Blockchain Is All the Rage, So… What Is It?

This post was written by Orly Ravid,  Director of the Biederman Entertainment and Media Law Institute at Southwestern Law School and an Associate Professor of Law. She is an attorney at Mitchell Silberberg & Knupp, LLP (MSK), which she joined after earning her undergraduate degree at Columbia University’s Barnard College in 1993 (where she majored in English with a Film Concentration) and her Juris Doctor at Southwestern in 2014.  She founded The Film Collaborative, a film distribution non-profit that advises independent filmmakers about all aspects of distribution and distributes films without taking rights. She continues to serve as President of the Board and Co-Executive Director of the organization.

Hollywood and independent producers never fail to glom on to new trends in film/content financing and distribution. As 2018 draws to its end, blockchain is all the rage in the content investment and distribution business.

Attorney Mark Hiraide: ‘Hopefully, the regulators will provide further guidance to assist us’

So, what is blockchain? It’s good holiday party chatter, and a technology solution — a decentralized, public (though there are private blockchains) digital ledger system focused on tracking important transactions even between strangers (e.g., investment or distribution). As the name describes, it is a chain of records (“blocks”), which are linked using a cryptography hash of the previous block, a time stamp, and transaction data.  By being decentralized, a blockchain is not housed in a single location or controlled by any one person or entity. It is updated and managed by its users, on a peer-to-peer (P2P) basis.

Blockchain is meant to dissolve a need to rely on middleman-third parties in financing and rights-content licensing while being totally public, transparent, and efficient regarding copyright ownership. While it was invented to function as a transaction ledger for bitcoin (cryptocurrency), blockchain is now being applied to film-series distribution.

Blockchain Applied to Content Distribution

This holiday season, Boston-based startup MTonomy will launch a video-on-demand platform for cryptocurrency users. “Now millions of Ethereum users will be able to buy, rent and stream films, documentaries and TVshows, and discover new content published directly by studios, filmmakers and distributors,” says Tim Riser, who leads partnerships at MTonomy. 

Ethereum, a blockchain platform, describes itself as “a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.” One can use the Ethereum Wallet and use ether and other crypto-assets built on Ethereum while entering into so-called “smart contracts” (computer-created, self-executing agreements converted into code and supervised by the blockchain computer network). To learn more about “smart contracts,” you may be amused by an article entitled “Smart Contracts: The Blockchain Technology That Will Replace Lawyers.”  On MTonomy, content providers can be paid their revenue share in U.S. dollars, even though the content will be consumed via the Ethereum network.

Observing “a lack of a distribution mechanism for small, substantial and free-thinking cinema or entertainment content within India,” myNK, the soon-to-emerge, India-based OTT platform from MinersINC, “firmly focuses on filling this gap between demand and distribution of  quality world cinema.”  Utilizing blockchain technology, it promises to “ensure a safe, assured distribution platform for filmmakers to access a whole new audience that has only just begun consuming content on smartphones and hand-held devices.” Founder and CEO Nitin Narkhede further explains that “currently, approximately 299 million people use smartphones in India. Over time, this number is expected to grow to 499 million as Reliance Jio expands access to high-speed data at very low prices. This is a market for movie consumption that simply has no match in terms of reach and numbers.

Narkhede adds that blockchain technology can empower creators in the long run. “Blockchain technology naturally extends to the fundamental framework of how digital media gets distributed. It is a peer-to-peer decentralized network that brings the filmmakers in direct contact with their consumers without passing through the archaic distribution system. It gives leeway to filmmakers to bypass the costly distribution mediums and distribute their films directly to consumers. It has the potential to liberate the filmmakers by putting them back in control of their work and gives them complete autonomy on how their content gets distributed and priced. Correspondingly, consumers are also empowered, as they get the freedom to choose from a global library of films.”

Blockchain Legal Issues Spotting

Although it’s wonderful to contemplate the new technology’s stimulation of investment in content and robust solutions for content creators with respect to the threat of piracy and old distribution models with inefficient and costly layers of middlemen (sales agents and distributors), it’s not a risk or complication-free solution. For starters, blockchains are vulnerable to hacks and in that way would offer no solution for piracy (there already have been cryptocurrency hacks). (For more about hacks read “The 8 Worst Cryptocurrency Hacks in History by Dan Price” – posted in Commentary on Nov. 30, 2018, which can be read here).

For any legal disputes, what would be the venue and applicable law given that nodes and users would likely be worldwide and certainly rarely just regional? If contracting with a specific service, that service will likely want to centralize how it handles disputes, and that forum and choice of law will likely not be ideal or convenient for many users. Smart contracts have yet to be put to the test as far as breach, remedy, and adjudication overall. A dispute provision seems critical. Often blockchain users are anonymous, which poses an obvious challenge in case of dispute.  Where blockchain is not heavily regulated (it is regulated and even banned in some countries), it is vulnerable to market manipulation (thought by some to be the cause of the cryptocurrency boom in 2017 and triggering scalding criticism from, for example, Warren Buffet, warning of a bubble crash). 

SEC regulation is a key legal issue confronting cryptocurrencies and, therefore, impacting entertainment industry financing. Mark Hiraide, a partner at MSK who specializes in capital transactions, observed in late November that “a year ago, the cryptocurrency mania was at its peak with the price of Bitcoin nearing its all-time high of $20,000.  Today, we are in the throes of a cryptocurrency market meltdown with the price of bitcoin at $3,336.  Most other tokens have dropped 99 percent from their all-time highs.” In contemplating what is causing the crash, Hiraide explains that “many argue it’s over-regulation. The Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), the Commodities Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the Department of Justice have charged cryptocurrency operators with violating various laws under their respective jurisdictions.  No doubt, the SEC has been the most active, having taken swift action since its July 2017, report of investigation when it first weighed in on whether tokens and cryptocurrencies are securities. Since then, they have filed over 20 civil enforcement actions against companies and individuals selling initial coin offerings (ICOs).” 

Hiraide adds that, “if digital assets are securities, the SEC registration and investor protection laws come into play. Before you can offer or sell a security, you must comply with strict requirements to avoid having to file a registration statement with the SEC.  Regulation D under the Securities Act of 1933, or Reg D, is just one of several possible exemptions. [Typically, independent film financing relies on Reg D exemptions.] And if your digital assets are securities and you don’t comply with both federal and state securities laws, you can be held personally liable to return ALL investors’ money.”

Hiraide explains that the SEC has, however, “made clear that it does not want to stifle innovation of blockchain technology nor force developers offshore.  It has even gone so far as to acknowledge in public statements that digital assets initially offered as a security can over time “morph” into a non-security.  Bitcoin and Ether are examples of two cryptocurrencies that the SEC no longer regards as securities.  Hopefully, the regulators will provide further guidance to assist us in determining at what point the transformation takes place.”

Time will tell how successful blockchain film and series financing and distribution will be, but lawyers should not only get conversant with the technology but get ahead of all relevant legal issues and proceed appropriately. In the meantime, enjoy the trendy party chatter and happy holidays!