I am not a lawyer, and this is not formal legal advice. You should really speak to one if you want to be more sure.

I would expect that you're fine to allow the user to play their own music that they have locally on their own machine.  They are responsible for whether or not they legally own the music, and you're effectively just providing a media player.

However, broadcasting or sharing the music to other players is distribution: suddenly instead of just a media player, you're now equivalent to a radio station, streaming service, or file sharing service. These things tend to be illegal if they don't have proper licensing.

Local playback of the user's own files: probably ok.

Sharing the user's files with other players over the network: almost certainly requires some sort of licensing.

You could look into adding a disclaimer that the user can only share media they have the necessary rights to share, registering as a DMCA Safeharbour, and promptly responding to any complaints, which I think would legally protect you if done correctly - but you would need to confirm with a lawyer whether I'm correct, and that adds additional development and management work.

Personally, I think unless this feature is somehow integral to your game idea, it would probably be easier to just not do this.

Hope that helps!

11 hours ago, GameDevRT said:

The user can play the music while playing the game during online multiplayer too. If the user hosts a server, he/she can play the loaded audio files from his/her computer, if the user is a client then there is an option to send the user's audio files and lighting animation to the host So the host can play them. Everyone the on the server will be able to hear the music.

This will be the issue right here. You cannot have people load mp3s for copyrighted content and store them on your server, or pass files from one user to another or you will be held accountable due to creating a platform that allows pirating (intentionally or not). The other issue is if other people can broadcast copyrighted music on your platform you will also be held accountable unless you have been granted rights by the IP owners to stream the content.

If you simply make a game offline and people can load their own music into the game (Grand Theft Audio) which they own and not online, it wouldn't be an issue. The issue occurs because you're allowing sharing of such content, and essentially allowing the streaming of the music without paying for rights to do so

It is simply not worth the risk, and if your game becomes very popular and makes a ton of money, you'll end up losing everything when all the wolves come to the door. You need to get an approved music catalog if you wish to move forward with this idea, but see a lawyer if you're still wanting to go forward.