Tokenizing IP: How David Bowie and Blockchain Set the Stage for Creating a Digital Exchange for Intellectual Property Assets

By Andrew D. Butzen – November 16, 2020

The ‘Bowie Bonds’ and What they Inspired

In 1997, David Bowie pulled off a move that, at that point, neither Wall Street nor the music industry had seen before. Bowie bundled up nearly 300 of his recordings and copyrights into a $55 million security – backed by the income from his future royalties, record sales, and licensing deals – and sold it as a bond.[1] The “Bowie Bonds” ignited a wave of asset-backed securities[2] deals based on intellectual property – inspiring the likes of Edward and Brian Holland, James Brown, Rod Stewart, and even Eminem’s producers to issue bonds backed by the future income generated from their works and copyrights.[3]  

Over the past twenty-three years, the “Bowie Bonds” have inspired an intriguing question: what if there was a way to issue, trade, and invest in intangible assets – like intellectual property – on some sort of marketplace or exchange? This idea is not entirely outlandish. Oddly enough, blockchain technology provides a potential avenue for creating a digital marketplace of intellectual property assets through a process called tokenization.

What is Tokenization and Blockchain?

Tokenization refers to the process of converting the rights to an asset into a digital token on a blockchain platform.[4] Blockchain is essentially a digital open ledger system that records and tracks transactions on a peer to peer network where each participant in the network verifies each transaction.[5] Each transaction exists on a block that is then transmitted to all of the participants in the network.[6] In order for the transaction to go through, it must be verified by each member on the network.[7] Not only does this ensure the integrity of the transaction, but every time a new block is created, or a new transaction is made, it is time stamped and creates an immutable chain of information for the rest of the block’s life.[8]

Benefits of Tokenization and How it Could Work to Create a Digital IP Market

Tokenization would allow holders of intellectual property rights – for example, musicians – to issue on a digital blockchain network – through a process called a security token offering (SCO) – digital tokens that represent a share in their protected work.[9] These tokens could then be purchased, sold, and traded on a secondary marketplace. This would allow for those rights holders to receive immediate capital while providing a more liquid investment opportunity for investors.

For example, let’s say Artist A is an independent artist who wrote a hit song. He then licenses that song to a major film studio to be the hit song attached to a summer blockbuster film. Artist A now wants to make a new album, but he does not want to go through a record label for capital. Artist A could issue, through a security token offering, tokens representing shares in his hit song. Let’s say Artist A issued five tokens, each at the price of $100, worth 20% of Artist A’s hit song. Now, let’s say Buyer B purchases one of those tokens. This means that Artist A gets $100 and Buyer B is now entitled to 20% of all royalties that stem from Artist A’s licensing deal. Additionally, Buyer B can now sell his token on the blockchain marketplace and receive cash immediately.

Tokenization adds a great level of transparency to each transaction. Security tokens are capable of having the legal responsibilities and rights attached to the asset embedded in the token[10] – meaning every buyer of Artist A’s tokens in our above scenario would be made aware of the licensing deal with the film studio. Additionally, because the token would exist on a blockchain network, each token would have an immutable record of ownership and transaction history embedded in it.[11] This would guarantee that whenever you seek to purchase a particular token, you will be able to know exactly whom you are dealing with, what rights or restrictions are tied to the asset, and the entire transaction history of the token. 

Trading intellectual property assets as tokens on a blockchain network would make these assets simpler and cheaper to trade. Token transactions are completed using smart contracts, which essentially are computer protocols intended to digitally facilitate, verify, or enforce either the negotiation or performance of a contract.[12] In other words, it is an automated, living electronic contract that can regulate and enforce itself. Smart contracts enable the trading of tokens to be done with less administrative burden and with fewer intermediaries as would be required for traditional securities trading – resulting in a cheaper and more streamlined trading experience.[13] 

Tokenization would also allow a wider audience to invest in intellectual property assets because tokens are highly divisible; meaning that issuers – like Artist A in our foregoing scenario – can issue tokens representing incredibly small amounts of their asset.[14] This would eliminate or substantially reduce minimum investment amounts and enable a broader audience to invest in their favorite artists’ works and intellectual property rights.[15] 

Potential Challenges

As is the case for many new and promising innovations, several challenges and obstacles obstruct the path to implementing a token based digital marketplace for Intellectual Property assets.  For starters, blockchain platforms are primarily self-regulated, begging the question as to how government agencies like the SEC could get involved.[16] 

It’s Worth a Shot

Nonetheless, intellectual property assets have emerged as the leading asset class over the past twenty-five years.[17] David Bowie might not have realized it at the time, but he put Wall Street and the world on notice to the extraordinary value of intellectual property assets.  Tokenizing intellectual property assets and creating a secondary marketplace on a blockchain platform could create an entirely different channel for rights holders to extract the maximum value out of the assets they toiled to create. 

[1] Liz Moyer, How David Bowie Changed Wall Street, N.Y Times (Jan. 11, 2016), https://www.nytimes.com/2016/01/12/business/dealbook/how-david-bowie-changed-wall-street.html?mcubz=1&_r=0.

[2] James Chen, Asset Backed Security, Investopedia (Aug. 21, 2019), https://www.investopedia.com/terms/a/asset-backedsecurity.asp. An asset backed security is a financial security such as a bond or a note that is collateralized by a pool of assets. 

[3] Liz Moyer, Eminem stock follows in the footsteps of ‘Bowie Bonds’ as producers aim to cash in, CNBC (Sept. 25, 2017), https://www.cnbc.com/2017/09/25/slim-shady-stock-follows-bowie-bonds-as-eminems-producers-cash-in.html.

[4] Jaclyn Wishnia, Blockchain Technology: The Blueprint for Rebuilding the Music Industry, 37 Cardozo Arts & Ent L.J. 229, 261 (2019). 

[5] Birgit Clark, Blockchain and IP Law: A Match made in Crypto Heaven, WIPO Magazine, https://www.wipo.int/wipo_magazine/en/2018/01/article_0005.html (last visited March 29, 2020, 11:16AM).

[6] Id.

[7] Id.

[8] Id.  

[9] Patrick Laurent et al, The tokenization of assets is disrupting the financial industry. Are you ready?, Deloitte, https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/lu-tokenization-of-assets-disrupting-financial-industry.pdf (last visited Mar. 30, 2020, 9:45AM).

[10] Laurent et al, supra note 9.

[11] What is Blockchain and Why Should Records Management Professionals Care?, Iron Mountain, https://www.ironmountain.com/resources/general-articles/w/what-is-blockchain-and-why-should-records-management-professionals-care (last visited Mar. 31, 2020, 6:35PM).  

[12] Ameer Rosic, Smart Contracts: The Blockchain Technology that Will Replace Lawyers, Blockgeeks, https://blockgeeks.com/guides/smart-contracts/ (last visited Mar. 30, 2020, 7:35PM).  

[13] Laurent et al, supra note 9.

[14] Laurent et al, supra note 9.

[15] Laurent et al, supra note 9; see also Why asset-backed tokens could be a better investment than REITS or rentals, QuantmRE, https://launch.quantmre.com/asset-backed-tokens-are-a-better-investment-than-reits-or-rentals/ (last visited March 31, 2020, 6:45PM).

[16] Giovanni Perani, Blockchain: Is Self-Regulation Sufficient?, Medium, https://medium.com/coinmonks/blockchain-is-self-regulation-sufficient-5bb68ac7e33f (last visited March 31, 2020, 6:48PM).   

[17] Intangible Asset Value Market Study, Ocean Tomo, https://www.oceantomo.com/intangible-asset-market-value-study/ (last visited March 29, 2020, 3:04PM).