Blockchain in the (music) copyright environment

3/2019 16.7.2019

The music industry has faced criticism over the imbalance therein. Some parties (e.g. labels) have too much power and creators are not in a fair position. Blockchain might provide a disruption to the system in the form of democratization of power and royalty allocation.

The use of creative works has changed quite a lot during the 21st century as technology has rapidly developed. The digital ways to use creative works have facilitated widespread use and made it less expensive, while copyright owners’ tools to monitor the digital environment (arguably) have not kept up with the development. Blockchain has potential to introduce new ways to control copyright protected works. It could be used for real-time royalty payments, which would allow a fair remuneration to artists, as they would get compensated from each stream of their songs and they would not have to wait months or even years to get compensated from each stream. Also, the potential of increased transparency provided by blockchain could solve the problem of poor access to information about music rights in the music industry.

The technology and proposed blockchain applications to the music industry

Distributed ledger technology, colloquially known as blockchain, is essentially an immutable record-keeping database that enables a digital ledger of transactions and that is stored across a peer-to-peer network and synchronized automatically. It is a decentralized solution where all participants within a network have their own identical copies of the ledger, thus a way of avoiding the risk of malfunction or malicious action of one source. Each block of data is cryptographically added to the chain of blocks according to the programmed protocol, (e.g. by the majority of blockchain users). Hash function creates a unique ID to each block, and each block contains the ID of the previous block, which creates a chain of IDs. A slight change in the data of the block creates a new unique ID to it, which creates a chain reaction that changes all the following blocks’ IDs. This change is then accepted or denied according to the programmed protocol.

Blockchain architectures can be divided into public and private. In a public blockchain, all data is public, and everyone has access to it. The most popular public blockchain is Bitcoin. The data in a private blockchain is public to all users of that specific private blockchain, but the level of user access can be limited.

Blockchain technology enables the use of smart contracts. A smart contract is basically a program code that executes a certain specific result when predetermined conditions are met. Smart contracts can be used for automated royalty distribution and different types of license agreements in the copyright environment.

SounDAC is an operating platform (private blockchain) specifically designed to be used in the music industry. The idea of SounDAC is to provide a single location for all copyright information without intermediaries or fees, and to let the creators take control themselves. It offers three different use cases for music streaming. Firstly, existing streaming services can retain their own database and use SounDAC’s database and technology for reference, i.e. the streaming services would get notified by the blockchain (to check the need for modification of the database) when there is a new transaction in the blockchain. Secondly, it can be used as a database and by means of payment, and thereby royalties can be transferred in a similar way as in Bitcoin, according to how data is recorded into the database. Thirdly, it can be used as a database, by means of payment and a source of currency (cryptocurrency).

SounDAC uses a Delegated Proof of Stake algorithm where elected people (so-called ‘witnesses’) act as the governance body that makes decisions to create blocks. It has two cryptocurrency tokens. XSD token is the official tradable cryptocurrency. XSD can be upgraded to VIP form, which determines the users’ (artists’) reputation score. Only users with XSD in VIP form can write changes to the database (metadata or smart contract) and participate in the election of persons to the governing body. RYLT token is the internal cryptocurrency used for royalty payments. As an attempt to manage the volatility of RYLT token, it has been defined in ways that one RYLT can be redeemed for approximately 1 USD worth of XSD.

Each stream is timestamped in the tamper-proof blockchain. SounDAC uses a 24-hour royalty pool, which is daily determined by the market value of SounDAC and equally split up amongst all listeners that specific day. This listener’s share is then allocated per second. For example, if I listened to music for 300 seconds (100 seconds for song A and 200 seconds for song B), my “assigned” royalties will be paid out for the songs A (1/3) and B (2/3) to the recipients in accordance with the smart contracts. The indisputable benefit of this kind of individual streaming behavior application is fairer allocation of royalties in music streaming. Spotify has attracted criticism because the most popular lists and songs receive the majority of the royalties, even though some paying streamers may never have streamed these popular songs.

PeerTracks is the practical music streaming Decentralized application (dApp) that uses SounDAC blockchain for automated royalty payments. It is possible to develop competing dApps that use SounDAC. Ujo Music is another blockchain technology for the music industry. Its technology is regarded as outdated because it requires heavier computing power (as based on Ethereum and Proof of Work algorithm) than the pre-mined Delegated Proof of Stake algorithm. Binded and KODAKone are blockchain technology developments for the management of photographs. An interesting solution is DLive (based on Lino Blockchain, a decentralized autonomous content ecosystem) that is designed for live streaming (a competitor to Youtube and Twitch).

Transparent information about copyrights

There may not be enough incentives for sharing information in the music industry. Basically, the information concerning songs is scattered everywhere, and people do not have proper access to it. Creative work suffers from this because it is difficult for creators to find information about ownership, and thus to acquire licenses or other permissions to use copyrighted works. Blockchain has the potential to create an international and public database that holds the metadata of songs. However, blockchain technology is not the only technological way to accomplish this, but the benefit of blockchain is the distributed copies of that database, one party cannot block the access.

Alexander Savelyev [2017, page 5] has written that the lack of transparent information about copyrights is caused by the absence of formal requirements for verifying copyright ownership. What we need here is a mindset change in the music industry.

Questions concerning the development

At an early stage of the development, it is important to consider the system’s transparency and the balance between copyright owners, creators and users. The developer can define code of conducts at code level, which may form rules that govern copyright in the same way as happened to DRM technology, such as rules concerning how metadata or smart contracts can be altered.

Generally, costs are split up between the developers and maintainers. A characteristic of blockchain is that part of the maintenance costs is directed to users; users save copies of the blockchain on their hardware and participate in block creations and smart contract executions by using their computing power. The cost-effectiveness of blockchain is uncertain, especially when blockchain becomes internationally comprehensive (i.e. for how long does blockchain provide an incentive for users in exchange for their maintaining efforts).

The immutability of blockchain in the copyright environment

What if a court rules that a certain song (that is downloaded to blockchain) infringes someone other’s copyright? Or what if there is a need for altering ownership information? In a public blockchain, this is solved by a new transaction. It leaves the previous “wrong” data block as part of the ledger, thus it is still possible that someone finds this “wrong” data block and obtains wrong information. Is a balanced copyright status obtained by applying certain dApp solutions? For example, in a database by hiding the “wrong” data block as the last search result or adding red flag to that data block so that the user could be more careful of the information validity. In a private blockchain, an alteration of metadata or smart contract (e.g. to add a new creator as copyright owner or inheritor) is possible. Either way, because of the immutability of blockchain, a written data block cannot be erased or encrypted ex post to hide information.

Blockchain technology does not allow for a total removal of data block, meaning that once downloaded, a song cannot be removed from the blockchain ex post. This is one of the biggest uncertainties of blockchain in the copyright environment, because a creative work is protected automatically when it is created and no authorization is needed. Moreover, there is a lot of artistic influence and uncertainty about what type of use constitutes copyright infringement.

Copyright enforcement with blockchain

Birgit Clark has envisioned that blockchain could make it possible to code ‘smart information’ about intellectual property right ownerships into digital form, and this coded information could be utilized for monitoring Internet. Savelyev [2017, page 8] on the other hand has envisioned a way to individualize each digital copy of a copyrighted work by using the hash function. A serial number could be added to each digital copy which is enough to differentiate each digital copy from other copies, and thus individual data blocks are created, which in turn could be used to monitor the usage of each block (i.e. each digital copy). The possibility of more monitoring tools provides creators with better control and may allow for dynamic pricing (pricing could follow the supply and demand or artists could offer discounts to their fans).

Another aspect of enforcing copyrights or other intellectual properties is the potential of increased value of evidence because of the public and secure timestamp. Blockchain records every event. The timestamp would provide highly reliable evidence about that a certain event occurred on a given date and time of the day. Since a creative work is protected as created, the potential of this timestamp in the copyright environment could enhance the proof of first use against a counterparty. A digital timestamp does not prove that a certain song was created earlier than another, since it is possible to download a song to blockchain afterwards. Both parties still have the possibility to prove the first use in other ways. It is within the discretion of the court to rule on the evaluation of proof. It is reasonable to give weight to blockchain’s immutable timestamp when the counterparty is not sufficiently able to prove against it.

Storing metadata and creative content

It is possible to store metadata and creative content in a blockchain. However, the cost-effectiveness of this solution is doubtful. Bitcoin has reached 210 Gb size, and it only stores metadata concerning transactions (not creative content). Another solution is to store creative content at third-party servers, but then it must be ensured that the blockchain is always kept linked and synchronized to the relevant copyright work. This solution also dismisses the benefit of decentralization, since a third party could block the access by a unilateral act.

The new EU directive on copyright in the Digital Single Market (2019/790/EU) brought new requirements for information society service providers (like Youtube) that store and provide access to large amounts of works or other subject-matter uploaded by their users. Article 17 states that measures, such as the use of effective content recognition technologies, shall be appropriate and proportionate. However, the measures have not been defined yet. As regards blockchain, it would be appropriate to define the measures in a way that takes into account the nature of blockchain (mainly immutability, such as the impossibility to delete content from blockchain in case of preventing the availability). The potential benefits of blockchain (like the decentralized content ecosystem Lino) should not be dismissed by implementing measures that would prevent the meaningful or practical use of blockchain.

Cryptocurrency as compensation

Is it possible to negotiate license agreement fees when cryptocurrency is used for royalty payments? In reality, it is necessary to solve the amount (and/or the way) of the payment for each stream in blockchain code. It is possible to negotiate license agreements that would take into account the cryptocurrency sphere. The problem here is that copyright organizations license their repertoire and in Finland, for example, labels themselves license their own copyrights. Thus, it would require a collaborative and uniform licensing practice from all music copyright parties.

The Finnish Copyright Act (404/1961) is mainly dispositive. The copyright owners have the power to constitute cryptocurrency as a reasonable copyright compensation. Despite that, cryptocurrency is not a fiat currency, which could cause problems. The Finnish Promissory Notes Act (622/1947), Section 7 states that when a promissory note has been made payable in a currency which is not legal tender at the place of payment, payment may, unless otherwise agreed, be made in the currency of the place of payment. According to this provision, an artist may demand payment in Euro in case there is no agreement about using cryptocurrency (especially considering the relationship between copyright organizations and artists). The Finnish Act on Collective Managment of Copyright (1494/2016), Sections 1 and 19 require responsible economic management, and license agreement using cryptocurrency can be considered to fall under this requirement, which is why the unstable nature of cryptocurrency poses a risk for copyright organizations.

Need for legal amendments?

Finnish copyright law already contains a strong presumption of ownership, which is rebutted by court decision, so I do not find it necessary to increase the legal status of the records in the blockchain system, like Savelyev has suggested [2017, pages 18–20]. Another question is the need and means for increasing the usability and trust for blockchain system in the copyright environment. A blockchain-based copyright register/database does not enjoy public reliability. A development of a copyright register that would enjoy public reliability and be maintained by an authority is unlikely to happen. When I consider the present political climate (e.g. trade war) and previous failed attempts to create a global register for information about musical works such as songs, I find it hard to see a successful government cooperation and adaption of global blockchain system that would be controlled by a governmental authority. Perhaps, the usability of blockchain could be improved by exemptions from the liability for infringement for users of blockchain-based copyright management system [Savelyev 2017, page 20], but it is not an easy task to define such exemptions. They should be balanced with the presumption of ownership concept and the interests of copyright owners and the whole copyright system. In order to maintain balance, it would be necessary to somehow reimburse financial losses incurred by right holders in case of abuse committed by users [Savelyev 2017, page 20].

The Finnish Copyright Act (404/1961), Section 7 prescribes an assumed ownership for the person whose name is indicated on the copies of a work or when the work is made available to the public, unless otherwise demonstrated. A dispute of assumed ownership as a civil case is decided by Market Court (Section 61(1)). The copyright owner is entitled to reasonable compensation for copyright infringement despite the assumed ownership or negligence (Section 57(1)).

The doctrine of registering under Finnish property law means recording the legal relationships of property objects in a public register that is maintained by an authority. The public reliability of the land and mortgage register may be spoken on the basis of the Code of Real Estate (540/1995). The doctrine of public reliability generates legal protection for a third party on the validity of registered right, unless the third party knew or ought to know of previous registrable but unregistered right. Registering of property rights is considerable for real property and mortgage, but also for book-entry and intellectual property rights (not copyright). Copyright generates legal rights from creation, not from registration, and the Berne Convention Article 5(2) prohibits formalities for the enjoyment and exercise of copyrights.

The current situation and future of blockchain in the copyright environment

Undoubtedly, blockchain offers benefits to the copyright environment and a possibility of democratizing the music industry. The concept of smart contract offers more equal allocation of royalties and a more dynamic system where creators can solve questions of legal status without resorting to slow and, possibly costly, court proceedings. At the same time, I find it important to regulate the power associated with smart contracts because of the impact on the legal position of others (i.e. artists’ income). The increased level of automatization requires high-quality data, thus it is necessary to agree on the legal ownership of a song at an early stage and avoid misspellings, etc.

For the majority of produced music, availability in a music streaming service requires consent of labels, publishers and other intermediaries, hence their dominance is the biggest obstacle for a comprehensive implementation of blockchain. There is much uncertainty about the immutability of blockchain related to copyright law; creative content cannot be deleted once downloaded to blockchain (in case of infringement). It will be interesting to see how these questions will be solved.

 Author: Aku Turppo, LL.M., University of Helsinki