What would it really take to decentralize the music industry?

Blockchain or Web3 or whatever we want to call decentralized technology is at a crossroads. It, along with related tech like cryptocurrencies and NFTs, has matured dramatically.

Yet music blockchain companies have struggled to succeed, even as they promise (and occasionally deliver) real creativity and efficiency in areas where the music industry desperately needs it. The reason for this is clear: there’s a huge tension between what the current music industry needs and what decentralized systems do.

The music business’s main value flows from its ability to control creative intellectual property, and that’s an essentially centralized activity. We need to be clear-eyed about what needs to happen to create a truly robust, multi-faceted decentralized ecosystem for music. Spoiler: that system will be a hybrid for years to come, no matter what some crypto purists want or some startups believe. For the music industry to be fully decentralized and permissionless, several challenging things need to happen.

Global copyright framework

First, there would need to be a global copyright framework that could operate on-chain with every collective rights organization signed on—all 240 of them around the world. They would become validator nodes on the network, the computers that approve and guarantee the correctness of transactions. Furthermore, there would need to be an on-chain claim, counterclaim, and dispute resolution protocol that these CMOs could be part of, along with all the publishers and sub-publishers around the world.

As part of this, there could be a staking mechanism for right owners to put up collateral (likely as virtual tokens) when they register assets, collateral they would lose if they infringe on copyrights. This would solve the problem of alignment and incentivize good behavior. All of this is a big ask for a legacy industry with misalignment at the core of the business model. Things look simpler if we examine it from the creators’ side. They need to register their copyright and their creative works on the blockchain. This is something we’ve already solved, but the next problem is who would pay for this technology and who would maintain it until it can maintain itself in a fully decentralized fashion.

Similar to the way the Music Modernization Act set up the collective funding of The MLC in the US, you could argue that a global copyright consortium of those 240 CMOs/validators could come together to fund and launch this new decentralized registration system. Of course, things get more complicated on the publishing side. Way more complicated.

“A hybrid approach that slowly builds on decentralized protocols like the tokenization of rights management or DAOs for artists and their fan communities will help us find the right way to balance centralized structures and decentralized benefits.”

On top of this, a music creator or rightsholder would want all of the digital streaming platforms and music-related services and apps to be connected to the network, so that these services could make payments directly to rightsholders, according to the ownership structure embedded in the smart contracts of their copyrighted works. This would be marvelously efficient, as some pilots we’ve conducted have demonstrated, but it is also another big ask.

That’s what it would take for the industry to be fully decentralized and permissionless. There need to be financial incentives for all the participants of the network, or these big asks will go unanswered. And we thought a global repertoire database was hard!

However, the outlook is not as gloomy as it might seem, despite all the big asks. There’s hope if we aren’t overly purist and doctrinaire about decentralization. The traditional legal system will catch up, though it definitely will not lead us there. This is exactly what happened in finance: the financial regulatory environment has been playing catch-up to digital currencies and crypto-assets. It did not lead this effort towards the decentralization of finance. Why would anything be different with music?

While this happens, a hybrid approach that slowly builds on decentralized protocols like the tokenization of rights management or DAOs for artists and their fan communities will help us find the right way to balance centralized structures and decentralized benefits.

This isn’t an exotic suggestion; hybrid approaches are everywhere in crypto. Take Coinbase, the first crypto company to IPO. It built the largest centralized and regulated exchange for cryptocurrencies and digital assets, something that did not stop crypto purists from backing the company. Ultimately, Coinbase’s success has boosted awareness of digital assets for the crypto industry, for the greater good. The same thing is possible with creative industries.

Digital assets, be they digital collectibles or rights, are here to stay. Creative IP is a massive $500B untapped asset class ($39B in music royalty collections alone currently off-chain) that could benefit more at this point from a centralized exchange than it would benefit from a cool decentralized network with no scale. At its core, the answer lies in better, more effective rights management and in a good protocol for copyright and royalty settlement to set the stage for future decentralization, as needed. Smart contracts will become the application layer that turns the internet into a native settlement layer, meaning fewer middlemen and less accounting and shuffling of royalties.

While implementing new tech is important, it’s more important to capture and realize more value for creators. Decentralization may help us do that, but the road ahead is long. Without rights management at the protocol level, the music industry will never fully reap the benefits of blockchain or decentralization.