As a seasoned attorney with years of experience navigating the complexities of digital assets and blockchain technology, I find myself captivated by the burgeoning world of musical entertainment in the metaverse. The tokenization of music is an exciting frontier that offers unprecedented opportunities for artists and fans alike. However, it’s crucial to tread carefully, given the potential legal challenges and financial quagmires that lie ahead.

“On June 1, 1999, Prince Rogers Nelson sang about partying as if it were still 1999, marking a significant shift in how music was shared and consumed. This transformation was led by Napster, a peer-to-peer file-sharing service that took the internet by storm. Launched in May 1999, Napster amassed over 20 million users by March 2000. This revolutionary software, developed by Shawn Fanning and Sean Parker, scanned your computer’s hard drive, listed all MP3 music files it found, and enabled others using the service to share and play those songs.”

The rise and fall of Napster happened quickly due to its legal issues linked with cybercrimes like file sharing and piracy, as reported by the Recording Industry Association of America (RIAA). They claimed that Napster’s software encouraged copyright infringement, leading to a lawsuit against the company. Eventually, Napster was closed down in 2001. However, its influence on the music industry was significant. It opened the door for other peer-to-peer (P2P) file-sharing services and boosted the notion of downloading music online. This eventually led to the creation of the first virtual currency for P2P systems: Karma. Introduced in 2003, Karma was used as a payment method for P2P file-sharing services.

Magic internet money—Karma

The creator of the initial digital currency, preceding Bitcoin (BTC), was Karma, devised by Dr. Emin Gun Sirer, who additionally serves as the founder and CEO of Ava Labs. Dr. Sirer pointed out that the advent of the internet and then the World Wide Web signified a transformative change from individual, local processing to large-scale, global computing.

“Initially, we used individual computers independently. However, we shifted towards a ‘client-server system,’ which allowed us to access services run by others, making use of their software and resources. This change led to the development of digital services that catered globally, created numerous jobs, and strengthened the U.S.’s role as a leading economic power.”

As a crypto investor, I found Dr. Sirer’s perspective particularly insightful. He introduced a system called Karma, designed to prevent freeloaders in peer-to-peer file sharing networks. Instead of just taking resources from the network, users should contribute as well. In an ideal world where everyone was downloading files but nobody was uploading, his proposed solution involved introducing a mysterious digital currency that wasn’t controlled by anyone. This currency, necessary for downloading files, would deplete if used excessively, forcing individuals to start sharing their own resources again to restore their ‘Karma’.

Ava Labs, established in 2018 and based in Brooklyn, New York, focuses on creating software solutions. Their primary objective is to facilitate the digitization of various assets across the Avalanche public blockchain and other decentralized platforms. Notably, they are pioneering the tokenization of the music industry through NFTs (Non-Fungible Tokens).

Music NFTs

Dr. Sirer points out that blockchains symbolize an advancement in computer system development, enabling multiple computers to communicate with each other in a shared ledger environment. This allows for collective decision-making, synchronized actions, and the construction of common network services. As a result, it fosters the creation of distinctive, secure digital assets like music NFTs, along with numerous other creative applications.

Leveraging the unalterable record-keeping capabilities of blockchain technology for musical copyright ownership, Avaissance’s music NFTs provide musicians with a fresh creative and financial landscape. This is achieved by enabling them to sell their music NFTs directly to supporters through an NFT marketplace, thereby broadening the scope of their compositions. Notably, Dr. Sirer highlights that there exist various types of tokens in this context.

A real-world asset 
A token can be the direct or indirect representation of a traditional asset. For example, numerous musicians are currently publishing complete songs and albums as music NFTs or selling their fans NFT concert tickets. While music NFTs offer exciting opportunities for artists, they raise copyright and intellectual property concerns. When artists tokenize their music, they must ensure they have the right to do so. Smart contracts, a key component of music NFTs, automate the payment of royalties to creators each time their tokenized music is resold. This feature is a game-changer in an industry where musicians often lose out on resale profits. Smart contracts simplify the process of compensating musicians, but it also raises questions about how different types of music royalties should be calculated and distributed fairly. 
A virtual item
A token can symbolize various forms of digital art, such as an artist’s album cover, posters, concert photos; collectibles like a musician’s autograph; gaming skins; videos of virtual concerts or tracks; unique artist meet-and-greet encounters; and more. These digital items can be converted into Music Non-Fungible Tokens (NFTs) for trading with potential profit. The functionality and appearance of these NFTs can vary greatly. They could be as straightforward as a non-interactive picture of the musician, which is a typical use of NFTs, or they could be intricate assets used in virtual concerts that contain various functions and attributes embedded within the asset itself.
Pay-for-use
In simpler terms, public blockchains represent communal processing power that needs to be utilized effectively. A token serves as an ideal tool for measuring resource usage and promoting crucial operations. These tokens are often referred to as “gas tokens.” For instance, Bitcoin uses BTC as its gas token, Ethereum uses ETH, Avalanche uses AVAX, and so forth. If there were no gas or fee charges, a single user or a small group could potentially overload the blockchain, similar to a Distributed Denial of Service (DDoS) attack, rendering it inoperable.

Musical entertainment in the metaverse

Sebastian Borget, CO-Founder and COO of The Sandbox, a culture and entertainment platform built on Ethereum, shared that he has created a new web3 venue for musical entertainment within the metaverse called “ShowCity.” This virtual hub hosts popular TV shows like The Voice, as well as music industry titans such as Snoop Dogg, Steve Aoki, The Chainsmokers, and Warner Music Group. Notably, Warner Music Group marks the first major music company to venture into the metaverse with their top artists including Bruno Mars, Twenty-One Pilots, Ed Sheeran, Madonna, Metallica, who will perform virtual concerts and other musical events at ShowCity.

In simple terms, ShowCity provides musicians unique benefits like access to The Voice live performances, both digitally and physically, if they invest in a parcel within ShowCity using The Sandbox (SAND) tokens. However, it’s important to note that The Sandbox was classified as a security by the US Securities and Exchange Commission last year.

That’s a bargain.

— Snoop Dogg (@SnoopDogg) December 3, 2021

Artists design digital representations, or personas, to perform in virtual shows, generating massive earnings from ticket sales and NFT products. Everything bought within The Sandbox is entirely owned by the artists, opening up new income streams.

Sebastian Borget stated that by moving one step closer to a sustainable, fan-owned, and community-driven open metaverse for musical entertainment, ShowCity is forging partnerships with non-profit organizations that champion social, environmental, and climate issues.

Potential legal challenges to the tokenization of music

In my exploration of the burgeoning music industry landscape, I’ve observed a growing trend among musicians to tokenize their music, host metaverse concerts, and issue collectible Non-Fungible Tokens (NFTs). As an investor in this space, it’s crucial to be aware that this digital revolution brings potential legal hurdles and financial complexities.

Jonathan Cutler, senior manager at Washington National Tax, Deloitte Tax LLP, said that,

“The new digital asset reporting guidelines, released in late June, encompass Non-Fungible Tokens (NFTs) in the reporting requirements for Form 1099-DA. These regulations stipulate a reporting threshold of $600 for ‘specified’ NFT sales – these being indivisible, unique, and not linked to excluded property. If NFT sales surpass this amount, a digital asset broker can report the yearly total on one Form 1099-DA instead of individual forms per sale. It is important to note that these regulations do not address how certain NFTs might be classified for tax purposes as collectibles. The initial draft of Form 1099-DA, currently being revised to align with the final rules, did not include any reference to collectibles either.”

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2024-08-04 18:07