Tag Archives: Blockchain

99 problems of the Music Industry- Can Blockchain technology be a panacea?

The music industry peaked in 1999, owing to sales of CDs and DVDs. The music industry had been on a downward spiral till the last couple of years but the Global Music Report released by IFPI (International Federation of the Phonographic Industry) reported a growth of 8.1% in 2017, expanding it to 17.3 billion Dollars.[1] According to the report the streaming industry was the frontrunner in the growth of the industry, accounting for around 29% of the total revenue at 6.6 billion Dollars. All forms of digital revenue combined amounted to around 9.4 billion Dollars.[2] While these numbers should curb the claims that the Internet and digitization are killing the music industry, it cannot be denied that certain music industry troubles from the vinyl era still plague the music industry.

While the number of people accessing and streaming music has gone up exponentially, the industry’s revenue and the royalty earned by the artist have not increased proportionately. Various factors could be attributed for the same. Given the peculiar nature of legal rights in a song, there are multiple rightful owners of royalty revenue in a song, the record label, the artists involved and the lyricists. In many suits regarding non-payment of the royalty due, the defendants have claimed that it was the inability of the defendants to figure out the right holders which resulted in the non-payment of royalty. In the Spotify case[3] it was highlighted that as there is no single or uniform database with respect to music and right holders, it was difficult for players like Spotify to pay the royalties, leading to lengthy litigations which affect the music label as well as the artists involved. Further, at times funds end up being paid to the wrong party.[4]

It is noteworthy that often the artists involved in creating music are unaware till the release of tracks (and even beyond that) whether their work was ultimately used in the released music or not. Since the specific details of the streaming deals are shrouded through non-disclosure agreements, the artists and their managers find it difficult to ascertain if they are being paid their fair share.[5] Given the fact that a listener just needs a few taps on his phone to access the music of his choice, it is preposterous that there is so much friction involved in the artists getting their due.

In early 2000s, the music industry fought tooth and nail, to fight peer to peer file sharing platforms such as Napster and Limewire as such platforms were being used to distribute illegal copies of music. In fact, Napster saw the highest user growth for any company owing to such practices, leading to massive losses for the music industry.[6] While the bigger culprits such as Napster and Pirate Bay have been ‘nabbed’ the music industry is still reeling under the effects of digital piracy. The digital restrictions (or rights) management system introduced in the early 2000s has been largely ineffective even though scrambling of DRM is prohibited under the law.[7] For example, the Section 65A And 65B were inserted in the Indian Copyright Act, 1957 through the 2012 amendment restricting people from circumventing any such digital rights management systems or tampering/removing of any such information contained in the copyrighted works.[8]

Lastly, lack of funds is a major concern for budding artists and independent record labels. Younger artists claim that big record labels are unwilling to nurture new artists, rather they are interested in picking up already established artists. Hence, an artist is required to be ‘big’ even before record labels notice them. Further, even independent record labels which initially grew with the motto of helping budding artists, are now unwilling to share the revenue with the artists because of lack of funds.[9]

Is Block-chain the Panacea?

Blockchain has been the buzzword across the globe since Satoshi Nakamoto published his paper on Bitcoin and block-chain in 2008. Tech enthusiasts, private entities and even regulatory bodies (such as India’s TRAI) have been lapping up block-chain as a solution to many problems. The popularity of the idea of block-chain can be gauged from the fact that a company’s shares surged by around 400% just because it added the term “blockchain” to its name.[10]

A blockchain is a distributed ledger or database that is not stored centrally (a departure from the tradition hub and spoke model); it can have duplicate copies on multiple devices across the world.  Information is added to this database in so-called blocks, each of which holds a unique code, that is generated cryptographically on the basis of older blocks and a timestamp. Once the data is recorded, the new block is linked to the ‘chain’ of older blocks. A blockchain can take various forms. It can be permissioned, i.e. one may not be allowed to join the network as a node unless specifically permitted to do so. Similarly, the rights granted to a node could vary, while some could be allowed to just view the data, others could be allowed to modify the information on the ledger.

A distributed database could be an answer to the lack of transparency in the music industry and the corresponding issues. The digital rights information along with the metadata for any piece of music could be updated by a permissioned node (say a record label or a copyright society). Information on the blockchain could be updated instantly that is, the same information would also be available to all nodes automatically. Some initiatives like Mycelia also allow for storing of meta-data such as tempo, key etc, hence a piece of music can easily be differentiated from its cover or ‘radio edit’ version.[11] The information contained in the blockchain could be freely accessible to everyone while only select participants would be allowed to modify the data. This could lead to drastic improvements in transparency and hence the quantum of royalties received.

The blockchain discussed above could be coupled with a content distribution network (CDN) thereby decreasing the friction as well as the number of middlemen involved. Further smart contracts or blockchain 2.0 could be used for smooth licensing and distribution of music. Smart contracts can be used to establish and enforce IP licenses and allow the transmission of payments in real time to the right holders. The information about IP rights a song or an image, could be encoded in digital form. For example, Ujo uses Ethereum blockchain for payments, rights management, and identity storage for artists. Effective digital rights management would involve a threefold approach a) access control, b) cryptography to restrict the data from being saved in a plain text format and c) digital watermarking techniques to identify legitimate copies of files. The same could be achieved through a well-designed blockchain based CDN. Attempts at achieving the same through various pilot projects such as Mycelia have demonstrated limited success as the acceptability of a particular crypto-currency, seriously limits the target audience. Yet, the limited success of such progress is proof of the fact that such ideas are becoming mainstream.

It has been widely accepted that people resort to pirated versions of a work, primarily when they are unable to access the content (preferably at a reasonable price) as evidenced from the fact that the leak of the Orange Is The New Black episode had no significant impact on Netflix. While the subscription model of Netflix could be the primary reason behind the failure of such ransom demand, yet it cannot be denied that allowing for micro payments on a content distribution network would expand the audience base of such networks.  A digital ecosystem could allow for micro-metering for viewing/accessing content and the user could pay for the same though micro-payments. The micro-metering could be achieved by the blockchain recording the components of the work that were used, defining the tiniest consumable unit of the work.[12] Low transaction costs in involved in blockchain couple with permissibility of really small denominations using the corresponding crypto-currency would allow for micro-payments.

Lastly, funding / investment –a crucial step between start-up and venture capital investment – is a major challenge in the music industry. Blockchain technology promises to solve some of these issues. Through tokenization, artists can crowdfund their projects by issuing/selling tokens to fans. The artists can use these funds to cover the expenses related to recording, touring, marketing and producing music videos instead of relying on traditional music labels for the same. As the fans own tokens issued by the artist, they would benefit from the success their favourite artist achieves. The transparency inherent in distribution of music through a blockchain based platform would improve investor’s ability to monitor the artists’ activities, sales figures and also the opinions of the fans. The possibility of having an accelerator model for artists would open up the sector to new sources of capital seeking highly scalable businesses for seed or venture capital.

Rights holders, especially music labels and copyright societies find it difficult to enforce their IP rights due to other factors such as difficulty in identifying acts of infringement as well the costs and efforts required follow the legal procedures for enforcement of rights. These issues are exacerbated for independent labels. A few start-ups such as Binded are helping photographers enforce their rights in the digital space. When a photographer uploads an image on Binded’s[13] portal, the same is registered with the copyright office and times-tamped on Binded’s blockchain. Similarly, other start-ups allow for reverse image searches to look for infringement of images online. Copytrack[14] would even take control of the legal proceedings on behalf of the photographer whose work has been infringed (in consideration of a share to be received from the damages/settlement amount). Old players like Kodak have managed to capture the minds of the new-age audience through the launch of their image protection, distribution and licensing solution KodakOne[15]. KodakOne makes use of its native token, KodakCoin (using the Ethereum hash function).

Needless to say, given the complexity of music as a work of art, having similar procedures in place to track infringement of musical is a tougher task. But given the success of music recognition apps such as Shazam, it is not difficult to imagine a world in which management of rights of music artists and the enforcement of their rights can be done in a smoother fashion.

While, it cannot be denied that blockchain technologies can revamp the music industry take care of the artists’ woes, but there are multiple challenges that need to be tackled to make practical use of the technology in the music space. Global Repertoire Database (backed by music labels and tech giants from across the globe) which sought to create an alternate and comprehensive database for the music industry had a spectacular failure, clearly establishing that ideas which look great on paper might have little or no impact in the real world[16].

Unlike conventional means for digital rights management, where only the hub was required save the massive amounts of data, in the distributed ledger system, each node would be required to store a copy of the data. New standards and models have to be developed and widely accepted to make the blockchain based model tenable. Similarly, to achieve interoperability of various databases, common standards need to be accepted among the parties involved. Similarly, users (non-artists) have to deal with user registration and sharing of payment details to take advantage of micro-metering and micro-payments. The privacy of the user needs to be handled in a transparent manner, to make sure that the users are confident of the privacy/security measures. Lastly, resistance from existing aggregators and intermediaries who might end up losing their piece of the pie needs to be dealt with to ensure the successful acceptance of the blockchain technology by the music industry.

Author: Mr. Asis Panda

[1] Global Music Report 2018 available at https://www.ifpi.org/downloads/GMR2018.pdf–

[2] Ibid

[3] Wixen Music Publishing, inc v Spotify USA inc. 2:17-cv-09288-GW-GJS

[4] Fair Music: Transparency and Payment Flows in the Music industry, Rethink Music available at https://novojurislegal.files.wordpress.com/2018/12/9f5c6-rethink_music_fairness_transparency_final.pdf page 3

[5] Cooke C, Dissecting the Digital Dollar Part One: How Streaming Services are Licensed and the Challenges Artists Now Face (2015) Music Managers Forum report.

[6] Roxanna Maddahi, The Music Industry: From Piracy To Profits available at https://www.forbes.com/sites/forbesfinancecouncil/2018/07/10/the-music-industry-from-piracy-to-profits/#1897df0d70f8

[7] What happens with digital rights management in the real world? available at https://www.theguardian.com/technology/blog/2014/feb/05/digital-rights-management

[8] Also see Article 19 of the WIPO Performances and Phonograms Treaty, 1996 (WPPT)

[9] Richard Smirke, Beggars Group’s Martin Mills on Why He’s Abandoning the 50/50 Streaming Split, Billboard available at https://www.billboard.com/biz/articles/6077399/beggars-group-martin-mills-streaming-money-reduction-spotify-revenue

[10] https://www.bloomberg.com/news/articles/2017-10-27/what-s-in-a-name-u-k-stock-surges-394-on-blockchain-rebrand

[11] Catherine Jewell, Mycelia: shaping a new landscape for music April 2016 available at https://www.wipo.int/wipo_magazine/en/2016/02/article_0002.html

[12] Jack Loechner, The Forces Of Blockchain available at https://www.mediapost.com/publications/article/305715/the-forces-of-blockchain.html

[13] https://binded.com/

[14] https://www.copytrack.com/

[15] https://kodakone.com/

[16] Klementina Milosic, The Failure Of The Global Repertoire Database available at https://www.hypebot.com/hypebot/2015/08/the-failure-of-the-global-repertoire-database-effort-draft.html

Advertisements

Initial Coin Offerings – A Case for Regulatory Framework in India

Initial Coin Offerings (“ICOs”) has gained prominence in the world of crypto-currencies and startups as a relatively-easy fundraising mechanism. News about raising millions of dollars in a few seconds upon opening of the ICO is adding to the frenzy. Many of them view ICO as a disruption to the venture capital industry.

The nature of ICOs may lead to people equating them to both IPOs and crowdfunding. In an IPO an investor invests in return for a security (ownership) in a company, under highly regulated process, which gives the investors voting rights, dividend rights etc.

In an ICO, investors transfer funds, usually in the form of crypto-currencies, to the ICO organiser. In return they receive a quantity of blockchain-based coins or tokens which are created and stored in a decentralised form either on a blockchain specifically created for the ICO or through a smart contract on a pre-existing blockchain.

An ICO which provides voting or profit sharing is under high scrutiny by the regulators, since it would blur the distinction to that of an IPO.

Even though the trade in ICOs, bitcoins and other crypto-currencies has been increasing rapidly with the passage of time, there still exists a large vacuum of regulations by governments in this space, which not only increases the risk posed to investors but also disincentives some investors from entering the process at all.

ICO regulation in India:

  • Currently crypto/virtual currencies and ICO’s remain unregulated in India. The Government is yet to finalise a regulatory mechanism so as to govern and regulate crypto/virtual currencies.
  • RBI on 1 February 2017 issued a press release, cautioning the users, holders and traders of crypto / virtual currencies. The press release stated that RBI has not given any licence / authorisation to any entity / company to operate such schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, trader, etc. dealing with virtual currencies will be doing so at their own risk.[1] The RBI in this press release also mentioned the press release published by the RBI cautioning the users of virtual/crypto currency.[2]
  • The Ministry of Finance on 12 April 2017 constituted an Inter- Disciplinary Committee chaired by Special Secretary (Economic Affairs) to examine the existing framework with regard to virtual currencies. The Committee was constituted to provide a detailed report on (a) take stock of the present status of virtual currencies both in India and globally; (b) examine the existing global regulatory and legal structures governing virtual currencies; (c) suggest measures for dealing with such virtual currencies including issues relating to consumer protection, money laundering, etc; and (d) examine any other matter related to virtual currencies which may be relevant.
  • The Government panel is also contemplating introducing compulsory Know Your Customer (KYC) norms in order to regulate the kinds of individuals/entities who can invest in these activities, and be able to track and identify them. If cross-border payments are involved, then it will automatically fall under the scope of FEMA rules and regulations
  • As of date, there is no regulation tabled before the legislature.

Recently, bank transactions and operation of a number of cryptocurrency exchanges in India were hampered without any prior intimation. Users were unable to trade or credit money to their wallet on the exchange/withdraw money to their bank account. This is speculated to be a knee-jerk reaction on the part of the banks, in response to the non-supportive stance of the Government with respect to cryptocurrencies. This certainly does not seem like an efficient and productive method of moving forward. While recognizing that the Government’s concerns regarding cryptocurrencies are genuine, we believe that it will be in the best interests of all stakeholders if the Government releases its official rules/regulations on the matter soon.

Regulatory framework:

ICOs raise a variety of legal issues for which there is no relevant case law and no consistent legal doctrine. Given the wide variety of types of token and ICO set-ups, it is not possible to generalise. Circumstances must be considered holistically in each individual case. The minimum information requirements for organisers form the basis for these decisions.

On 16 February 2018, Swiss Financial Market Supervisory Authority, FINMA, released guidelines to support the issuance of ICO and said will base its assessment on the underlying economic purpose of an ICO, most particularly when there are indications of an attempt to circumvent existing regulations.

We believe that the first step for the regulator to understand the ICO token categories. The world-wide discomfort of the regulators has been perhaps ICOs which issues tokens which is akin to a “security”. But there are many other ICOs which are not “securities”.

FINMA’s guidelines talk about the following token categories:

Payment tokens: Payment tokens (synonymous with cryptocurrencies) are tokens which are intended to be used, now or in the future, as a means of payment for acquiring goods or services or as a means of money or value transfer. Cryptocurrencies give rise to no claims on their issuer. Utility tokens: Utility tokens are tokens which are intended to provide access digitally to an application or service by means of a blockchain-based infrastructure.

Asset tokens: Asset tokens represent assets such as a debt or equity claim on the issuer. Asset tokens promise, for example, a share in future company earnings or future capital flows. In terms of their economic function, therefore, these tokens are analogous to equities, bonds or derivatives. Tokens which enable physical assets to be traded on the blockchain also fall into this category.

The individual token classifications are not mutually exclusive. Asset and utility tokens can also be classified as payment tokens (referred to as hybrid tokens). In these cases, the requirements are cumulative; in other words, the tokens are deemed to be both securities and means of payment.

In some ICOs, tokens are already put into circulation at the point of fund-raising. This takes place on a pre-existing blockchain. In other types of ICO, investors are offered only the prospect that they will receive tokens at some point in the future and the tokens or the underlying blockchain remain to be developed. This is referred to as pre-financing. Pre-sale represents another possible permutation. In this case, investors receive tokens which entitle them to acquire other different tokens at a later date.

Should the tokens at any point in time fall under Asset tokens or SEBI’s regulatory framework on the issuance of a “security”, then SEBI should definitely have a say.

The other regulations such as Prevention of Money Laundering, Collective Investment Schemes, Deposits under Companies Act should also be taken into account as a single guidance note to the issuance of an ICO.

A regulation / guidance such as this would augur well for Indian entrepreneurs to have an ICO in India and with clarity. It also provides a good base for the tax authorities to tax the economic benefits accordingly.

[1] https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=39435

[2] https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=30247