This is the second post in our NFTs and music series. Our last post looked at the recent surge of NFT activity in the music industry and touched on the fact that owning an NFT is not necessarily the same as owning the original work. So what are purchasers of NFTs actually buying? (with Lauren Neal)

NFTs: It's all in the contract

NFTs are transferred by connected "smart contracts". After the code for the smart contract is written, it is then permanently minted into a token on a blockchain, and acts as a non-replicable digital certificate of ownership of the NFT.

Whilst the smart contract might provide a buyer with a permanent digital receipt of your NFT, the rights granted and attached to your NFT depend on the particular contract and these can vary widely. As with any evolving technology and especially with one as technical (and nascent) as NFTs, it will be important for buyers to analyse and understand exactly what they are purchasing under the terms of their smart contract.

Taking a look at some of the most recent high-profile NFT sales, the terms underpinning each smart contract have not typically assigned any IP rights. At most, they tend to grant purchasers a non-exclusive licence to use digital versions of work for non-commercial purposes. The takeaway? Ownership of the copyright does not transfer automatically to the purchaser of an NFT. As with all copyright assignments, ownership will only transfer if expressly provided for and agreed to by the author of the original work.

To provide a recent example - the licence governing the Kings of Leon album (the NFT version sold at auction) states that the NFT owner has a right to display the art and included merchandise for as long as the buyer owns the NFT, but only for personal purposes. Use such as in third-party products or within movies and other media is expressly prohibited. This works in a similar way to the licence granted by most music download purchases / streaming sites.

NFTs: do you get what you pay for?

Unlike normal music streaming/downloads, a music NFT could set you back USD 3.6 million. If, for the most part, NFTs are not sold for commercial re-use, where does the (seven figure) value lie?

Like many collectibles (digital or not) the value of NFTs could be seen as intrinsically personal, and some commentators are describing NFTs as more of a bragging right to prove ownership of an on-trend digital art or collectible.

However, this could potentially change with the arrival of start-up platforms promising a platform for artists to sell fractional ownership of their sound recording copyrights as a new revenue stream. If realised, the more tangible value of NFTs may be in their potential to create divisible copyright with automated resale royalty payments.

Fractional ownership and onward use tracking poses an exciting alternative source of revenue and potentially transparency around use for artists. However, this currently remains unrealistic for most artists signed to a record label or those who share their copyright with multiple collaborators, so it remains to be seen to what extent NFTs can actually break through to the existing rights, tracking and royalty structures.

More layers of complexity?

It’s also possible that fractional NFTs could introduce an extra layer of complexity from a UK regulatory perspective. The entitlement to certain rights (such as the right of ownership and the right to income or a share in future profits) may mean that a particular NFT could qualify as a security, meaning they could attract regulatory scrutiny. Will NFTs prove to be a nifty solution or lead to more complexity in the music industry? We will continue to keep an eye on the market as it evolves and the new legal questions that arise.