Paul Durrant and Mark Hogarth describe a new concept for creative teams to share project ownership and revenues using a blockchain-driven share registry. Paul was one of the presenters at the Tech Law Futures Conference in November in the session on blockchain
Independent creative teams (such as games developers) planning to create new, original IP come together through various serendipitous routes. There may or may not be a fully shared vision of the project they aspire to tackle together at the outset. The individuals capable of delivering the project may be present at the start, or they might join along the way. Throughout the creative process there is also significant potential for change through both positive and negative events. There may be key individuals without whose talent and creativity the project will never achieve greatness or whose loss mid-project will leave the remaining team high and dry. The work itself may include third-party assets or content with distinct rights that must be embodied in the finished work. In addition to all of these challenges, the speculative outputs from creative teams are pitched into hit-driven markets where commercial success is not assured.
These are just some of the reasons why standard legal frameworks and company law do not serve creative teams well, particularly before they have sufficient working capital. Many emergent, hit-driven projects cannot risk spending money on formal legal agreements at day zero and the budgets and risk of market failure simply don't include scope to cover such costs. Formal agreements are less helpful where there is significant project and personnel flex as they date rapidly and are rarely updated. Failed projects can also leave founders unpicking one-project companies that never traded.
Technologies that can provide a semi-automated digital distributed ledger, as originally derived from cryptocurrency applications, are attracting interest for developers seeking to build distribution, immutability and transparency into various applications. It is thought that these technologies could provide potential to help creative teams through so-called smart contracts. Despite the name, there's nothing very smart about smart contracts. They're really smart registries that provide evidence of events and actions. They don't read the minds of the creative team. They can't make decisions for the creative team. They require underpinning rulesets. There's high potential for a classic case of 'garbage in, garbage out.' We plan to substitute the words 'smart contract' with 'Project Proofs' for our early stage experimentation.
This article primarily focuses on developing the business process that could allow creative teams to harness distributed ledger technology and create a Project Proof. It is not really clear quite yet what the ideal distributed ledger solution will be for this. However, it is fairly clear that there will be a solution – and the easier it is for a creative team to plug a well-defined business process into the emergent solution the better. UKGTF has been fortunate to identify the Digital Catapult as a partner for this work. There is a significant innovation challenge for SMEs working in the digital space both jointly (as in the context of the community that UKGTF serves) and severally for small companies pioneering their own ideas. UKGTF falls into both these definitions as we want to serve our community and we also want to innovate as a company in our own right. The Digital Catapult represents a highly significant, expert innovation resource and is also ideally placed to convene the key players to drive the critical mass needed to build scale around new ideas. For the time being the underlying technology under development at the Digital Catapult uses Ethereum.
We also believe that creative innovation levels can be increased if talented people find ways to work outside their circles of trust. If we can provide an open template for teams to adopt and build proven use-cases where the deployment has worked for all concerned, we believe that we will gradually inspire wider circles of trust and potentially greater levels of innovation.
Ultimately, this thinking can be applied to any project that requires a group of individuals to undertake work towards a single output formed from their blended inputs. For now, the focus is on the creative digital industries where the complexity of team collaboration across different disciplines is growing in areas such as VR and cross-media, with a heightened need for early stage experimentation and pre-visualisation as well as digital-to-physical such as 3D printing. However, our proposed approach could apply to a group collaborating to undertake pretty much anything where there is a complex blend of inputs and unpredictable outputs and outcomes. The overarching aim is to provide an open solution built around trusted standards, available as an 'out of the box' solution for creative teams to adopt and utilise to drive democratised creative team work.
2. Introducing Tals®
So at UKGTF we've gone back to basics. We've started to conceptualise a whole new type of share mechanism. We've created a new name for project shares using the word 'Tal.' The word Tal has been derived from a blend of the 'Talents' of ancient currency, the talented people who will own Tals for their work – and finally as a derivative of the word digital. We've developed a principle that Tals can be created in a whole range of different classes. Just like shares in a company. We're using the names of metals to describe Tal classes as that allows us to begin with Gold, Silver and Copper Tals with potential to create new classes above and below (using names of metals and their atomic number to signify hierarchy). You can find full details in our more detailed White Paper at www.talregistry.com .
Before any of that can be set up, creative teams need to make important decisions as early as possible after deciding to work together. No level of automation or proof can substitute for a basic agreement around the main principles at the outset. Key points for teams to consider:
· Who's done what already in the way of prior work at the start?
· What else is being vested in as ideas, unpaid work, finance etc?
· What is actually being done together (and who's responsible for doing what)?
· What third-party assets need to be incorporated and what rights are associated with them?
· What are the future plans (who else, how much, where from etc)?
· What happens if consensus can't be reached, who'll hold the key to unlocking a disagreement?
· How will the various collective efforts be traded as an exploitable unit (eg set up a new company, use one of the team's existing business, wait until commercial interest or early-access success etc)?
· What are the team's personal and collective ambitions and where do they align or clash?
So a real 'smart contract' would need to read minds if it could automate this initial step. Some futurists envision autonomous agents collecting declared preferences from the profiles of prospective parties and auto-writing smart contracts. This may be appropriate for data sharing in the Internet of Things but is less practical when considered in connection with our use case.
Clarifying these aspects in any event is just plain 'good business housekeeping'. We have previously developed the IP Manifest which includes a self-audit tool and post-audit tracking tool for video games IP.
It is worth stating here that merely making these agreements and recording them though a Project Proof or any other means does not guarantee that there will be no disputes. Like any contractual system, this is primarily about enhancing an evidence base from which a dispute could be equitably resolved.
We have defined a set of rules and Tal classes backed by formal Terms and Conditions (available in our White Paper at www.talregistry.com) that begin to capture equivalent provisions to those found in the Articles of Association and Shareholders Agreement in a conventional company. We used the template documents kindly made publicly available by the British Venture Capital Association (BVCA) to inspire our thinking here. The rationale for providing this information clearly in the project set-up form is to allow the starting position and methodology for change to be set out robustly for teams at the outset. The rules cover matters such as the governance of voting, majority definitions, provisions for issuing Tals within exiting classes, creating new Tal classes, policies for Creative Founders leaving in different circumstances, other powers of the Creative Founders, policies for licence and sale of the completed work etc. Essentially, in just the same way that investor-focused professional associations such as the BVCA provide template agreements for equity investment, we believe that we can embody similar frameworks in our project set-up tools. There is an extent to which this can be simplified and automated by forms and drop-down menus combining 'pick 'n mix' style but, as noted previously, an effective smart contract can only originate from a firm foundation. Given the present intention to structure our business process in such a way as to have a built-in arbiter holding a Gold Tal (ie UKGTF), the greater the level of detail and clarity in the founding documentation the better.
No express or implied warranty of legal veracity is offered with our experimental approach. Like many situations this represents a risk vs. reward trade-off for consideration by interested parties. In many cases we think that this will at least improve the situation where project participants are not taking any formal steps to underpin their relationship contractually. In time, we hope that the disciplines and rights we create around the intangible asset of IP will provide a basis for legal judgement in much the same way as the steadily growing area of e-signature case law.
We acknowledge that there is plenty more to consider from a compliance perspective in terms of VAT accounting, unintentional formation of taxable entities, PAYE etc. Nothing we are doing is intended to subvert any legal requirements or tax liabilities and we hope that HMRC and others will approach our experimentation in this spirit.
3. Looking ahead
Over time, we believe that professional creative individuals participating within teams and abiding by Project Proofs will be able to build professional integrity based on the way in which they've participated in and honoured Project Proofs, almost like a cross between e-commerce seller reputations, service-economy ratings and professional social network endorsements.
There will come a time with most projects where a legal entity is required to provide a warranty shield or limit liabilities or be a contracting name for a revenue deal. There is nothing to stop the creation of (or relationship with) that entity being recognised through the issue of a specific class of Tals. This may even be the point of transfer to conventionality for some teams (for example where there is a 'too good to refuse' equity funding offer on the table). The Tal register at that point would represent an excellent 'Founders Agreement' to build the deal around in such cases. For those with the appetite to scale whist retaining the Project Proof alone, perhaps independent arbitration service entities will be established that can hold Tals across a wide number of Project Proofs in order to resolve disputes. In our initial experiment UKGTF is taking such a role. Some people believe that the essence of 'smart contracting' is the opposite to this level of intervention. They think that the very existence of the distributed ledger record will act as a substitute for any intermediaries.
Further ahead, we hope that automated reports of Tal definition and ownership extracted from the distributed ledger can be used through an API to connect to platform payment systems. Once we have that functionality, revenues can be distributed according to Tal ownership. We plan to explore the potential of some of the Payment Platform APIs such as PayPal's Adaptive Payments systems to see if there might be an 'out of the box' solution here to provide interim solutions and experimentation potential.
There's scope for other API connectivity too. Third-party digital asset stores provide an ideal opportunity both for creative teams selling assets to use a Project Proof as well as incorporating purchased third-party assets into a Project Proof. Project management system integration with a Project Proof via API will also allow greater sophistication in the definition of the project and may also provide additional layers of team member authentication.
Beyond that, some commentators believe that three-dimensional open business systems driven by DL-enabled contracting might emerge in different industries. In translating this vision to the creative digital industries, different layers of activity from original creation through to audience participation are interlinked by DL-enabled contracting, with inter-layer contracting, in-layer contracting and integrity measurement representing the three dimensions of the ecosystem. We have visualised this in the diagram below (more legibly available by downloading the pdf from the panel opposite).
At present, our work with Tals focuses only on the 'Ownership' horizon in the diagram with some connection to the 'Fulfilment' horizon (eg when the consideration for a contractor's deliverable includes the issue of Copper Tals). This Fulfilment horizon could also include interactions with asset stores and project management software as noted earlier. Each horizon and the inter-trading between needs careful business process consideration. In theory at least, there is no reason why the approach we are taking could not be scaled and other business processes developed to create the 'scaffolding' for such an ecosystem. Our API approach will facilitate ecosystem connection points.
For the moment, we are looking at plugging into revenue distributions via conventional fiat currencies as that reflects the manner in which most revenue sharing is undertaken, but we recognise that for many there is a broader interest in connecting with cryptocurrency payments in the future. Compliant platforms have yet to be secured for any type of payment distribution as the case is difficult to make until we show a working pilot. Our first deployment of revenue distribution will require a manual intervention to match a Tal Registry report to BACS payments to team members and we're also exploring the generic payment system APIs previously mentioned.
It is also possible to imagine that the finance horizon might include contracting with investing (or lending) entities designed to hold a portfolio of revenue shares from multiple creative projects. This is an approach UKGTF could also consider for basic grant funding.
Scaling this ecosystem will not be easy and will require breakthroughs with various key stakeholders (platforms, project management systems, ratings widgets, payment systems, funders, HMRC etc). There will be a high degree of 'chicken and egg' type uncertainty around the specific things that will trigger adoption at scale. As a Community Interest Company serving our early stage creative games development community we recognise the potential advantages of such an ecosystem.
A legitimate question at this point is 'why do you need a distributed ledger?' Clearly the records associated with the types of transaction discussed here could be kept in a shared database or some other kind of automated, open-book accounting. The hypothesis is that a distributed ledger has higher potential to create scale, interoperability, transparency, trust and immutability in a way that could drive ecosystem risk-taking leading to more original IP. The degree of openness of a distributed ledger to all authenticated users is also an attraction. One of our aims is to establish if this hypothesis is correct. Given that no one appears to have addressed these long-standing creative industries challenges of trust levels / risk / legal costs by any other means, it seems worth trying to link our new business process to a distributed ledger to learn more. The democratic gains for creators offered by a truly inter-operable, reputation-driven, three-dimensional creative ecosystem as described above will require a higher level of sophistication if they are to be seamless. In the near future it is likely that the key technological components that underpin distributed ledger solutions will become more refined in terms of application specificity and hybrid solutions for challenges such as this will emerge. There are already a number of other concepts based around peer-to-peer autonomously-rewarding networks that may emerge to serve the registry needs for Project Proofs without a blockchain as such. Getting the 'lingua franca' of Tals ready for the distributed systems that emerge is worth pursuing in the meantime.
4. Some final thoughts
We are currently working at UKGTF to develop the additional functionality of the business process and with the Digital Catapult on some of the planned technical features described in the previous section as well as user-journey capture and enhancement.
We are also considering other ways beyond blockchain in which sufficient veracity to a distributed open system for a contract registry could be provided.
We hope to work with a number of platforms to allow the development of a fully end-to-end solution so that we have case studies of creative projects from inception to sales revenue, with the individual creators and other Tal holders receiving payments according to the Tal ownership profile.
Paul Durrant, Founder and CEO, UK Games Talent and Finance CIC and Creative Leader in Residence, Digital Catapult and Mark Hogarth, Director, UK Games Talent and Finance CIC.
 We are particularly grateful to Matt Ward, Senior Manager Creative Programmes at the Digital Catapult for his oversight of this work