• CFRED CUHK Law

Blockchain Copyright Exchange - A Prototype

Jiarui Lui - Stanford University


-- Morning Keynote Paper, Machine Lawyering Conference 2021, Day Three -- Assume you wanted to remit $100 dollars to your cousin in another city. You went to a bank to process the remittance. The bank told you it needed to charge 85% of the amount as an administrative fee, which would leave $15 for your cousin. Assume you love your cousin so much and decided to bite the bullet and accept the administrative fee. The bank then indicated that it took at least three months and up to a couple of years for the money to arrive. By the way, were the bank somehow unable to locate your cousin, it would simply give the money to other clients of the bank. Do you have any doubt about whether a bank like this, with such exorbitant costs and inferior services, may survive a single day in an ordinary market?

However, this is the everyday reality for artists in copyright industries. First, for every dollar that consumers pay for creative works, artists often receive less than 15 cents, with the rest diverted to cover administrative costs. Second, labels, publishers, and collecting societies are usually scheduled to report accountings of copyright royalties on a quarterly basis. In practice, it is not uncommon that royalty payments may be further delayed for a couple of years. Third, it appears that 20% to 50% of royalty revenues never reach their rightful owners and fall into a black box instead. If the royalties collected remain unclaimed for a certain amount of time (say three years), a collecting society would be legally permitted to use the unallocated amount to defray administrative costs and support collective-purpose projects for existing members. In the digital age while users may gain immediate access to any creative work with a click on the mouse, it seems absurd that it takes months or even years for intermediaries to distribute royalty revenues to rightful owners, if even.

The astonishing inefficiency in copyright industries is a byproduct of complicated legal and economic structures, which dictate that artists have to go through a web of hundreds, even thousands of copyright transactions to license creative works and collect royalties. Exorbitant transaction costs, in the forms of administrative bureaucracy and operating expenses, gobble the majority of royalty revenues from existing services, cause substantial delays in royalty distribution, and impede accuracy in identifying rightful owners.

My recent article presented at Machine Lawyering 2021 proposes a blockchain copyright exchange (“BCE”) to untangle the web of copyright transactions and unlock the digital potential for artists, by hardcoding thousands of copyright rules, license terms and money flows through smart contracts. BCE may dramatically improve upon mainstream online services like Spotify and YouTube at least in three aspects of royalty collection and distribution.

First, BCE enlarges the total pie of copyright royalties by restoring the market value of a stream. Additionally, by minimizing the transaction costs involved in copyright licensing, BCE dramatically increases artists’ share in the royalty pie. As a result, BCE allows artists to earn a revenue per stream up to sixteen times larger than Spotify offers and eighty times larger than YouTube offers.

Second, BCE smart contracts automatically enforce the rights and obligations under copyright license contracts whenever a user intends to enjoy a creative work in the BCE community. After the user gains access to the work of her choice, BCE generates and distributes 100% of the royalty revenue to the copyright owner in a matter of seconds instead of months, without charging any administrative fee. Further, BCE may directly split the reward pro rata to enable multiple copyright owners including artists, labels, and publishers to receive their respective shares simultaneously.

Third, BCE smart contracts are essentially immune from any external influence ex post as they are self-executing on an immutable blockchain in accordance with predetermined contractual terms. This cryptographic robustness minimizes the risk of a breach of contract or of fiduciary duty, e.g. an agent sitting on or misappropriating collected royalties. Nobody has any ability or incentive to create a block box of unidentified royalties as every dollar goes directly to copyright owners in the BCE ecosystem.

BCE develops a variety of innovative tools based on the blockchain technology to prevent copyright disputes and combat online infringements. Most importantly, the BCE ecosystem cultivates healthy socioeconomic conditions in which all the users including artists and fans are motivated to benefit one another, rather than fighting one another over copyright piracy. First, while artists receive equitable financial rewards in proportion to the values of their creative contributions, BCE keeps access to creative works essentially free to average consumers. Second, fans may share in the commercial success by acquiring a portion of copyright ownership in a creative work and therefore receiving a percentage of its revenue flows. The copyright crowdfunding created at BCE, featuring zero transaction fee and improved security, is superior to traditional equity or reward crowdfunding. Third, fans may mine BCE tokens by distributing, promoting, and voting for new creative works. Unlike such existing services as Spotify, the BCE ecosystem squarely aligns the financial incentives between artists and fans to the extent that the more fans support artists, the more artists excel in the market, and the more fans benefit themselves financially.

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