in general, you may require expert advice. Please do not hesitate to get in touch with us or your usual Brodies contract.
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