EDITOR’S UPDATE — June 15, 2022: V2 of this contract template has now officially been released to cover off-chain benefits (including merchandise and community/VIP access), which comprise some of the most popular forms of utility around music NFTs this year. You can read the research methodology behind V2 here.

tl;dr — This project began as an effort to create a “simple” music NFT contract template, as a follow-up to our high-level research from Season 1 on issues facing the music/Web3 ecosystem. After exploring the legal complexities behind many different music NFT use cases — including multi-creator, royalty-based and access-based NFTs — we ultimately decided to focus our prototype on the simplest use case for a music NFT: A single piece of artwork with music attached to it, all owned by a single creator. Our modular template guides the user through different paths based on their answers, and outputs a custom PDF file that they can then attach on- or off-chain to their NFT releases. We also populated our tool with education points about music copyright and Web3 fundamentals, making it an evergreen resource for artists, artist teams, entertainment attorneys and developers looking to navigate the wild west of music/Web3 law. To demonstrate the practicality of this resource, we’re partnering with Guspy, an independent artist in our community, to release a new song in the coming days as the first 1/1 music NFT using our contract template.

This is Part III of a five-part, collaborative research report that the Water & Music community has put together over the last two months on the state of music and Web3, as a follow-up to our Season 1 report in December. Part I of our report focused on the state of music DAOs; Part II focused on studying music NFT platforms’ onboarding strategies. You can view the current state of our report rollout and a full list of our contributors by visiting stream.waterandmusic.com.

Contributors to this research thread on legal music/Web3 issues are listed at the bottom of this page, sorted by role. To support our work on-chain, you can purchase an NFT cover of this study, which will grant you lifetime membership access to Water & Music.

Music is often the first industry to feel the effects of emerging, disruptive technology, and Web3 is no exception.

The first rush of music/Web3 activity in 2015 largely focused on the possibility for blockchain to improve a broken royalty system. The second wave, starting in 2020, has been marked by the rise of music NFTs. While the first wave tried to fix long-standing structural issues around attribution and payment, the second wave was a logical extension of the booming creator economy, promising artists the ability to transact with their fans directly in a platform-agnostic capacity.

Independent artists, long thought of as being on the fringes of the music industry, are often the first to experiment with and embrace new technologies because they are not beholden to third-party rightsholder control. NFTs have created an entire economy around this experimentation, with heavily funded tools that cater to solo artists’ needs and allow them to operate with good faith and often without as much legal formality. However, the harsh reality is that when it comes to enforcement and accountability, the law eventually comes in as the great equalizer: Even the most agile, tech-forward independent artists are still beholden to the same complex copyright law as artists signed to major recording and publishing deals.

As the music industry’s use of blockchain technology matures, the need for formal protections and mutual education for both sides will continue to grow. For our Season 1 collaborative research project on defining music NFT ownership, we annotated and analyzed almost every publicly available (off-chain) music NFT-related legal contract. In doing so, we realized that a lot of contracts for music NFT projects that were otherwise seen as pushing the music/Web3 ecosystem forward were making fundamental errors about basic music law concepts, like the difference between sound recording and composition copyrights. These mistakes weren’t always because of a lack of knowledge. Instead, they often reflected a tension between old and new music industry practices and mindsets, especially regarding copyright law.

Building from this initial research in Season 1, we saw the need to create a legally sound, foundational resource for the growing music NFT community to help bridge this educational gap. Our original idea was to create a basic music NFT contract template that artists could fill in. This idea evolved into a modular, interactive contract walkthrough between the buyer and seller of a music NFT, which populates based on the artist’s answers to a series of questions related to their release.

This article explains the challenges and limitations that arose throughout this process, and why we made our choices. We hope that by sharing the problems we ran into, we can highlight the problematic nature of new technologies for creation, distribution and monetization getting stuck in the gears of traditional copyright legislation.

Disclaimer: Our intention is to provide a platform for information and self-help. The information given in this article is provided for your private use and does not constitute legal advice. We do not review any information you provide us for legal accuracy or sufficiency, draw legal conclusions, provide opinions about your usage, or apply the law to the facts of your situation. If you need legal advice for a specific problem, you should consult with a licensed attorney. Information provided by this article is not a substitute for legal advice from a qualified attorney licensed to practice in an appropriate jurisdiction.

You can access the contract template here.

Who is this contract template for?

Part of the goal for this project is to continue the conversation around new forms of ownership enabled by blockchain technology and how they interact with existing copyright law vis-à-vis music. In addition, we wanted to create a resource for artists, artist teams, entertainment lawyers and Web3 builders to use and borrow from when executing their NFT projects.

This project will support artists and their teams as they consider how NFTs could become a part of their broader strategies for releasing and distributing music. In our contract template walkthrough, we’ve paired up the main legal text with a series of education points around key legal and copyright considerations that all musicians should understand, while explaining how these concepts relate to releasing NFTs and putting music on-chain. The contract template provides artists and their teams with a starting point to consider and fashion their own NFT projects and the legal agreements that underlie them. It also provides insight into some of the limitations and unsettled legal issues that still exist around music NFTs, allowing artists and their teams to enter into NFT projects fully informed about the risks involved.

The same applies to entertainment lawyers who are receiving more and more questions from clients about NFTs and are looking for resources that make sense of the relationship among traditional contracts, smart contracts and on-chain ownership. Our contract template provides basic language (we know how lawyers love to borrow from each other!) and explanations that present strong starting points for developing NFT contracts, while also foregrounding the tensions and unsettled issues between traditional legal ownership, contract enforcement and digital, “ersatz” ownership.

Finally, the outputs of this project will also be useful to music/Web3 developers, especially those who are less familiar with key legal considerations in music. Through our education points, our contract template helps builders to better understand the legal basis underlying the products and platforms they are creating, how their design decisions may impact artists and identify and mitigate potential legal issues before they become a problem. This project also highlights some of the existing guardrails around legal ownership that NFT projects must follow, including developing an initial understanding of how Web3 ownership concepts interact with traditional legal copyright structures, and allowing builders to identify areas where fewer extant limitations exist and where innovation could potentially take place.

We intend to expand the function of this interactive and modular contract and educational resource to cover more scenarios for artists and their teams. We started with a narrow scope to ensure functionality, but adding optionality in the future will help us continue to make sense of the possibilities and limitations around how this new technology interacts with the law.

METHODOLOGY & CHALLENGES

A. Defining scope

From a legal perspective, the primary challenge in executing this project is a lack of established legal standards for music and Web3. We decided to keep the scope of our contract limited to avoid questions that are still too unsettled or complicated to address in a “one-size-fits-all” document.

We considered many NFT models, such as “royalty” NFTs and NFTs with more than one creator, but we ultimately decided those would have to be a part of future iterations of this project. When working through this process, our primary consideration was how much adding a feature would complicate the contract for an audience that wasn’t as familiar with music copyright law or Web3, and whether that complication was worthwhile in the context of this report.

One feature we thought was worth including, despite adding complexity, was the buyer’s ability to resell their NFT with a percentage of the profits flowing upstream to the artist. We realized this was a fundamental part of the narrative around NFTs and their novel benefits to artists. However, a significant issue with this kind of utility is that a right to receive future revenue can be considered a “security.” This applies, for example, to NFTs that allow the buyer to own an interest in the future royalties of a song. Two major music-related examples here are Opulous’ S-NFTs and Royal, both of which we discussed in our Season 1 report in December, 2021. We concluded that most options fail to skirt potential SEC intervention entirely. The issue remains that when an NFT does constitute a security, a whole body of law and regulations applies. This issue won’t settle until the SEC starts to establish regulations in this sector, for which they have recently instigated a probe.

It is also unclear how the holder of a revenue-generating NFT can guarantee they receive accurate accountings from the disparate royalty streams that a single work generates (streaming royalties, YouTube income, public performance income, etc.). We are unsure, at this time, of how much of this accounting burden should fall proportionally on the artist, platform, or even the NFT owner, especially once the NFT has been resold on a secondary market. These are complicated questions that our template is currently incapable of resolving in any helpful way.

We also had to consider the jurisdiction for where this contract would be interpreted and enforced. Even though a decentralized blockchain allows buyers and sellers to transact without any geographic limitations, every country has its own rules for interpreting and enforcing contracts. Hence, a jurisdiction has to be determined in the context of our project. We chose United States law simply because we are licensed in the US, and that is the legal code with which we are most familiar. Also, using US law allows the parties to use the American Arbitration Association, which is a helpful mechanism for resolving contract disputes without resorting to costly and time-consuming litigation. (If you’re a non-US-based attorney who wants to get involved in this project, please reach out to us. We’d love to expand the borders of this project.)

Next, we considered cases where the artist minting the NFT does not own or control all of the rights to the intellectual property (i.e. composition, recording and artwork) contained in the NFT — perhaps due to there being multiple collaborators on the IP, or due to the included audio file being a remix, sample or other derivative work. This scenario includes situations where the minting artist may already be subject to an exclusive recording or publishing agreement. In these cases, the artist may not own or control the work they are purporting to sell via NFT (either because they created the piece with collaborators who have not granted permission or because their exclusive rights to the work have already been granted to a label or publisher). Here the artist must tread very carefully before minting an NFT and should consult with their own lawyer to fully consider the specific situation in question instead of relying on this template.

Finally, we considered NFTs that offer the buyer “off-chain” or “real-world” benefits, like tickets to a concert or exclusive access to the artist (e.g., through a meet-and-greet or exclusive community membership). Although adding such benefits to NFTs is an excellent way for artists to establish deeper fan connections, the details of those benefits should be described in a more customized way than we are able to generate using a template. For example, an NFT that lets the buyer meet the artist in person would require specific language concerning how, when and where the meet up would take place. This would be difficult to generate with a question-prompted template. There is also an open question about what happens to the NFT on a secondary market once the “real-world benefit” has already been used or experienced by the initial buyer. For these reasons, artists looking to mint NFTs with “off-chain” or “real-world” benefits should consult with an attorney instead of relying on this template.

After discussing and rejecting the various NFT models mentioned above, we were left with developing a contract for an NFT consisting of a single piece of artwork with music attached to it. Further, the artist minting the NFT is the sole owner of both the song and artwork, known as “the work,” and is not party to an exclusive recording or publishing agreement, and the buyer is only acquiring a non-commercial license to use and display the NFT without any other “real world” or financial benefits attached. This type of NFT is the most straightforward because it is a simple sale from the artist to the buyer, making it an attractive place for us to start creating a contract template.

B. Drafting the contract and designing the template

The next step in our project was to draft the actual contract. To do so, we combined language we prepared with modified language from contracts already being used in music/Web3 projects.

Our primary concern during this process was reconciling the inherent tension every lawyer faces between creating a contract that is “simple” and one that is “complete.” On the one hand, we wanted something precise, specific and comprehensive so that any judge or arbitrator could interpret and enforce its provisions in a meaningful way if it ever became the subject of a dispute. On the other hand, we also wanted to create something that anyone can read and understand in layman’s terms without necessarily needing the help of a lawyer. We were also careful to make sure that it’s clear that nothing in our contract constitutes legal advice or creates an attorney/client relationship. We chose our words carefully for each section of the contract and made changes whenever the non-lawyers in our research group told us that our “legalese” needed translating. As a result, this template is perhaps a lot shorter and less formal than what might be produced at a large law firm, and any artist using it should be aware that such choices were made intentionally.

Our focus on comprehension and accessibility also led us to create educational points that appear throughout the document and during the question prompts. These topical summaries and examples from the real world are intended to supplement the contract and provide context to each provision, even when some “legalese” is unavoidable. Hopefully, these education points add an extra layer of understanding so that both parties know what they are agreeing to when using this template.

As we went through these processes, it became clear that the most pressing, vexing and significant question addressed in this contract is “what can the buyer actually do with this NFT?” This consideration gets to the heart of what is so challenging about creating a legal standard for music NFTs: The “thing” the buyer is acquiring is not the exclusive copyright to the music or artwork, but the NFT itself, which is a difficult distinction to conceptualize. Paragraph 2 of the contract seeks to draw this line in a clear and meaningful way by setting forth which rights in the “bundle of rights” that one gets with a copyright remain with the artist, as well as describing with examples how the buyer of the NFT might violate those rights by engaging in certain commercial activities.

The most complicated parts of the contract to explain to a non-lawyer are the transfer of rights. We needed to make the artist wanting to use this contract understand that they can’t sell their NFT if they don’t own all the copyrights to the artwork and the music. In the context of our education points, this involved explaining all the copyrights involved in a piece of music and why an artist might not own them if they have a record deal or a publishing deal. It also required explaining what rights one gets when one owns a copyright, and which of those rights the artist is selling in this contract and which they are keeping.

For all the reasons cited above, this template is far from exhaustive in covering all the short- and long-term use cases around music NFTs. Instead, the template is intended for artists who use it to better understand what exactly they are selling and why they might not be able to use this contract in the first place. We also hope to catalyze a long-term discussion about how the music/Web3 ecosystem can start to develop stronger shared legal frameworks around NFTs, which will be an important ingredient in scaling and sustaining the market as a whole.

Of course, when you try to develop new standards, there’s an XKCD for that:

C. Releasing a sample contract with a real artist NFT

As we neared finishing this iteration of our project, we tried to think of the best way to launch it. We knew that people were going to have questions regarding how the software should be used and who should use it. These hypotheticals led us to realize that having an actual artist mint an NFT using our contract would provide this guidance and demonstrate what is at the heart of our whole effort: Helping artists navigate this brand new frontier.

We chose Guspy, an independent artist in the Water & Music community, because he’s precisely the kind of artist this project is designed to help. Guspy is a half-Mexican half-Filipino independent solo artist, self-taught multi-instrumentalist, songwriter, producer and engineer based in Los Angeles. He first released music under this name six-and-a-half years ago when he was just 15. Having grown up in Southern California, Guspy’s love for surf, punk and garage rock evolved into a passion for DIY that would eventually lead him into the world of web3.

Guspy is using his own cover artwork and song “HESH GIRL” as the first 1/1 music NFT using W&M’s contract template. It will be the first token minted through his own ERC721 contract that he deployed using Manifold, and a 72-hour auction for the 1/1 NFT will be hosted on OpenSea with the contract linked through the token’s on-chain metadata. We will formally announce the auction via email and on social media in the coming days.

Guspy had the following to say about his experience collaborating on this release:

“I admire this research project because it strives for simplicity, education and balance, which are all direly needed in the current music NFT world. This contract template lays a foundation for artists, creators and builders to innovate, create and build on, all while simultaneously reigning in the reality of blockchain’s current legal and technical limitations in regards to sharing and transferring “ownership” of music and music rights. It grants the creative freedom to accelerate at one’s own pace, while also providing the legal guardrails to not veer off course and potentially crash and burn.

Personally, I’ve been hesitant to mint my own music NFTs because there is currently a narrative that NFTs must provide some form of “utility,” such as fractional ownership of royalties, access to exclusive perks or governance share in a DAO through airdropped social tokens. I like all these ideas, and the digital infrastructure and legal solutions that will enable these ideas to become more tangible and widely accessible are being pioneered as we speak by people way smarter than I. However, for now, as an artist first and foremost, I think an over-obsession with “utility” for music NFTs is distracting from the most currently accessible and basic use of the tech, and I can’t help but feel like the disillusionment that follows our inflated expectations greatly contributes to the poor taste of the NFT space for both artists and collectors. It’s important to stretch as tall as your branches can grow, but it’s just as important to water your roots. As Jack White once said:

“When you’re in your little room
And you’re working on something good
But if it’s really good
You’re gonna need a bigger room
And when you’re in the bigger room
You might not know what to do
You might have to think of
How you got started
Sitting in your little room.”
– The White Stripes, “Little Room”

What’s cool about NFTs is that in their purest, simplest form, they enable random internet music lovers to stumble across a work of art and then directly pay the artist for the art accordingly, instantaneously and immutably and in a trustless manner. Of course, buyer motivations vary; perhaps they like the art, they want to see more of the art or they want to see the art increase in value and then flip it for profit. Regardless, it’s simple, art-centric and well-balanced, aligning the incentives of both the artist and the buyer to continue participating in creating quality art and exploring new artistic mediums. I think this project and contract template is incredibly valuable in laying out the barebones legal undertones behind this simple agreement between artist and buyer.

Perhaps it is somewhat ironic to want a centralized legal foundation for a decentralized, trustless transaction. But when considering the lack of consensus in determining the value of owning a one-of-a-kind, tokenized piece of digital art, it makes complete sense to reduce some of the risks and uncertainties through legal means. Again, balance.

Above all, this project is representative of a next-gen internet ethos, where innovation and progress is best achieved through decentralized, collaborative, openly distributed and continuously evolving means. By providing artists with the knowledge and tools to confidently navigate the music NFT landscape, this project helps propel music NFTs along the technology hype cycle towards enlightenment. I’m incredibly excited to see if this experiment works and if robust legal standards are eventually adopted from it, and I’m honored to be the first to utilize it. I hope artists will see and appreciate the efforts of passionate communities like W&M that are working hard towards improving and legitimizing the NFT space for the benefit of us artists.”

FUTURE DIRECTIONS

Web3 is generally identified as an almost linear progression of the internet, where Web1 is the early manifestation of websites with technologies like hyperlinks and Web2 is the rise of the platform economy. In this progression, Web3 takes the creativity of both previous iterations of the web and adds an ownership layer. Instead of developers, founders, marketeers, engineers, etc., getting a paycheck from a platform’s popularity, Web3 ownership and upside now includes those who create and consume the content that drives that popularity.

In reality, though, Web3 isn’t a linear progression from Web2, nor was Web2 even a linear progression from Web1. Instead of a linear progression, there’s more of a web (no pun intended) of constantly evolving relations, with each innovation interacting with what came before.

The case of music NFTs clashing with elaborate and complicated music copyright systems is a salient example of this dynamic playing out in practice. It shows how difficult it is to break free of previous paradigms completely. Examining the tension between the promise of music NFTs and existing power structures leads us to three important future considerations for further iterations of our template and the legal foundations of music/Web3 at large. They are as follows:

• The difficulties around deploying our template
• The complicated nature of accommodating splits for multiple artists involved in a particular NFT
• Whether or not policymakers and legislative bodies will view digital assets like NFTs as securities

Contract deployment

The first issue in our contract was where the NFT would be minted from a deployment perspective. If the NFT was minted on Royal or some other similar third-party platform,  existing terms of service could take precedence over our contract. We resolved this with an education point discussing how if there were a conflict between our contract and a platform’s own terms of service, the platform’s terms of service would take precedence.

The next issue we encountered around deployment was where a contract should live relative to the NFT whose sale it is governing. The options we considered were whether the contract should be hosted on a webpage, stored in IPFS as off-chain data or stored in the actual on-chain metadata for the NFT. The vast majority of NFT platforms that artists are using don’t give the artist an option to upload a contract or terms as a separate attribute for the NFT alongside the song or video itself. This rigidity is probably why the contracts we reviewed in Season 1 often lived on the minting website and were hosted on a centralized server.

We also considered whether the contract should be between an artist and one buyer whose identity was known in advance or whether it would be used more often in a situation where the artist doesn’t know the buyer beforehand. We decided that the most common use case would be between an artist and an unknown buyer. In future versions, we may account for options for contracts with a known buyer.

Ultimately, in our first test deployment with Guspy, the contract will end up as a PDF listed in the NFT’s on-chain metadata.

One interesting issue to consider for the music/Web3 ecosystem at large is whether the way a legal agreement for a music NFT is deployed will influence the value of that NFT in the future. One could argue that the perceived value of an NFT is inversely related to perceived risk and that a strong legal contract should reduce some of that risk especially from the buyer’s perspective. On the flip side, an argument for a legal contract contributing negatively to an NFT’s value would be that the presence of the contract clearly links the NFT’s underlying assets to existing, off-chain legal structures that may become outdated. This could be at odds with the desire to operate innovatively outside of existing frameworks, especially for artists seeking alternatives to Web2 music-industry structures. The eventual legal standardization for what an NFT is in the first place could also put a ceiling on the speculation that is driving much of the value in the music NFT market today.

Revenue splits and accommodating for collaborators

A large part of the utopian narrative around how blockchain technology will impact the music industry revolves around perpetual, platform-agnostic, trustless and automated payments to multiple owners. In contrast, our contract template is “single-player,” meaning it assumes that the NFT’s underlying song and artwork are created and owned solely by one artist.

While this was the easiest solution for our test deployment, this situation is rather rare in the context of artists’ existing creative practices. It is not uncommon to see five to ten writers on a single song, and artist features and collaborations are everyday occurrences.That said, much of the music/Web3 ecosystem is severely limited in its ability to serve “multiplayer” use cases for artists. Of all the major music NFT platforms, only Sound.xyz (which is invite-only), is providing split capability, on the back of an incredibly recent protocol development known as 0xSplits. In the general NFT landscape, Foundation, which is also a closed, invite-only platform, allows splits for up to four people.

As Web3 technology develops and proliferates, we hope to iterate on this contract to adapt and allow for more flexibility and much-needed real-world use cases around artist collaborations.

Securities and royalties

One of the most intriguing types of NFTs allows a fan to buy a piece of a song and then receive streaming royalties from their purchase. The issue of whether this type of NFT is defined as a security may seem trivial, but the answer to that question couldn’t be more critical in the context of scaling music/Web3 use cases to mainstream audiences.

According to the SEC, the legal definition of a security is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” You could argue that drops like Lil Pump’s S-NFT on Republic, Nas’ streaming royalty-based NFTs on Royal and Decent’s attempts to redefine participatory fandom through incentivized ownership structures meet this definition. Hundreds of pages of legal articles have been devoted to defining exactly what these terms mean. For our purposes, it’s only important to know that if a royalty-bearing NFT is considered a security, it would bring them under the auspices of the SEC. This would place an entirely new layer of laws on top of NFTs and completely change how they are treated by sellers and collectors alike.

Because of the importance of these types of NFTs in a music-industry context, we would like to include them in future contract versions. In order to do that, we would specifically appreciate help from securities lawyers. We would also love to find more lawyers and royalty experts to join us to help with the specific requirements of how to deal with royalty sharing and royalty splits on-chain.

If you’ve gotten this far in the article, you should receive a prize. You’re clearly as invested and intrigued by this project as we are. If you think you can help us resolve some of the many issues we elucidated here, please join us at Water & Music to continue to evolve this contract.

Contributors

Jonathan Larr (A, B, C, F)
Brett Kaminsky (B, C, F)
McKenna McAreavy (B, C, F)
Brodie Conley (C, F)
Cherie Hu (C, F)
Dan Smith (C, F)
Yung Spielburg (C, F)
Maarten Walraven (C, F)
Alex Webbs (C, F)
Guspy (C, G)
Alexander Flores (D, F)
Vintroxx (D, F)
Dan Fowler (C)
Brandon Landowski (C)
Christina Calio (F)
Levi Downey (F)
Abhijit Nath (F)

(A) Project lead
(B) Lawyers
(C) Writers and editors
(D) Developers
(E) Visualization
(F) Ideation
(G) Artist

Appendix

Contract template walkthrough site
Contract template education points
W&M lifetime membership NFTs to support our work