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  • Writer's picturejames allen

Thinking about whether or not royalties should be in the same conversation as NFTs?

Updated: Aug 23, 2023

Why push this antiquated royalty model for NFTs? Why can't one just HODL art? As use cases outside art emerge, royalties shouldn't be discussed.


*Disclaimer:* This is only my opinion. Not the sentiment of any associates.


I began my foray into the music business in 2010. I've seen countless music tech startups come and go with a mission to "empower" artists or creators somehow. The word "empower" carries a specific legal connotation:


ĕm-pou′ər

transitive verb

  1. To invest with power, especially legal power or official authority. synonym: authorize.

  2. To equip or supply with an ability; enable.

  3. To give authority to; to delegate power to; to commission; to authorize (having commonly a legal force).

The American Heritage® Dictionary of the English Language, 5th Edition.


This week, OpenSea announced that they would stop enforcing creator royalties, getting backlash from Yugo Labs. At the same time, Coinbase is doubling in saying it is committed to enforcing creator royalties. Both announcements used the language of empowerment.


Coinbase is still fighting legal battles over what is considered a security. So what business do they have to commit to creator royalties?



Royalties, in a digital age, are like tipping. As technology improves, it gets messier. Like that barista that pours you a cup of drip coffee, swings the iPad around, and looks away, embarrassed that it's asking you to tip for holding a nozzle button and applying a cup top. Hopefully, you plan on drinking that coffee, not reselling it on the open market.



I am ALL for tipping in the digital economy. The [old] benefit of tips may or may not still apply. Whether you like the show or not, South Park often predicts things in advance. Take a page from Matt Stone and Trey Parker's book. They eliminated tipping and paid employees more at the Casa Bonita. We'll see how it turns out well or not for employees. It reduces wasteful transactions.


Regarding the creator economy, "Royalties" will get hairy. Royalties on secondary sales imply speculative trading. The messaging invites retail traders to invest in speculative NFT "utility." It advertises a sense that Art is more like stock trading. But is it?



Again, I love the concept of tipping in the digital economy. It should not, however, be baked into initial or secondary sales. If the creation is bad, and the current owner wants to offload it, why should that constitute a royalty? Imagine a celebrity artist created an NFT with a utility that allows access to show meet and greets; the NFT changes hands city by city; the creator/celebrity artist dies before the next show. What will happen to all those royalties, and what does this mean for estate planning?


The upsetting part of this marketing is that, in the end, it is just trickle-down economics. The independent creative likely will not benefit from secondary sales. I can't stand mission statements or marketing messages using the word "empower" concerning artists. The independent creator doesn't have a staff full of lawyers.


Royalties once served a purpose and made sense, yet the terminology needs to be updated: mechanicals, etc. Once technology advanced, royalties became a mess. It's analogous to the digital tipping "mechanism."


If you want to give the anti-Crytpo establishment more ammunition, commit to royalties on NFTs. I would sincerely ask Brian Armstrong and Conbaise if they understand how fractional royalties can be. Let (choose your anit-crypto politician) harken back to environmental concerns.


Take a page from Spotify's journey: getting sued for mechanical royalties - which have no place in a digital era. Everyone is talking about how Spotify is taking advantage of creators. If they didn't have to pay royalties (i.e., they had perpetual royalty-free licenses) and didn't rely on advertising revenue, think about how different the model would look.


Let's not get too buzzy. Let's not try and advance "royalties," let's not treat creators like publicly traded firms, and let's not let publicly traded exchanges swerve out of their lane for some seemingly, ESG agenda. For example, this could hurt the argument for whether certain digital assets are commodities.


That's all. That is just my opinion.


Update Aug 23:


Today, Coinbase announced it will suspend trading. See announcement


What happens if they halt the trading of NFTs?


Coinbase's NFT Terms & Conditions at the time of posting only mention royalties once!


In the context of their T&C, they are definitely playing the "platform" game. In essence, the "platform" is requesting a license to use the content you provide (including your NFTs, images, text, and other content) for various purposes related to operating and promoting their service. The license being requested includes the right to host, display, distribute, modify, and more, without requiring payment of royalties.


In this specific example, the platform is not promising to pay royalties to content creators. Instead, they are asking for the right to use the content without the obligation to provide compensation in the form of royalties. This type of license is relatively common and allows platforms to operate and promote their services using the content provided by users.

The NFT landscape has brought unprecedented opportunities for creators and collectors alike. Yet, the sudden pause of NFT transactions or the shutdown of a platform can lead to a cascade of consequences that ripple through the ecosystem.

  1. Unfulfilled Royalties: When a platform halts NFT transactions or closes down, creators could find themselves without expected royalties from secondary sales. This unexpected turn could curtail anticipated earnings and impact the livelihood of creators.

  2. Legal Entanglements: The abrupt change of plans might lead to legal disputes. Creators may feel entitled to compensation if platform actions contradict contractual obligations or earlier promises.

  3. Reputation in Peril: Platform decisions conflicting with prior commitments can tarnish its reputation. The breach of trust resulting from such actions could deter both creators and users from engaging with similar platforms in the future.

  4. Unwanted Regulatory Attention: Here's where it gets complex. Suppose the platform's social media promotions pledged "commitment to creator royalties" while its actual terms didn't ensure these royalties. In that case, regulatory scrutiny could arise. If these actions inadvertently classify NFTs as securities, the platform might face regulatory challenges, including potential securities violations.

  5. Erosion of Confidence: Sudden platform halts could erode the confidence of users and investors. The abruptness can cast doubt on the reliability of NFT platforms as a whole.

Safeguarding against these outcomes requires transparent communication, consistent terms, and adherence to legal considerations. A balance between innovation and compliance is vital for a resilient NFT ecosystem."

 


https://finance.yahoo.com/news/backlash-over-opensea-royalties-change-050027449.html


https://www.businessinsider.com/south-park-creators-eliminate-tips-casa-bonita-pay-30-hour-2023-6?op=1

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