NFTs in video games: a level-up for a fast-growing industry?

Non-Fungible Tokens ("NFTs") may soon change the video game industry, as they provide easy access for players’ unique virtual goods in digital worlds. Collecting has always been a great passion for people in the ‘real’ world. In contrast, digital collectibles haven’t yet caught up with the broader market.

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Many digital goods used to be hard to own because they were not ‘exclusive’ in a physical sense, meaning they weren’t unique and were too easy to reproduce. Blockchain technology as a distributed ledger system may be the answer as it fosters a degree of trust in digital goods. Virtual in-game items can therefore be transported on individual, ‘non-replaceable’ NFTs on an immutable blockchain. This means that they cannot be deleted unilaterally, changed or withdrawn by their creator – NFTs can guarantee a certain ownership to the players. The market may recognise an individual value in these NFTs that players can potentially obtain by simply playing video games. Such a development comes with several Intellectual Property issues which the video games industry will have to face in the near future.

Goodbye analogue baseball cards – hello multifunctional NFT

NFTs are more than just digital equivalents to analogue collecting cards. As digital goods they can change over time and have multiple functions. The versatility for the benefit of their owners has triggered some excitement as NFTs may be used as a passport, as an avatar, to show one’s individual fandom or to simply profit from any special abilities of NFT-items in video games. NFTs can also acquire a market value and even increase it over time. A ‘magical sword’ in a game like Legend of Zelda provided as an NFT can improve its properties over time through continued use, become a rare collectible and potentially even change its appearance (e.g. different colours). Such unique items can create a more individual gaming experience and increase the quality of video games. In contrast, analogue trading cards are static, cannot improve and even lose value when you wear them out through playing.

The industry is also considering certain cross-game uses of NFTs. The existence of the NFTs would then no longer depend on one game. Players could continue to use their acquired NFTs in other games. Players could transfer their unique shovels of Minecraft into their favourite games on Roblox. In this way, games may become independent, as the NFTs from an original game have an individual impact on the story and gameplay of other games.

Nevertheless, NFTs in video games are still in their infancy. In terms of numbers (player numbers and sales), NFT-games don’t yet compete with big video game series such as Call of Duty or FIFA. In the future, however, more complex NFT games may emerge and NFTs may find their way into existing blockbuster games. For example, the company ‘WAX’, a blockchain-infrastructure-service-provider, is teaming up with established rightsholders in the gaming industry. As an example, WAX is creating NFTs for unique axes in World of Warcraft or for new skins in the game Fortnite and both rightsholders and WAX benefit from every trade of these NFTs cards. Furthermore, the players get unique items with a value of their own which improve gaming experience and allow them to profit from wider functionality of their in-game items.

‘Play-to-earn’ as a new business model

NFTs in video games allow players to monetize their time (‘play to earn’). This development may become a logical continuation of the popular free-to-play-games. The concept of these free-to-play games is offering users enough value in-game to keep them playing for as long as possible. Players are encouraged to make in-app purchases to enhance their gaming experience and to fund the development of these games. However, players do not receive ownable digital assets in return for their invested time and money. Plus, developers have full control over in-app purchased items and could therefore change or even delete them at their discretion.

This may change with NFTs in video games. In NFT-based games, players obtain unique NFTs as digital assets for fulfilling in-game objectives. These NFTs gain value due to blockchain based transactions. The transfer of NFTs is executed via smart contracts which automatically send these NFTs to the players when they have passed a certain level in a specific time or met other conditions. Since the data in a blockchain cannot be changed, there is no chance for third parties to undo or simply disregard any such smart contract. Therefore, NFTs represent rare and unique items which may evolve into an asset for which many people would be willing to pay considerable sums of money. Their value can even grow, if the NFTs are linked to real life experiences. For example, in offline e-sports tournaments with a physically present audience, players could use NFTs as equipment for their characters (e. g. a special skin) and the blockchain could store this usage throughout the tournament. If the player subsequently sells his or her used NFT items, the audience will be willing to pay a lot for an item used by a World Series winner. It is not surprising that even e-commerce platforms like eBay now allow buying and selling of NFTs.

IP – Rightsholders’ views

NFTs transport unique texts, pictures, graphics, trademarks, designs and even music in digital worlds. NFTs in video games are linked to different IP-related and, in particular, copyright-related questions. It is crucial for rightsholders such as game publishers and/or developing studios to know whether the design of character based on an NFT is copyright-protected. NFTs will not be protected if the design neither shows any originality nor sufficiently reflects the author’s personality. However, the threshold for any such originality is not too high according to case law from Court of Justice of the European Union. If a game developer individually designs a game character with its own outward appearance (such as the ‘Witcher’ from the game series of the same name), copyright protection is very likely to emerge.

The emergence of copyright protection may raise follow-up questions:

Firstly, the NFT may draw on prior art such as pre-existing graphics, characters or items. These may be subject to copyright protection themselves. In that case, game publishers must obtain respective licenses from these authors to lawfully use the protected content for their own NFTs. They further need to contractually ensure that these (third-party) creators – whose objects, musical works or in-game graphics have been incorporated into NFTs – actually own the requisite rights. It often turns out that such third-party creators have drawn on other IP themselves, modified musical works, slightly tweaked the physical appearance of figures or built in objects or graphics from blockbuster games.

Secondly, effective digital asset management prompts game publishers to monitor the market to identify any unlawful third-party use of their IP rights in foreign NFTs. This may also lead to follow-up issues such as how to assert cease-and-desist claims against users of NFTs transporting an infringing but also immutable design due to blockchain technology. In order to obtain protection, publishers would have to turn to other virtual world operators who provide gateways to these NFTs. The use of NFTs as fungible assets that make their way into other virtual world games further requires game publishers to set up a notice-and-takedown-mechanism for unlawful use of third-party NFTs in their own games.

Thirdly, such a monitoring must also focus on players’ use of NFTs with protected IP rights. For example, if an NFT displaying a skin of ‘Super Mario’ is used in an unwelcome political or religious setting, this can be prevented in the EU if the rightsholders invoke their moral rights.

Finally, rightsholders must decide which platforms may distribute (and resell) NFTs carrying their protected IP and which (resale) licenses must be paid. Rightsholders must also ensure 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 gambling. Rightsholders should therefore check if platforms provide for adequate safeguards against such abuse to protect the brand image of their IP carried by the NFTs.

Licensing – The player’s point of view

Buyers often wonder which rights they may acquire when purchasing NFTs. A distinction needs to be drawn between the ownership of the token on the one hand and specific rights inherent in its included intellectual properties such as graphics like a character’s skin on the other. In the EU, copyright protection (containing of the entirety of the rights to use and the moral rights) related to that skin rests with the respective artist and is not transferable, even by purchase. The moral rights remain with the original creator by express statutory provision. Consequently, the sale of NFTs does not transfer the “copyright” to the buyer in its entirety, but simply economic “rights of use” derived from such copyright. These may include the right to reproduce, distribute and communicate the work to the public.

These rights of use can be granted as non-exclusive or exclusive rights. Non-exclusive rights exist alongside other non-exclusive rights of third parties, such as the game publisher or other players. Consequently, several players in one territory could then use the same character skin even in the same online game. This may, however, cause confusion and have a negative impact on the consumer experience. To avoid such unpleasant effects and to increase the NFT collector’s value, NFT creators need to ensure a certain scarcity – for example, granting licenses only to a very small number of players in different territories. Alternatively, the NFT creator may also grant so-called exclusive rights prohibiting any related third-party use. These exclusive rights of use can be unlimited in time, territorial scope and content, and also transferable and sub-licensable. Players could then use unique items that only exist once in the world. In addition, the NFT creators can allow further types of use such as allowing the 3D-printing of a ‘Viking axe’ based on an NFT.

In return, users of NFT must pay licenses to the rightsholders. Based on smart contracts, a transfer of NFTs could automatically trigger the execution of a license contract by sending a royalty payment to the rightsholder. If an NFT gains new functions over time and increases its value, this will also have an impact on pre-existing license agreements. Future NFT improvements made by their original creators may trigger the application of the bestseller clause, resulting in statutory (and non-waivable) claims for additional remuneration against licensees. Therefore, if the NFT gains in value and the buyer resells it at a higher price, the rightsholder can request an appropriate share. Since the blockchain continues to identify the historical rightsholder, an appropriate participation on the transaction could be ensured automatically via smart contracts in the event of further sales. NFTs can therefore ensure recurring royalty payments in future.

Conclusion

NFTs in video games are here to stay. The involvement of major gaming companies such as Microsoft and Atari provide ample evidence of this. Even though NFT-games are not yet big competitors for Triple-A-Games like Fifa or Call of Duty, the whole industry is flirting with the idea of implementing NFTs into their digital worlds. The reasons are obvious: Players love to collect and own unique, multifunctional items and publishers can benefit from recurring profits from license payments on NFTs. NFTs show considerable promise to change the video games sector in the near future.

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