Remastering Royalties: The Future of Music Industry Finance

The digital age has brought unprecedented disruption to the music industry, upending traditional distribution models and empowering independent artists in new ways. Something I’ve been thinking about for 10+ years is what innovation looks like on the financial side of the industry. The financial infrastructure underpinning this ecosystem is tethered to legacy systems, characterized by friction, inefficiency, and inequitable distribution of value.

Since I first read about Ethereum and the potential for digital assets I’ve thought about the intersection of technology and operations. Lately I’ve been going back into stablecoin research, a class of digital assets with the potential to orchestrate a fundamental shift in finance, in particular music industry finance, offering the potential to unlock unprecedented efficiency, transparency, and artist empowerment.

While “cryptocurrency” often conjures images of wild price swings, stablecoins are designed to be different. They are digital assets engineered to maintain a stable value relative to a reference asset, typically a fiat currency like the U.S. dollar or a commodity like gold.

There’s some thought needed into the best taxonomy for them—digital dollars come to mind. I’ve always been excited by the idea of “digitally-native goods” but am aware it makes little sense to anybody unfamiliar with the space.

The stability of stablecoins is achieved through various mechanisms – from the straightforward fiat-collateralization of USD Coin (USDC), where each digital dollar is backed by a dollar held in reserve, to more complex models like algorithmic stability, which rely on intricate smart contract systems to adjust supply and demand. I think the inherent design of stablecoins positions them as a potentially powerful tool for revolutionizing how artists are paid and how music companies manage their finances.

Beyond the Bank: Elevating the Artist Experience

The allure of stablecoins extends far beyond mere technological novelty. They represent a tangible opportunity to reclaim control over their financial destiny and transcend the limitations imposed by traditional banking infrastructure. That’s the promise. What does that mean for artists? Imagine a world where royalty statements aren’t just a quarterly glimpse into past earnings, but a continuous stream of value flowing directly from fan purchasing power.

Consider the stark reality faced by many independent artists and music companies operating in the global music market. International wire transfers, often subject to exorbitant fees and opaque exchange rates, can decimate already slim margins. The industry is designed for US hegemony. These charges, often levied by multiple intermediary banks, act as a silent tax on creativity, eroding the earnings of those who are often struggling to make ends meet. Stablecoins, by contrast, offer the promise of significantly lower transaction costs, enabling artists to retain a larger percentage of their income – a critical advantage in an increasingly competitive landscape. Studies suggest that on-chain foreign exchange transactions using stablecoins could reduce remittance costs by up to 80%. This difference alone can represent a pivotal shift for global artists.

Moreover, the glacial pace of traditional payment cycles can create crippling cash flow bottlenecks, forcing artists to delay projects, forgo opportunities, and struggle to meet basic living expenses. Stablecoin transactions, settling in minutes or even seconds, offer the potential to dramatically accelerate payment cycles, providing artists with immediate access to funds and empowering them to make timely investments in their careers. This speed facilitates a new level of agility and responsiveness, enabling artists to seize opportunities and manage their finances with greater precision. Faster payment processing also means an easier reconciliation for revenue coming in across international borders.

Perhaps the most compelling benefit of stablecoins lies in their potential to expand financial inclusion to artists who are currently underserved or entirely excluded by the traditional banking system. Millions of talented musicians around the world lack access to basic banking services, limiting their ability to participate in the global music economy. Stablecoins, accessible to anyone with a digital wallet and an internet connection, can overcome these barriers, empowering artists in developing countries and marginalized communities to monetize their creativity and connect with a global audience.

Digital currencies in the distribution back office

The potential benefits of stablecoins extend far beyond individual artists, offering music companies a compelling opportunity to modernize financial operations, reduce costs, and increase transparency. The shift to stablecoins represents a strategic imperative to optimize financial processes and unlock new sources of value.

Imagine a world where royalty payments are processed in near-real-time, eliminating the delays and complexities associated with traditional banking systems. This improvement in payment efficiency can have a deep impact on the bottom line, particularly for companies with extensive global operations. The transparent and auditable nature of blockchain-based transactions can significantly reduce the risk of fraud and enhance the accuracy of financial reporting. Every stablecoin transaction is recorded on the chain ledger, providing a clear and verifiable audit trail that can be used to reconcile payments, track royalties, and ensure compliance with regulatory requirements. This increased transparency can foster greater trust between music companies and their artists, promoting a more collaborative and equitable relationship.

Integrating stablecoins into existing ERP systems may seem daunting, but the emergence of specialized “stablecoin orchestration platforms” is simplifying the process, enabling companies to monitor, direct, and integrate stablecoins into their payment workflows without requiring major infrastructure overhauls. These platforms provide a centralized dashboard for managing stablecoin payments, tracking balances, and generating reports, making it easier for companies to navigate the complexities of the digital asset landscape.

Reality check

Let’s be clear: the vision outlined above isn’t a fait accompli. I’m not naive about the hurdles that stand in the way of widespread stablecoin adoption. I’m the first to admit tThere’s a ton of nuance here and I’m deeply skeptical of the idea that all of this is ready to work right now. The challenge is always in implementation and migrating incumbent systems which is not easy in an industry that loves incumbency.

While this analysis focuses on the technical and financial advantages, the practicalities of implementation are far more complex.

The Big Question—Consumer Demand

A central challenge remains: how do you drive demand for digital currency payments among everyday consumers, let alone artists? The vast majority of music listeners are perfectly content using credit cards, debit cards, or PayPal. For all their frustration with payments, artists are still more comfortable with bank or paypal payments. Convincing them to adopt a new payment method, requiring the setup of digital wallets and a potentially unfamiliar user experience, is a significant uphill battle.

The success of stablecoin-based payment systems hinges on creating a seamless and intuitive user experience for both artists and their fans. This requires collaboration between music companies, technology providers, and artists to develop user-friendly interfaces, provide comprehensive education and support, and address concerns about security and privacy.

One potential avenue is to incentivize stablecoin payments by offering discounts, exclusive content, or other perks to fans who choose to pay with stablecoins. Another is to integrate stablecoin payments into existing music streaming platforms and social media channels, making it easier for fans to support their favorite artists. Artists have to be very careful and wary of over-promising as there have been cases of scamming in the music industry around cryptocurrency.

The stablecoin landscape is still evolving, and music companies must proceed with caution, carefully evaluating the stability and security of different stablecoin offerings before integrating them into their financial operations. Moody’s reported on the relative instability of stablecoins, which in some cases is a feature of the design.

Volatility and de-pegging risk remain significant concerns. You can diversify a stablecoin strategy, allocating reserves across multiple fiat-backed stablecoins from reputable issuers to mitigate exposure to any single asset. Algorithmic stablecoins, with their inherent instability, should be approached with extreme caution or avoided altogether.

The collapse of TerraUSD (UST) serves as a stark reminder of the potential pitfalls associated with algorithmic stablecoins and underscores the importance of conducting thorough due diligence before investing in or utilizing any digital asset.

Regulatory uncertainty also poses a challenge. In the current US tax environment, it’s not feasible for a music company making payments at scale to swap in and out of USDC while the IRS treats digital currencies as property, creating a capital gains tax event with every swap.

I think the part of wallet adoption is solved. MPCs and smart wallets make the experience easy for consumer onboarding. The off ramp into a bank account still creates friction.

There is a compelling vision for digital currencies as the future of music industry finance, promising increased efficiency, transparency, and artist empowerment. The key for decision makers at music companies is to navigate the integration of new payments channels without alienating either artists or their accountants.