20 Questions: An artist’s checklist for an NFT pitch

By Chris Castle

[This post first appeared on MusicTechPolicy.]

If you’ve been pitched to lend your name to an NFT platform or promotion, or if you are an NFT promoter who wants to attract artists to your program, there are some issues that should get addressed. Obviously, discuss all this with your lawyers since this isn’t legal advice, but the following are some issues that you may want to consider before you commit to anything.

As NFTs are priced in cryptocurrencies, a word about that. You should understand that cryptocurrencies use a huge amount of energy due to “mining” (See the Cambridge University bitcoin energy consumption index) and the current spike in the cost of energy is going to have an effect. Also realize that when someone tells you that an crypto enterprise is “green” you have to ask them what they mean exactly–for example, Google tells you that their data centers are “green” because they buy carbon offsets or use hydroelectric power from Oregon or wind farms in Nebraska (just ask Senators Ron Wyden and Ben Sasse), but that doesn’t mean that it doesn’t still take enough electricity to power Cincinnati in order to operate YouTube. There are no magic elves on golden flywheels producing electricity as if by magic. They still plug into the wall like everyone else.

1.  What artist rights are being granted and to whom?

2.  Does grant of rights match the project summary and are license agreement, smart contract, marketplace/auction TOS and cryptocurrency rules all consistent?  Has a subject matter expert been engaged to produce a report stating and certifying that the smart contract code implements the actual deal or needs to be revised?

3.  What royalty is paid and to whom and when?  Does artist, previous owner or charity participate in resale revenue after initial sale? Are any state or federal relevant tax rules implicated? What have you done to keep NFT revenue as far away from MLC as possible? (Remember that Etherium vehicle Consensys is somehow involved with the MLC.)

4.  Are there exploitation or marketing restrictions on the NFT that would prevent the NFT and artist name being used in ways that are offensive to the artist, at least during the artist’s lifetime? Could heirs enforce these rights?

5. Are there any third party payments involved like producer payments, production company overrides, or any third party rights involved, re-recording restrictions. Will any letter of direction be required, e.g., for producers?

6. Are you being asked to clear publishing? If someone is telling you that they have cleared publishing, has the publisher confirmed the license and are individual songwriters actually receiving a share of revenue? The tendency is that the major publishers “settle” these kinds of cases for a lump sum and prospective royalty, which may or may not be received by individual songwriters after multiple commissions being siphoned off the top.

7.  When does NFT terminate?  (On resale, transfer by owner, term of years)

8.  What is the governing law and venue?  (And how to enforce)

9.  Who maintains the blockchain and who is responsible for policing it? What happens if they fail to do so? (See my post with Alan Graham on this subject.)

10.  Is artist asked to make representations, warranties and indemnity?  Can the artist make such reps and warranties?

11.  Is indemnity capped?  

12.  Are there any active disputes among anyone in the chain on the NFT promoters’ side? (“Disputes” is any disagreements, including, but not limited to, litigation or threatened litigation.) Who will cover artist’s costs of defense?

13.  Is there insurance on chain of title, failure to enforce the smart contract, nonpayment, business risk?

14.  Can license agreement or smart contract be revised unilaterally?

15.  Is the NFT or NFT collection comprised of “generative art” or artwork created by machines, algorithms, artificial intelligence, and related technologies (i.e., potentially not capable of copyright protection)? What are implications for name and likeness rights.

16.  What assurances have been given to identify purchasers of NFTs to enforce terms or prosecute breaches for first or subsequent sales?

17.  Are any union rules implicated (e.g., SAG-AFTRA Basic Agreement Par. 22A)?  See my post on NFT union payments.

18. Is NFT or any NFT cash flows implicated in any sanctions placed on persons related to the Russian Federation? Given the strong reaction to Russia’s invasion of Ukraine, consider any implications if China were to invade Taiwan and similar actions were taken against China or China-based companies.

19.  Has NFT seller or marketplace obtained legal opinion regarding whether the NFT constitutes a “security” that would require sale by a registered securities broker-dealer or other regulatory oversight?

20. Are any state securities laws, tax laws or regulations, or “doing business” laws implicated or reporting obligations triggered?

Each NFT raises its own questions, so this checklist is just a starting point.  

@agraham999 and @musictechpolicy: Forever is a Long Time–thoughts on the state of NFTs

By Alan Graham and Chris Castle

If you’ve followed any of the drama surrounding the NFT music infringement marketplace Hitpiece, you know it has deservedly received a lot of grief—and at least one pretty potent cease and desist letter–for its blatant attempt at profiting from allegedly scraped IP it didn’t own. But the interesting thing is that it actually gives us an opportunity to discuss some of the greater potential challenges surrounding NFTs, and how it may in fact be impossible to live up to their promise. Let’s start by picking apart Hitpiece, and see where we get with this teachable moment.

Blockchains or databases that represent ownership, must have one trait in common to provide value, and that is a consensus mechanic whereby each party that is allowed to write data is known to the system, therefore the data that is written is trusted, and then all copies (or nodes) can commit these changes. Ta-da.  There is an inherent logic to the consenus mechanic.  It’s what Shawn Fanning’s SNOCAP accomplished with its registry in sharp contrast to the Wild West of p2p and essentially lies at the heart of Hernando de Soto’s extensive work in macroeconomics.  Good things can happen when people trust the system.

It’s also the starting point of what went wrong at Hitpiece.  Instead of using a blockchain solution like Ethereum, we’re told Hitpiece operates some kind of a “private blockchain.”

So what does that actually mean? It should suggest a distributed ledger, hosted by multiple separate parties to keep everyone honest, with a method of cryptographic consensus (who can write data, how are they known to the system, how is it trusted).  Remember, the definition of “good faith” is “honesty in fact” and it is an essential condition of contracts, all contracts be they smart or just human

The novel bit Hitpiece was doing, from what we can read, is that they were using regular credit card payments, not crypto, to allow collectors to mint/purchase the NFTs, which is actually very clever. Seriously, there’s no reason you have to use a cryptocurrency to pay for something, if you are in fact also hosting the blockchain/database. A private blockchain doesn’t need a cryptocurrency, it just needs trusted parties, and there’s the rub. Cryptocurrency is a sufficient condition of a successful NFT platform, but a trusted consensus mechanic is a necessary condition.

Now while we could go on and on picking apart many of the flaws in the Hitpiece model, it opens up a broader discussion that we’d like to have as to how NFTs plan to offer their grand promised future of benefits and entitlements (buy my NFT and get xyz). Whenever you challenge someone in the crypto space about how they plan to handle this, they simply say “smart contracts”, when what they really mean is, “I have no idea how/if this is going to work”.

Terms of Service

First, in order to have a product or service that you sell or provide online, there has to be a series of terms as to what is being purchased, who is paid each successive purchase price, what is being provided to the purchaser, and for how long. That means, in the case of a platform that allows creators to mint/sell/auction NFTs, the party that is minting/selling the NFT has to provide a Terms of Service as to what can be expected, not the platform. The platform is simply a service provider. It’s buyer beware, because the seller doesn’t necessarily have any technical solutions for supporting future benefits.  It’s also seller beware because if the initial seller specifies terms for the sale (and subsequent sales), there ought to be a believable and efficient way to enforce those future rights and post-sale conditions.

So if you are a creator promising this, you need to spell out what those might be, the term of that relationship, and be damn sure you can deliver on it. Likewise, if you are a creator being promised something will happen after the initial sale, you have to believe that your rights can be enforced in an efficient way (like the future sale can’t close without X being the case or $Y being paid to you).  This is a concern for both featured and nonfeatured recording artists (as well as union signatory record companies with collective bargaining obligations), plus co-writers of songs and their publishers.

To pluck two examples from the headlines on The Trichordist, Neil Young might want to place conditions on future NFT sales that have nothing to do with money;  elderly songwriters might want to be assured of a stream of future income from NFT sales that they can ill-afford to sue over.  This is not hard—it happens with real estate every day of the week in practically every country of the world (and was at the heart of Hernando de Soto’s “Peruvian miracle” that started with land reform).  If you don’t meet the sale conditions, you don’t close on the property and the title company won’t take money from the buyer or pay it to the seller.

Perhaps this is especially true of collectibles where resales may be part of the buying motivation.  (See for example, the pending lawsuit over the Quantum NFT against Kevin McCoy and Sotheby’s regarding the Namecoin blockchain that is for “slander of title” among other things—a real estate concept.)  The expectation most buyers will have is that the thing in question will live in perpetuity. For example, If you purchase a physical painting, you have the expectation of enjoying that painting as long as you possess it.

But what are your expectations regarding the NFT? This entire subject seems to be heavy on promises of future benefits and entitlements, but lacks any hard explanations of how that’s possible and for how long. That puts creators and collectors at great risk, because there’s no guarantee of being able to deliver on that promise—until there is. Technology practically assures us that whatever you buy today, will not necessarily work 10 years from now.  How’s that WordPerfect program working out for you?

Technical Challenges

The second issue we never see talked about derives from the first. It seems common for promoters to promise benefits/entitlements in the future from owning NFTs, but how? Where’s the mechanic that makes this possible? Simply saying “smart contracts” is just procrastinating and hoping something will exist later. In order to provide a series of benefits, like exclusives, you have to also provide a structure to interpret these, and we’re dealing with potentially thousands of intermediaries, and millions/billions of NFTs. We don’t have any idea how anyone expects this to work with the existing NFT model.

Say you want to provide exclusive first access to concert tickets to anyone who has a particular NFT. The ticketing site or agency has to be able to recognize this NFT and be able to trust it. One way to do this is they can run native code that runs independently on the site that can say, “I know this collectible” by being able to recognize who cryptographically signed something with a known set of keys. Or they could run an embed from a third party that did the same thing. The most secure way to do any of this is likely having more than one party sign the NFT to prove it is real, but not really something trustless blockchain folks like.

The ability to trust the NFT sale and automatically enforce the terms of each sale is vital for creator-driven NFTs.  If a creator places marketing restrictions on how the NFT can be used downstream, there ought to be a way to enforce those restrictions.  Recording artists and songwriters commonly have such restrictions in their artist or songwriter agreements with record companies or music publishers.  They have approval rights over how their works are used and they have blanket prohibitions.  Approval rights means they are asked before a license is granted by their label or publisher and they can sue if that fails to happen.  A blanket prohibition could, for example, prohibit the use of the work in a commercial promoting a product, say firearms, that the artist or songwriter doesn’t agree with, or a country whose laws the creator rejects, say Beastie Boys with China over Tibet, or a platform that distributes a podcaster the creator doesn’t want to be associated with.

The punchline there is why would a creator take, or allow their label or publisher to grant, lesser rights in an NFT than the creator has for the same work outside the NFT?

You Can Check Out Any Time You Like

Then we get into talking about serious security implications, as NFTs might have both a monetary value, and a potential “smart contract” that remunerates/rewards the purchaser, and has an ancillary connection to the collector’s wallet. Any compromise in this chain and you could not only put one creator or collector at risk, they could all be at risk including the seller (All apes, everywhere, stolen). A single errant smart contract or malicious developer, could put creators or downstream sellers at serious legal risk because they exposed the collector’s wallet to compromise. That means you’ll want to see that every NFT marketplace has serious security experience and precautions, but also as a collector, you’ll want to know that everything you purchase has an audit trail whereby you can verify the NFT is authentic and each link in the chain can be trusted.

That’s a whole lot of magical hand waving.  And title insurance or the equivalent.

In any case, not only does someone need to build, service, and maintain this, but also has to maintain it forever, and it can never fail.

And forever is a long time.