Author: Johannes Hoericke
Abstract In 2017 the Blockchain technology experienced a great excitement and soared to new heights. With an increase of 1200% of the main cryptocurrencies (Bitcoin and Ethereum) global players such as stakeholders and banks expressed their interest in the promising technology. While investors are grappling for an easy way to make money, on an international level, the governments in Russia, China and within the European Union (EU) are already discussing a legal framework concerning cryptocurrencies. Setting aside the debate for the financial sector, the Blockchain technology seems promising for today`s enforcement and protection of copyright in the digital age. Since the development of the internet with new business-models arising and a society, which infringes copyright by sharing and uploading on a daily basis, rightsholders of copyright protected works find themselves in dilemma between missing remuneration of their works and prohibiting unauthorized usage of their content. This study explains the relevant aspects of blockchain technology, in particular the distributed ledger, Decentralized Autonomous Organization and smart contracts. In addition, it will be explained how these aspects can be used to facilitate licensing, digital rights management with a short explanation of the current challenges rightsholders face in the digital market environment. In the last part of this paper, the arising downsides of using blockchain technology will be examined and discussed.
We are the Bocconi Blockchain and Cryptocurrency Association. We foster a community- driven approach for the adoption of Blockchain and Cryptocurrencies. Our goal, as an association is to research the technology, to help other people learn about its mechanisms, potential application and challenges, and provide opportunities for discussion with experts and professionals in this broad new exciting industry. This paper is written by Johannes Hoericke.
Content 1. Brief summary about the Blockchain technology The first noticeable use of the blockchain technology occurred with the creation of Bitcoin, a cryptocurrency introduced in 2009. The technology is considered to be one of the most revolutionary achievement, which will have an enormous impact in a vast variety of different sectors in the upcoming years and decades. Blockchain can be described as a decentralized method of recording any transaction, including the dispositions concerning value or assets in a continuously encrypted and irreversible distributed ledger and was first introduced by Satoshi Nakamoto with paper explaining a new method of executing transfers of values between parties in a trackable and secure manner.
1.1 Distributed ledger Blockchain is similar to a database in that it is a structured collection of information using certain cryptographic functions to achieve the requirements of data integrity and identity authentication. In case of value-exchange transactions for example, the transactions (or so-called blocks) are sequentially grouped and chained into blocks and identified through hash functions. This creates a digital fingerprint and is used to demonstrate a persistent and tamper-evident record of each transaction on the so-called distributed ledger. Each block is thereby connected to a previous one and immutably recorded through a peer-to-peer network. By using cryptographic trust mechanisms, each transaction maintains as agreed-upon by all participants in the network, without requiring a centralized party, which controls the transactions. Unlike other databases, the distributed ledger is saved on numerous computers using the distributed ledger, leading to a level of transparency and security between the connected parties. Considering the decentralized nature, the main principles for blockchain are therefore transparency, redundancy, disintermediation and immutability. A distributed ledger is publicly available and stored on a local copy of the blockchain, indicating that it can be transparently verified by all users. Secondly, the technology is redundant, because every user of a blockchain holds a copy of the data, thus it cannot be taken offline due to a technical malfunction or unlawful actions by third parties. Since changes in the blockchain require a consensus by the majority of users within the protocol (so-called consensus protocol), the transaction within the blocks can hardly be manipulated. Consequently, the transactions on a blockchain are secured and immutable. Furthermore, the removal of an intermediate such as banking facilities from transactions decreases the costs and risks connected to such intermediaries.
1.2 Smart Contracts With the introduction of the Ethereum network, founder Vitalik Buterin further revolutionized the formal understanding of blockchain implemented systems. The network is based on an open source code and runs with so-called smart contracts. The concept of a smart contract was introduced by Nick Szabo in 1997, where he defined the network as an“computerized transaction protocol that executes the terms of a contract”. Their primary function is to automate the executions of contracts, by incorporating certain requirements defined by the parties (e. g. currency rate, time of execution and validation, registration of an IP right etc.). By setting the components and criteria before the execution of a transaction, smart contracts can automate agreements between the parties according to the set of instructions previously written in their code. Once the criteria are met, the smart contract is triggered and the transaction is executed by validating the transaction and adding it to the blockchain. Because Ethereum is a so-called turing-complete network, the scope of smart contracts can have a variety of encoded processes, which go beyond a normal payment transaction. 1.3 Decentralized Autonomous Organizations (DAOs) Another newly introduced concept in the Ethereum network are Decentralized Autonomous Organizations (DAOs). Such DAOs are organized by smart contracts to manage assets and determine the structure, the purpose and the functionality of an organization. By enforcing transactions by using smart contracts and replicating some elements of a legal company , the members of such organizations can for example decide by a two-thirds majority how to spend founds or how to dividend receiving shareholders. At the same time, DAO allow third parties to contribute capital towards an enterprise anonymously without having to trust an intermediate to exercise control over the associated capital.
2. Current challenges of Copyright in the digital era The functionality of existing copyright laws is mandatory for the cultural development of humanity. Considering this, lawmakers try to create balance between protecting the rights of copyright owners for their protected work and the use for society of such works. In order to create incentives, the protection of the economic and moral rights of authors will be ensured above all in order to reward their creativity and ensure fair remuneration. Digital technology enables the transmission and use of protected materials by third parties in digital form over interactive networks, which allows the transmission and re-distribution or copy in a perfect digital form. Whereas older technologies such a photocopying only allow copies in lesser quality, users can make an unlimited amount of virtual copies and make them publicly by uploading them on the internet. In this sense authors find themselves in a dilemma, where their economic rights are exploited, while platforms monetize their works without remuneration. This issue is currently addressed by European legislators to ensure fair reward for rightsholders in the digital environment. This chapter examines the core issues of copyright enforcement regarding the digital rights management, the lack of transparency in regard of collective management organizations and licensing compensation for rightsholders. 2.1 Digital rights management Once a protected work is uploaded on the internet, it circulates via hyperlinks, sharing and copying throughout the internet. Consequently, after making protected works available on the internet, the information about ownership gets lost within the world of bits. Considering the lack of transparency and a central database that manages authorship information, substantial problems arise in regulating the subsequent use of protected works and identifying the original rightsholders. Such information are currently fragmented in the variety databases of collective societies and publishers, which do not have incentives to share it. This leads to immediate and negative consequences for rightsholders and users. Firstly, rightsholders do not receive remuneration for the usage of their works, unless they share it with intermediaries, such as collective societies, which retain a substantial part of the compensation. Additionally, users of protected works find themselves in a state of legal uncertainty, since they cannot obtain permission from the original rightsholders directly. By implementing a Digital Rights Management (DRM) system, rightsholders try to avoid the exploitation of their works and try to restrict duplication and distribution of their digital assets. However, these systems are often perceived as problematic and do not work as intended. A registration to such systems is time consuming and the implementation is very expensive. They are vulnerable to hackers and lack interoperability between the different systems. Furthermore, such system fail to maintain the control of intellectual property assets and therefore do not meet their purpose.
Finally, DRM tools may even prevent the fair use of works that could eliminate rights recognized by law. An example is the introduction of encryption on DVD that prevent the consumer’s ability to legally create private copies of DVD they purchased. Considering the prohibition of circumvention on copyright protections in the law of the United States of America, DRM tools could also limit scientific research and make copyright restrictions less convenient. 2.2 Lack of transparency on renumerations Over the years e-commerce service providers, labels and collective societies have increased their impact on the digital content economy. With the grow of streaming platforms such as Spotify and Netflix the consumption of digital content switched from ownership to access. This concerns for example the broadcasting rights, where the content is delivered only at a specific time of the transmission chosen by the service provider, instead of communication rights, where the transmission time is chosen by the user. Unlike for broadcasting related rights do not apply for streaming, artists receive royalties about 15-20% (depending on the contract), instead of 50% for broadcasting. However, the generated revenues for broadcasting are collected by collective management organizations (CMO) and the revenues are split up between the members of such organizations. Current legal frameworks do not create a viable market for individual rightsholders to license their works without the involvement of CMO. Collective arrangement of rights offer economic benefits for both authors and users, notably by reducing the transactions costs. With that, authors are encouraged or required to join CMO of their relevant industry in order to enforce their intellectual property rights (IPR). They manage large catalogues of copyright work and enforce the licensing on behalf of the individual rightsholders. One of their main advantage is that content services can negotiate an agreement for their catalogue, instead of negotiating with every individual rightsholder. CMO have a greater bargaining power and to locate users, resulting in better enforcement of intellectual property assets than individual rightsholders could archive on their own. However, such organizations have been criticized for lack of transparency, missing remunerations for rightsholders, excessive abuse of their monopoly and inefficiency. Some CMO are accused for monopoly exploitation against users that have only a single supplier of licenses for their particular repertoire, and also against rightsholders with no alternative rights administration available to enforce their IPR. Additionally, their problematic behavior includes discriminatory treatment in payment of their members, denying access to foreign authors or charging excessive fees to users that only wish to license a part of their repertoire.
The current approaches of European lawmakers seek to strengthen the position of CMO, which could generate more issues for individual rightsholder. In summary, lack of transparency within a CMO leads to unfair compensations for authors and lack of individual enforcement possibilities. Authors find themselves in a weaker position towards CMO as their intermediaries, where they have to obey the rules set by CMO. Another common complaint lodged by artists concerns new intermediaries such as Spotify and YouTube that increasingly insert themselves into the distribution chain between artists and their audience. While such platforms monetize a large amount of content, creatives receive only a small part of the revenue generated by such content, without any information on how their work is priced, shared or advertised. Taking into account the bargaining power of such online intermediaries, it is unlikely that a fairer share is guaranteed if the status quo remains.
3. Promises of the blockchain technology The chapter above has shown which core issues individual rightsholders face in the digital environment. With the lack of transparency within the content distribution chain, intermediaries seem to withhold an unjustified amount of generated revenue based on the use of copyright protected works. Emerging technologies make it difficult for rightsholders to prevent unauthorized distribution and enforcement of their rights. Currently, the functionality of copyright enforcement is inadequate, leading to insufficient incentives for creatives and a stagnation of cultural development of today’s society. The following chapter examines how these issues could be solved by applying the blockchain technology for DRM.
Secondly, it will explain how DAO could prevent their critical behavior. Finally, this chapter examines how blockchain could useful for licensing and copyright enforcement.
In this context, the individualization of each work through digital fingerprints – jointly with the possibility of tracking the sale and resale of such copy – enables the application of a digital principle of exhaustion. Consequently, the rightsholders regain their power over their digital copies in the digital environment, which has been lost since the new emerging technologies and the possibility to create infinite copies with the same quality by way of distribution, transmission and copying. 3.3 Automated licensing Blockchain could shift the traditional means of copyright licensing as a solution for proprietary DRM systems, by the use of smart contracts. While DRM systems deal with access and control of permissions, licensing is about the exchange of permission and the connected remuneration. With the introduction of smart contracts and the removal of intermediaries, a greater control over content could be provided with lower transactions costs for rightsholder. As a result, smart contracts can generate an immediate remuneration by allowing rightsholders to license directly with their users. By implementing the criteria on the smart contract, rightsholders can set up individual criteria such as the price and, once the criteria are met, the digital transaction is complete and the necessary information are embedded on the blockchain, allowing the use of the work in return for an appropriate remuneration of the artist. Smart contracts can be coded to facilitate complex transactions and therefore may encompass multiple authors or works. By setting the percentage for every involved author, a smart contract could automatically remunerate their share for every purchased copy. Considering the immutable nature of blockchain, the encrypted agreements by all involved parties cannot be tampered later. Thus, any future disagreements regarding revenue payments will be solved based on the original agreement between the parties involved. Therefore, the use of smart contracts seems promising to address current issues with licensing mechanisms. Current systems are considered slow and problematic, with lack of cash flow and traceability. A direct distribution of payment could avoid costs associated with collecting and managing statistics. While proprietary DRM systems do not allow users to enjoy the licensed work for other systems, a neutral blockchain DRM system would overcome this issue with numerous benefits for users. That means users could purchase a digital copy of a protected work and use it throughout different platforms.
3.4 Tackling the monopoly of Collective Management Organizations CMO are, as explained above, accused of insufficient transparency regarding royalties and excessive license fees to certain users and rightsholders. In order to prevent such abusive behavior, many jurisdictions attempt to restrict CMO by unilaterally setting fees and tariffs under competition law or case law. Nonetheless, CMO still have bargain power due to their monopoly position for their repertoire, whereby multiple issues remain. Without the dependence of intermediaries, blockchain could enable fairer and more transparent mechanisms of remuneration. Being both a network and a database, CMO could be entirely substituted. As seen above, protected works can be licensed directly, but with reduced transactions and inscrutable remuneration. Furthermore, blockchain contains all the necessary information for example for proving ownership and thus can be an infrastructure for licensing and clarification of rights. With the use of smart contracts, the rightsholders can set their own conditions and regain control over such conditions. Additionally, under current conditions different CMO are constantly litigating against each other to prevent multi- jurisdictional licenses. Blockchain could eliminate the need for online content providers to acquire a license from the relevant jurisdiction and have a positive impact for cross-border availability of online content. In summary, a blockchain-based ecosystem could coordinate the clarification of rights for the rightsholders and licensing and substitute the functionality of CMO. As a consequence, their monopoly position can be unseated, and copyright owner can participate in creating a repertoire that can generate economic value for new copyright mechanisms. This value would be carried out by rewarding so-called miners for the integrity of the blockchain and rightsholders with tokens for supplying their work on the system. These tokens can be exchanged for other cryptocurrencies or demonstrate voting rights in DAOs. Even though, CMO are currently mandatory in order to enforce rights by legislative means, they could be substituted by DAO. Rightsholders within a DAO could then assemble together as an alternative to individual or private licensing systems by use of smart contracts. Consequently, a transparent organization would be created, whereby all members could democratically set their conditions for purchasing their works or criteria for joining the DAO. As a result, performers, artists and musicians would not have to follow the rules of intermediaries and gain power by licensing agreements with users.
4. Challenges of blockchain Although the implementation of a blockchain-based DRM seems to overcome many issues, there are still some challenges, which needs to be addressed as the technology is not fully developed yet. This chapter examines current legal and technical problems of implementing a decentralized DRM system. 4.1Legal issues Since the technology is not fully developed, it lacks a precise legal framework that outlines the use of blockchain. Blockchain misses a legal definition and a proper acknowledgement within the law. The reputation of cryptocurrencies is still damaged by unlawful activities from users abusing the anonymity of blockchain for illegal transactions to hide transactions from law enforcement agencies. For example, Bitcoin has been abused to facilitate drug or weapon trafficking and for money laundering. This leads to prohibiting certain activities with cryptocurrencies or even ban them completely. As a result, the implementation of blockchain-based systems is stalled by lacking a proper framework and trust. Furthermore, the treatment of a blockchain DRM system needs discussion. A blockchain platform that manages and stores information for copyright protected work could fall under the definition of an information society service provider under Directive 2000/31/EC (e- commerce directive). Especially its liability regime may be problematic. The liability regime is manifested in Art. 14 of the e-commerce directive and exempts liability for infringing content if providers can prove that they have no control over the information provided by third parties and act expeditiously to remove the infringing content after becoming aware over the unlawfulness.
Thus, providers of such databases cannot be held liable for information transmitted on the ledger, since they act as mere conduits. Connected to the decentralized nature of blockchain the liability exemption would lead to problems of identifying parties to sue for infringements. Another issue is the legal treatment of smart contracts. The term of a smart contract is arguably misleading, since it refers to the automatic execution of computer code. Therefore, it is highly debatable if an automated mechanical process can qualify as a legal contract in the traditional sense. Such are commonly defined as legally enforceable agreements and promises normally consisting of a voluntary offer and acceptance. They can be executed in many forms: oral, written or through actions, such as clicking. However, some jurisdictions require that certain types of contracts must be conducted in a specific form, such as in writing or signed by a notary. As a result, a smart contract may not be legally enforceable when their offer is not provided in human- intelligible language to determine the terms of the contract.
With the lack of case law on whether a smart contract qualifies as a legally binding contract, the use seems risky. Additionally, liability questions arise when smart contracts are wrongly coded and therefore void.The immutable nature of blockchain aggravates the reversal of void smart contracts. Also, the contractual performance of a smart contract is limited to the predefined criteria within the code. Therefore, if the parties include obligation based on other communications, the smart contract cannot execute these agreements. As a result, there may be a mismatch between the agreement of the parties and what the smart contracts executes and with this causing non-performance. Similar problems arise with DAO. As explained above, a DAO could imitate the elements of a legal company, such as dividend-receiving shareholders on the base of smart contracts.Nonetheless, many jurisdictions feature formal requirements for creating a company, such as registration in a central registry system, like the German commercial register. As a result, a DAO might not be recognized as a legal person and shareholders would not be able to enjoy its limited liability. Participants may face significant legal risks, potentially being held personally responsible for the organizations liability. 4.2 Technical challenges With blockchain being a decentralized database, one of the main questions concerns the storage of copyrighted works. Currently the state of blockchain technology imposes constraints in putting the content directly on the ledger. The size of Bitcoins ledger has been increased exponential and reached 250GB today, with only containing metadata of transactions. The amount of storage for a blockchain-based DRM would be higher, regarding to the complexity of the metadata. As a result, the associated cost for storage may be substantial. If decided that content should be stored off-chain, it has to be ensured that the data related to the content is linked accordingly. Otherwise issues about accessibility and the control over such content would remain. Another fundamental issue blockchain faces is the speed of processing transactions. Compared to traditional transaction platforms, blockchain is significantly slower. Whereby Bitcoin can handle 2-5 transactions-per- second (TPS), Visa for example can process 56,000 TPS.121 Additionally, the blockchain technology cannot unleash its full potential if the number of users is limited. This so-called network effect increases the value over a network as it attracts a wider user base. With limited content provided by blockchain, the usage would be unattractive for users to purchase content on the system. This is especially the case after collective societies and intermediaries become redundant and publishers start to license content directly with no intermediaries. Therefore, it is unlikely that CMO will arrange their repertoire on a blockchain-based DRM system currently. Furthermore, users need to acquire cryptocurrencies for purchasing content. However, more steps are required to obtain cryptocurrencies, while current licensing systems are easy to use.
Conclusion Blockchain has the potential to shift the current copyright system towards a fairer one. With the use of blockchain and smart contracts a DRM system could be created, which benefits rightsholders and provide greater control. Getting remunerations directly over digital content – without having to fear that intermediaries take an unjustified share – should be attractive for copyright owners. Furthermore, smart contracts are able to facilitate licensing and lower transactions costs. Digital fingerprinting leads to a better traceability of copyright ownership and can be used as evidence in court. The substitution of CMO with DAO can overcome the criticized behavior by granting its members voting rights and providing the necessary transparency for renumeration. Blockchain provides all the necessities for rightsholders to negotiate with intermediaries on equal terms. However, the technology is not fully developed yet and issues like storage space and transaction speed need to be solved. Most importantly, a proper legal framework is necessary to develop the full potential. Lawmaker should examine the positive advantages of blockchain instead of focusing solely on abuse cases in the past. Furthermore, the current copyright framework has to consider how to unset the monopoly position of CMO and intermediaries. Nevertheless, if the technical problems are addressed and a proper regulation exists, blockchain will be a step towards a fairer and more transparent copyright system in the digital world.