Negotiating an agreement relating to the minting and sale of NFT in the gaming and gambling industry raises legal issues to address adequately.
The video gaming and gambling industries have grown tremendously over the past years. Most games are structured to benefit the one-way value stream usually. Traditional and modern video games and casino games require players to spend real money to either gamble or gain access to in-game assets. However, if publishers/developers decide to shut down the game servers, all game assets will no longer be accessible. Moreover, existing game resources have no intrinsic value in the outside world. Accordingly, players cannot monetize in-game purchases in secondary markets to recover investments if and when they want to stop playing. This is where NFT in the video gaming and gambling markets and blockchain technology come into play.
NFT can provide ownership of gaming assets while rewarding players for their time, loyalty and investment. With the emergence of cryptocurrencies, NFTs represent the gateway to a new global gaming economy that rewards players with unique and therefore “non-fungible” digital collectables. This characteristic makes them suitable for use in games as representations of characters, commodities and other tradable items. When customers purchase these NFTs, they not only exercise ‘true ownership of the object’ but can also sell and trade in-game assets on open markets to generate profits.
But how shall the business model be contractually agreed upon, and what are the main criticalities to consider in negotiating an agreement of NFT in the gaming and gambling industry with the different entities involved in the process?
How to regulate the ownership of NFT in the gaming and gambling markets?
A clear distinction does exist between the ownership of an NFT and specific rights inherent in its included intellectual properties, such as graphics like a character’s skin on the other. Therefore, copyright protection related to the skin remains with the publisher and is not transferable, even by purchase. On the contrary, after the minting, the sale of NFTs transfers economic rights of use derived from such copyright. This circumstance includes the right to reproduce, distribute and resale the NFT on the secondary market.
It is crucial to properly structure the rights granted through NFTs in the relevant smart contract. Blockchain-based technologies are by definition disintermediated, and once an NFT is sold, right owners might lose control of the attributed rights beyond their original intent due to ambiguous terms of the relevant smart contract.
How to structure the consideration model?
The agreement between IP rights owners and entities minting NFTs and then marketing them through their marketplace or third parties is traditionally structured as a license agreement whereby the gaming or gambling company grants exploitation rights in return for royalties.
Royalties can be customized, and the structure of the deals can vary considering the value of the NFT. Also, each time an NFT will be sold on secondary markets, publishers may get a certain percentage for each exchange. Indeed, NFT shall have an underlying smart contract that will set the rules on allocating revenues generated through each transaction. Indeed, in most cases, NFT acquire value through multiple transactions since they become collectables and their demand increases their price.
Publishers can easily monetize their work and have direct contact with fans on most platforms. They can also customize the royalty scheme to reflect their relationship with their audience accurately. Traditional royalty systems are often flawed due to a lack of transparency that causes huge losses for creators, especially in the music industry, where royalties often go to the studio companies instead of the singers and/or authors. While basing the royalty system on the blockchain can ensure that artists (in this case, the publishers) do not lose out on their revenues.
This aspect unveils two major legal issues. On the one hand, right owners shall carefully calibrate the attribution of rights through NFTs. On the other hand, the smart contract terms shall be transparent towards potential customers to avoid challenges and reputational damages.
How to protect IP rights in NFTs?
NFTs in video games, casino or bingo games are linked to different IP-related questions such as:
Which IP rights shall be excluded from the scope of the agreement with the entity minting or marketing NFTs?
When licensing rights to mint NFTs, it is important to clarify what is and what is not being licensed. When licensing intellectual property for use in an NFT, publishers should grant rights to mint a limited number of NFTs associated with a licensed property. This circumstance would maintain the scarcity (and associated value) of the NFT based on the video game. Also, a publisher may choose to expressly prohibit or impose restrictions on the right of the licensee to make modifications associated with the licensed work for purposes of the NFT. Given the growing prevalence of programmable and generative contributions in games, this circumstance is particularly important. Each of these techniques can cause publishers’ IP to be used with other IPs or modified in ways that they may not desire.
Are game publishers aware of whether the design of a character based on an NFT is copyright-protected?
NFT may contain pictures, graphics, trademarks, designs and even music in the digital world. Accordingly, NFT may draw on prior art such as pre-existing graphics, characters or items. In that case, game publishers shall obtain respective licenses from these authors to lawfully use the protected content for their own NFTs. This objective can be achieved by ensuring that third-party creators own the requisite rights.
How to assert cease-and-desist claims against users of NFTs?
Right holders should primarily regulate which platforms may distribute (and resell) NFTs carrying their protected intellectual property rights and which (resale) licenses must be paid. Publishers must also ensure with liability and indemnity clauses that the platforms on which their NFTs are distributed comply with regulatory requirements. Since blockchain technology allows for transactions to be anonymous, NFTs can, unfortunately, be easily abused for money laundering or unlawful transactions. Publishers should therefore check if platforms provide for adequate safeguards against counterfeiting and comply with cybersecurity technology standards to protect the brand image of their IP carried by the NFTs.
Effects on termination to license agreements on NFTs
After expiration or termination of the license agreement, publishers shall provide that licensee shall have no further right to mint, advertise, distribute, sell, or otherwise deal in any NFTs which utilize the video games licensed property.
Also, publishers shall ensure that the licensee will cooperate to ensure the migration of NFT to a different blockchain, marketplace and/or website designated by game publishers so that customers can continue to access and use the NFTs.
The transfer of NFTs after the termination of the license agreement is technically feasible. It mainly depends on the nature of the blockchain (private or public). To implement the transfer, the asset representation of NFTs on one chain needs to be replicated to the representation on the other chain. Accordingly, the total number of tokens on both chains must remain constant. This circumstance is usually achieved by burning or immobilizing tokens on the source chain and minting or unlocking tokens on the destination chain.
On a similar issue, the article “What is an NFT: speculative bubble or next digital revolution?” can be interesting.