Over the last few years Water & Music has emerged as the go-to resource for research and data on the emerging web3 music industry. Founded by Cherie Hu in 2016 as an experimental sandbox for music innovation, the organisation joined the third Seed Club cohort and became a DAO in late 2021.  Today, they boast newsletter readership in the tens of thousands and their 1,500-strong research community spans everyone from emerging artists to start-up founders and C-suite music executives. Their pioneering research is helping musicians understand trends, build strategies, and innovate in the sector. Nowhere is this truer than in their contribution to our understanding of NFT music contracts.

Jonathan Larr is a practising music lawyer who teaches papers in music business at UCLA, and USC in California, and is one of the DAO’s leading researchers and drivers behind their work on NFT copyright law. We sat down to discuss the importance of the Music NFT Contact Builder, the legal landscape that made it a necessity, and the team’s future development plans.

Towards the end of 2021, Jonathan and fellow researchers at Water & Music set out to get some perspective on the legal frameworks surrounding music NFTs. “We took every publicly available music NFT contract we could find and went through them,” he says. What they found was far from reassuring: there was little consistent language and few common standards from one contract to the next, and many were making simple but consequential errors. “We realised that a lot of them were bad, and they were bad in very fundamental ways.”

Foundational concepts, like the legal distinction between a song's sound recording copyright, and its composition copyright – i.e., its music and lyrics – were being blurred or entirely confused. Many of the contracts they reviewed were drawn up by independent artists “doing the best they could” without legal advice or specific knowledge of copyright law. Seeing the lack of standardised frameworks, and the pitfalls this could create down the line, Jonathan proposed a solution. “I had the idea of making a template contract that artists could use. Something that would, at the very least, be legally correct.”

After taking his proposal to the Water & Music team, the project eventually grew into an interactive tool that populates a legal contract based on an artist’s responses. There are pop-up messages that alert you to common areas of confusion which can trip up non-lawyers, and the tool also acts as an educational resource, with explainers for each clause and background reading for those looking to improve their understanding of copyright law.

Released in March, Jonathan says the community response has been “overwhelmingly positive overall, which is great. People have really liked it, a lot of artists have used it, and found it really helpful.” However, he says the team also encountered some pushback to their initial report from web3 musicians who felt there was too much pressure to apply web2 legal concepts to this new and rapidly evolving market.

“Some people have that kind of ‘move fast and break things’ tech philosophy, which basically means they're not going to hire lawyers or won’t care what lawyers say and will just go ahead with it and see what happens.” Of course, that anarchic spirit can lead to significant innovation in the right circumstances, but music NFT contracts with vague, conflicting, or even misleading language can be a minefield if things turn sour.

“We're trained to think in terms of lawsuits,” Jonathan says of his own perspective. “If you buy a piece of the sound recording copyright and the contract says you receive royalties, and then you don't, that's a lawsuit.”

“We took every publicly available music NFT contract we could find and went through them.”

— Jonathan Larr

Whether the result of honest error or of intentional boundary pushing, contracts that leave one party holding the short straw have the potential to damage the delicate and reciprocal relationship web3 artists have with fans and supporters. That’s why Water & Music’s contract builder, and its ongoing development, is such a significant resource for independent musicians.

Following feedback from their community, the latest version has added language to support a rapidly growing area of music NFT’s: off-chain, real world benefits. Physical merchandise and access to backstage or VIP experiences are nothing new, but once Jonathan and his colleague Brett Kaminsky, an attorney and fellow W&M member, began digging into how these contracts were adapted for NFTs, they found that many were startlingly vague.

“We thought there would be plenty of language out there describing, for example, what happens if you go to a venue and you buy an NFT for a meeting (or event), and it's not valid – what do you do? Who do you contact? And there really wasn't any.” Without any clear existing contract law to pull from, the two lawyers were forced to draft the legal language that was eventually used in the contract builder to cover real-world benefits “more or less from scratch”.

Currently, the contract builder only covers US law, but the team are hopeful that it can be expanded to include a number of different countries in the future. However, Jonathan says this would be dependent on getting input from people with the relevant expertise. “We're cautious. UK law isn't that different, but we’d want to get a UK lawyer or a European lawyer who can vet things. We've had a couple of Indian lawyers who are interested, we've had some Japanese lawyers who are interested. So, we'd love to adapt it to those countries, those languages. That might be a part of version three.”

“It’s going to be regulated in some fashion.”

— Jonathan Larr

Beyond adapting the contract builder to other legal systems, there are many other areas of contract law that artists are clamouring to see included in the template, such as event ticketing and royalty splits. However, Jonathan says right now these areas are either too complex to be easily covered by the template or, as in the case of royalty splits, they’re awaiting clarity from regulators like the US Securities and Exchange Commission (SEC) regarding what regulatory burdens will be placed on NFTs going forward. “They're definitely going to come out and say something. They might come out and say that royalty investments are not a security, they might say it is, but it's going to be regulated in some fashion.”

That uncertainty just underscores how fast the music NFT ecosystem has evolved and how much catching up the legal establishment has yet to do. Asked what areas of the law still seem ill-defined or too fast moving to get a handle on, Jonathan replies: “It'd be easier to say which ones aren't! The law is always behind where things are at, but in this case, it's even more so because of the pace of advancement. But that’s what I’ve found really interesting about this project: trying to put a legal structure in place, and hopefully designing some standards in an area where there isn't any of that yet.”

“If you buy a piece of the sound recording copyright and the contract says you receive royalties, and then you don’t, that’s a lawsuit.”

— Jonathan Larr