Why more music companies are paying artists’ royalties in crypto

If you’re reading this, you’ve probably seen all the headlines out there about the “crypto crash.” From global government crackdowns on cryptocurrency mining to the disillusionment around exclusive, big-ticket NFT auctions, the technology’s hype and novelty are largely wearing down as people question what it will really be good for in the long term. This is certainly the case in the music industry, where music NFT sales are down by around 70% month-over-month so far in June, according to Water & Music data.

At the same time, we cannot dismiss the tangible, positive financial impact that crypto has had on many artists. Our data shows that over 130 artists, most of whom are independent or unsigned, have earned five figures or more from NFT sales in the last six months. That’s roughly the equivalent of 3 to 5 million streams per artist (or in the highest cases, 5 to 6 billion streams) — a figure that should not be dismissed, especially from the perspective of an independent artist trying to build a sustainable business. The tangible upside that crypto offers for artists has sparked heated debates about the role of traditional music-industry stakeholders — especially labels, publishers and centralized streaming platforms — in a world where immediate, decentralized, dynamic payments directly from fans are the norm.

One intriguing, if incomplete, way that some of these stakeholders are catching up is by giving artists the option to cash out their royalties in the cryptocurrency of their choice.

A small but growing number of music rights holders and artist services companies are experimenting with this approach right now — including publisher Prescription Songs and independent label services outfit Alpha Pup, which distributes several artists and music brands like Justin Boreta, Brainfeeder and Spirit Bomb that are active in crypto and NFTs. Revelator, a music payments platform that works with B2B clients like CD Baby, Teosto and mtheory, is currently beta-testing a mobile app called Original Works with a few dozen independent artists and rights holders that allows them to receive their music royalties in the form of a stablecoin called OWN, which they can cash out for fiat currency.

On May 3, Alpha Pup founder Kevin Moo (a.k.a. Daddy Kev) tweeted about his company’s venture into crypto payments for its roster artists. Since then, he’s signed up over a dozen artists to the distributor’s beta test. While that might sound like a small number, “it’s become a $10,000-a-month experiment now,” he tells me. “There’s real money moving through.”

Does this approach make sense, though? To many artists, the whole point of embracing crypto and blockchain technology is to bypass, not rely on, the low-margin streaming ecosystem. Crypto-native album rollouts, like Matthew Chaim’s Textures Of A Long Forgotten Assumption and RODG’s Unlock Album, have intentionally been designed not only to make payments to artists more immediate and direct, but also to use crypto to capture dynamic value that would have never been realized through streaming payouts — what Chaim called “solving for resonance” rather than just for reach or consumption.

In this environment, merely converting traditional streaming royalties to crypto might seem like a temporary band-aid, rather than a genuine cure, for artists’ qualms around digital music economics. But it’s also a highly strategic move for music companies that are looking to build goodwill with artists and familiarize themselves with crypto in the context of their existing accounting systems. From the artist’s perspective, it also helps lower one of the biggest barriers to participation in the crypto economy — namely, owning crypto in the first place.

As more and more industries around the world experiment with compensating their workers in crypto, it only makes sense for the music industry to follow suit. How are the earliest movers doing it, and what does it reveal about the way music payments might work in the future?

Wide view: The rise — and risks — of crypto payroll

While the notion of compensating artists in crypto might feel relatively new, the concept of “crypto payroll” — i.e. paying full-time employees and independent contractors in crypto, rather than in fiat currency — is almost as old as crypto itself.

Unsurprisingly, many crypto startups like Coinbase, Monolith and CoinCorner have been experimenting with paying their own employees’ salaries in crypto for several years. A handful of celebrity athletes and entertainers have also requested crypto-based compensation, such as NFL star Russell Okung’s decision to put half of his salary into Bitcoin as part of his $13 million contract with the Carolina Panthers.

Now that crypto has gotten much more mainstream, several payment companies have launched features specifically for helping employers run official crypto payroll programs, including BitWage, BitPay, Gilded Finance, Deel and Papaya Global. Such programs are fast infiltrating small businesses, big-tech companies and public organizations alike — from local restaurants struggling to recruit employees, to Twitter (helmed by longtime Bitcoin evangelist Jack Dorsey), to even the Miami government.

As for how employers actually get crypto into employees’ wallets on a technical level, it’s somewhat complicated. Only a few dozen companies in the world have dedicated crypto treasuries; this setup can be a significant risk from a tax perspective, especially given crypto’s current volatility. So, what most employers do for crypto payments at scale is wire checks in fiat currency to a middleman payment company, which then converts that check amount into an employee’s preferred cryptocurrency (usually Bitcoin or Ether).

For instance, as part of Okung’s compensation plan with the Panthers, the team wired half of his salary in fiat form to the Bitcoin payments app Strike, which then converted those dollars into Bitcoin and sent the tokens to Okung’s cold storage wallet. For the more risk-averse, many employers adopting this approach also offer employees the option to receive only a certain percentage — say, 10% to 20% — of their salary in crypto, rather than 50% to 100%.

Aside from taxes, there are several other legal reasons why more companies haven’t invested in crypto payroll options. In the U.S., certain states require by law that employees are paid specifically in U.S. currency, including meeting minimum-wage and overtime thresholds. If an employer is paying staff in crypto during a time when the market is more volatile, these thresholds quickly become murky. As attorney Eliot Rushovich wrote for Law360:

Imagine, for example, an employer being sued for paying its employees based on the cryptocurrency’s value on the payroll date. If the employees can show that the cryptocurrency’s value at the time they worked the applicable shifts is more accurate and, on average, leads to a higher payment amount — or otherwise leads to a nonneutral result as compared to the employer’s calculations — there is a good chance the court will find in their favor and award the wage difference and damages.

Crypto payment platforms also continue to face increasing pressure from regulators around the world, potentially posing a legal and administrative risk for employers. For instance, BitPay, which counts Prescription Songs as a client, recently had to pay over $500,000 in settlement fees to the U.S. government for facilitating payments to countries like Ukraine, Cuba, North Korea and Iran that were subject to sanctions by the Office of Foreign Assets Control (OFAC).

Inconsistencies in these global crypto regulations might be slowing down institutional adoption of crypto payroll — but artists and creative professionals are already transacting millions of dollars in crypto on a monthly basis, whether their “employers” or business partners like it or not. So, what is the music industry doing to catch up?

Fine print: Questions for the music industry

What are the incentives for artists — and companies — to convert royalties into crypto?

To understand why it might make sense to convert streaming royalties into crypto, it’s helpful to learn first from artists who have experimented with music NFTs and other crypto campaigns outside of the dominant streaming ecosystem.

Music payments and royalty accounting are notorious for being complicated, slow and low-margin, with several middlemen taking their percentage share as the money flows to the artist. Crypto turns every aspect of this model on its head — simplifying and expediting payments, making the process more transparent and removing middlemen almost entirely from the process.

Bryan Laurenson, who makes music as Quiet Theory, was one of the collaborators featured in the first NFT auction from the music/art collective Songcamp, which released three audiovisual art pieces direct to and exclusively on the Ethereum blockchain (i.e. not on DSPs). The NFTs all sold out within 24 hours, generating a total of $21,000 for all the artists involved.

“The immediacy of it felt very strange,” Laurenson tells me. “In the land of the traditional music industry, things are not days, or weeks, but often months behind in terms of what you’re getting paid relative to what is reported. For the first Songcamp release, everyone got paid automatically in the course of minutes. It felt very foreign, like transacting on a different planet.”

The international backgrounds of all the collaborators was also a major motivating factor to release direct-to-blockchain with transparent revenue splits, as opposed to having to negotiate traditional royalty agreements. “There were eight or nine of us on each split [for the release], and only half of us are in the U.S. — the rest are in Asia, E.U., Canada,” said Laurenson. “The fact that all of us are getting paid the same amount at the same time, and can immediately go out and collaborate with other artists using those funds at the same time — it’s really such a different way of thinking from the traditional music industry, where there are so many more barriers to collaboration from an infrastructural and financial standpoint.”

Many of these same benefits also apply to the context of converting streaming payments into crypto. The payments don’t necessarily come at a faster cadence — they’re still reliant on DSPs’ traditional reporting and accounting practices — but crypto does make cross-border transactions much easier to manage, without having to go through bureaucratic processes at incumbent banks. Payment services like PayPal and Stripe that distributors commonly use in Western markets also remain unavailable in many countries around the world, especially in certain parts of Asia, Africa and Latin America — all considered the fastest-growing markets for music.

Clint Choi — co-founder and label manager at Acrylic Label, which releases instrumental music spanning lo-fi, ambient, bossa nova and jazz genres — recently shared on LinkedIn that any artist, vendor or creator that works with Acrylic can request to be paid in BTC, ETH or the stablecoin USDC “for an indefinite time going forward, a definitive time duration (one full calendar or even one quarter), or even for a one-time payment period.”

“What a lot of artists outside the U.S. find appealing about crypto is the ability on a micro level to fight the dollar hegemony that affects a lot of their payments,” says Choi, who regularly works with artists in Latin and South America. “Inherently, investing in crypto is fighting against the dollar.”

Another major incentive for artists to opt in to crypto royalty conversions is the opportunity to even get involved in the crypto economy in the first place, and have a tangible stake in its upside. The majority of music NFT and “metaverse” platforms like Zora, Foundation, Decentraland and Cryptovoxels require an active crypto wallet to participate.

One interesting side effect that Moo has noticed from Alpha Pup’s experiments so far is that financial literacy and financial planning have become even more of core component of conversations with artists — which, unfortunately, remains rare in artist deals. “If you think about concepts like your assets working for you, stored value appreciating — if I can instill that in any young person or any young artist in terms of encouraging a long-term view on their finances, if [crypto] is an instrument towards that goal … I can’t in good conscience say BTC or ETH is the best way to do that, but at least we can get artists starting to think about investing and thinking long-term,” says Moo.

What tech stack are music companies using to pay artists in crypto?

Because this practice of crypto royalty conversion is so new, the tech stack is far from standardized across the music industry.

As mentioned above, Prescription Songs partners with BitPay, a Bitcoin payments service that launched a B2B payroll product known as BitPay Send in November 2020. In contrast, Alpha Pup maintains its own Coinbase wallet, and manually moves USD royalty payments into the wallet for each artist in the beta test.

“Generally speaking, we know roughly how much we’re going to be paying in royalties 10 days before actually paying it out,” says Moo. “So we initiate the transfer in USD ahead of time, it sits in Coinbase, and when it’s time we hit each individual artist payment manually. Coinbase doesn’t have any autopay or mass-pay feature, but I assume they will in the future.” For the time being, Alpha Pup also covers all gas fees involved in these transactions.

Revelator is building technology that will merge these two functions of music distributor and crypto wallet into one. The key challenge (and opportunity) is what Revelator’s founder/CEO Bruno Guez calls “bridging the gap between off-chain streaming royalties and on-chain streaming and payment data” — i.e. between receiving streaming royalty information from DSPs, and registering the asset and making a royalty payment in crypto through a smart contract. For instance, there have been a few instances of artists selling “music publishing NFTs” that include a portion of royalties in token ownership (Lil Dicky, Jacques Greene, VÉRITÉ), but in all of these cases, the actual rights transfer was handled off-chain via traditional publishing agreements.

Through their app Original Works, Revelator has been beta-testing a system with a small handful of rights holders (covering “roughly 2,000 works,” says Guez) that consists of two token types: An “asset token” that represents a given person’s share in a creative work, and a stablecoin “payment token” that represents royalty payments and settlements. Revelator takes a given asset’s streaming royalties and pipes that information directly to the asset’s corresponding smart contract, with rights holders receiving their payments in a stablecoin format that they can cash out for a fiat currency of their choice.

One of Guez’s goals with Revelator is to scale and expand the Original Works platform to the point where asset tokens can become fractionalized and tradable, with tangible royalty flows attached to them on-chain.

“Say a song’s smart contract has 1 million tokens, and you own 50% of them because you own 50% of the rights to the song,” says Guez. “You can decide if you want to invite other collaborators in or transfer some of your shares to someone else — a guitar player, fan, producer, influencer, et cetera. And you can do that all on your phone.” (For now, Revelator does not cover gas fees for rights holders; unless gas fees go down significantly, this will likely become a contractual sticking point in the music industry in the future.)

What are the downsides of this model?

From the artist’s perspective, the biggest downside to getting more royalty payments in crypto for the time being is… the real world. 99.9% of businesses still don’t accept crypto, which means that fiat currency is still a necessary reality for artists to function in society (e.g. pay rent and bills) and build long-term careers (e.g. buy DAWs and music gear).

“There’s this narrative in the crypto ecosystem where if you see the value of ETH long-term, you want to hold onto it — you don’t necessarily want to be selling it,” Matthew Chaim, who is also part of the Songcamp collective and released his latest album on primarily crypto-based platforms, tells me. “But even if it’s your primary income, you have to sell it, because your landlord is not accepting ETH.”

Financially, of course, there’s the issue of volatility. Even if crypto might make cross-border streaming payments faster, they’re still going to be paid out around once every month at most. Payment cycles for music publishing and performance royalties can be even slower, ranging from 90 to even 140 days or more. In crypto time, once a month is basically the same thing as playing the lottery.

Case in point: When I interviewed Moo for this article on May 11, the price of ETH was at $4,132.76, its highest on record. At the time, this would have been a positive development for artists on Alpha Pup’s beta test, as the value of their crypto payments would have significantly appreciated (assuming they held onto it). But as of publishing this article (June 28), the price of ETH has dipped by over 50% to $1,946.15, as part of the wider crypto crash.

“When you move money into Coinbase, if you’re buying ETH through your bank account, there’s usually up to a six-day delay before you can start transacting with it,” says Moo. “That’s definitely an immediate concern, because it’s such a volatile currency. We account for our royalties in USD, but a lot can happen within those six days in crypto.”

From a tax perspective, this means that any risks (and rewards) of crypto volatility fall primarily onto the artist, not the company or employer. Choi tells me that he had to design a specific clause in his artist/vendor agreements stipulating that Acrylic would not be liable for any crypto price drops or gains after payments are made. This is sensical in the context of small-scale experiments with independent contractors — but as discussed earlier in this piece, it could also be grounds for a lawsuit if and when it expands to regular payroll for full-time employees.

As a suggestion for countering this volatility, Chaim is inspired by companies like Sablier Finance that are promoting the concept of “money streams, where you stream payments into a person’s wallet at a certain rate over time, in real time,” he tells me. “I like this idea of the flow of music rights and royalties being structured in smart contracts, and that really being a flow in real time, as opposed to these brick units every few weeks or months.”

Herein lies the major revelation: Arguably the only situation in which it truly makes sense for music companies to pay artists’ royalties in crypto is if those payments are arriving in artists’ wallets every day. That’s how quickly the crypto ecosystem is moving nowadays, and that’s arguably how quickly artists would need to access funds in their wallets to support each other and participate in the music crypto economy (NFTs, DAOs, social tokens. and all) in a meaningful way. Whether labels, streaming services, distributors and other tech companies are ready and willing to adapt to this pace is another question entirely.

While crypto royalty conversions are an exciting stepping stone for getting artists and music companies more familiar with the technology, it still inherently ties artist compensation to pro-rata consumption payouts on DSPs — which are still subject to the whims of streaming and social-media algorithms that many artists are trying to escape with crypto — and at a rate that is simply too slow to keep up with crypto markets. Hopefully, as more music companies jump on board with these kinds of deals, they will realize that crypto can act not just as another form of payment, but as the foundation for an entirely new way of operating in the music business.