Understanding The Legal Landscape Of Fantasy Sports And NFT Gaming – Gaming
In April 2022, Dream Capital, the investment arm of the company
that owns Dream 11, invested $120 million in Rario, a cricket
non-fungible tokens (“NFTs“) platform,
thus setting the tone for the next frontier of growth in the
fantasy sports sector.1 The use of NFTs in gaming has
been an emerging trend since late 2021, attracting companies like
Ubisoft and EA Games. Most notably, a French start-up named Sorare
raised $680 million for its fantasy soccer platform which is built
on blockchain technology.
1. NFTs
Before delving any further, let us first understand what NFTs
really are. NFTs are encoded in the same manner as cryptocurrency
and act as a certificate of authenticity of a unique asset. They
can be in the form of an artwork, music, video, or even an in-game
item. While infinite digital copies can be made of the underlying
asset, the NFT represents a unique token which cannot be
replicated. NFTs fall in the ambit of a Virtual Digital Asset
(“VDA“) under the Finance Act,
20221 but a concrete definition of NFTs is yet to be
notified by the Central Government.
2. The Role of NFTs in Fantasy Sports
NFTs can be incorporated into fantasy sports in different
manners. The simplest is that of a NFT trading platform. For
instance, NBA Top Shot allows users to purchase, earn, collect and
showcase NFTs that capture milestone achievements and viral
highlights of NBA matches.
Sports NFTs can also be incorporated to impact gameplay.
Sorare’s fantasy sports model is a case in point, as it
combines the basic point system with NFTs. Users are required to
form teams by acquiring NFTs of football players for free (common)
or through blockchain transactions (limited/rare/super
rare/unique). As with traditional fantasy sports models, points are
awarded based on the football players real world performance.
However, Sorare incorporates the unique nature of NFTs by providing
levels to the NFT card. As an NFTs’ level increases, the
minimum guaranteed points it earns also increase. These minimum
guaranteed points ensure that the NFT retains long term value for
playing and trading.
3. Legality of Fantasy Sports Incorporating NFTs in India
It is now well settled that fantasy sports fall under the
exception carved out for “games of skill” under the
Public Gaming Act, 1867. However, in fantasy sports where the
rarity of the NFT player card has an impact on points, the game may
not clear the “preponderance of skill” test as
set out in K.R. Lakshmanan v. State of Tamil
Nadu2. For example, if a rare NFT attracts more
points than a common NFT of the same cricketer for the same sixer,
the user with more money to burn would invariably win as he she
would have the necessary disposable income to buy the most
expensive NFT which would award the highest points. This needs to
be suitably addressed in the fantasy sport model, with some level
of involvement of knowledge, or skill on the part of the user. For
instance, in the Sorare model explained above, a user may choose to
place a player NFT in training between leagues to increase the
value of the NFT for playing in future matches or for trading.
4. Intellectual Property Rights
4.1 Trademark and Publicity Rights
At the outset, NFTs that capture the image, audio, or video of a
sportsperson can be subject to the rights under trademark or
publicity rights of the sportsperson in question. The right of
publicity refers to the right of individuals (in most cases,
celebrities) to have control over the “commercial” use of
their name, image, likeness, persona, and other indicia such as
voice or signature. The Supreme Court in its landmark right to
privacy judgment3 held that every individual has a right
to exercise control over his image and persona. In the world of
sports, this right has been expressly discussed in ICC v Arvee
Enterprises4. In addition to this, some sports
celebrities like Michael Jordan and Sachin Tendulkar have obtained
a trademark of their name or image, illicit use of which could
amount to infringement.
The word “commercial” is key because in the present
model, a fantasy sport does not use the image and name of the
sportsperson for any direct revenue. The image is merely used to
identify the player and, unless otherwise agreed upon, not used for
any endorsement or promotional purposes. This model drastically
changes in case of NFTs. Trading of Sorare collectible’s is
akin to real world trading of football cards, with the collectible
depicting the name, image and relevant stats of the sportsperson.
In such a scenario, obtaining a license for any third-party
copyright of the sportsperson’s image may be required. This
license can then be granted to users in a more limited
capacity.
In this context, Dream Capital’s acquisition of Rario is
prudent. Aside from having the technical expertise in creating
sports NFTs, Rario claims to have the largest share of cricket NFT
rights globally through exclusive partnerships with international
cricket leagues and a roster of over 900 cricketers.
4.2 Rights under Copyright
Section 13 of the Copyright Act, 1957 (“Copyright
Act“) recognizes an owner’s copyright in
“literary, musical, dramatic, cinematographic films, sound
recordings or artistic works“. The owner of the
copyrighted works has the right to reproduce, issue copies, adapt,
perform, sell, commercially rent or otherwise exploit the works for
whatever purpose, including making monetary gains. In the event the
owner chooses to license the works to a third party, the licensee
enjoys the aforesaid rights to the extent granted under the
license.
In case of fantasy sports, the developers and creators of the
NFT would be the authors and first owners as per the Copyright Act.
The transfer of such NFTs would require specific terms to be
incorporated under the terms and conditions so that specific rights
under copyright can also be assigned. The ownership of the
underlying copyright will be retained by the developer, while
rights to access, perform, display, replicate, or trade may be
granted to the player under license. For instance, Sorare has drawn
a distinction between sale of the player NFT and intellectual
property rights under the term “third party elements”,
which include player image, team branding, image, jerseys, etc.
While a player is the definitive owner of the NFT, the third-party
elements are expressly stated to be licensed by Sorare and users
are granted a limited, non-exclusive, worldwide, revocable license
to use, transfer and display the NFT. Any other use is strictly
prohibited.5
5. Advertising Guidelines
In addition to the Consumer Protection Act 2019 prohibiting
misleading advertisements, the Advertising Standards Council of
India (“ASCI“), on February 23, 2022
issued Guidelines for Promotion of Virtual Digital Assets and
Linked Services (“VDA
Guidelines“)6. As per the VDA Guidelines,
developers must issue an express disclaimer that VDAs are at
present unregulated, risky and there may not be any legal recourse
for any loss suffered. They must ensure that advertisements do not
refer to VDAs as “currency”, “security” or
“depositories”. VDAs cannot be advertised as a solution
to any monetary/personality problems. Additionally, celebrities/
prominent persons appearing in VDA advertisements must ensure that
they conduct their due diligence on any statements and claims in
the advertisement regarding VDA. The guidelines don’t define
celebrity which leads to further ambiguity.
The VDA Guidelines are in addition to the “Guidelines on
Advertisements for Online Real-Money Gaming”7 by
the ASCI in 2020, which require advertisements to carry warnings
that real-money games carry a financial risk, can be addictive and
must be played responsibly. There is also an onus to avoid
depicting the game as an alternate source of income or an alternate
employment option. This sentiment was recently reiterated in an
advisory dated June 13, 2020 by the Ministry of
Broadcasting8, in which, they have asked print and
electronic media to refrain from publishing advertisements of
online betting platforms.
6. Taxation
Transacting in VDA is not devoid of tax implications. Entities
that own/operate a platform for facilitating trade of game-related
NFTs and charge a commission on such transactions will be obligated
to pay Goods and Service Tax (“GST“) as
per the extant regulations. The GST council is presently
contemplating imposing a 28% tax on all services related to
cryptocurrencies.9
The platform must also ensure compliance with extant income tax
laws. The Finance Bill, 2022 imposed a 30% tax on income arising
from transfer of VDAs, in addition to 1% TDS payable in case of a
transfer of VDAs over a certain threshold with effect from July 1,
2022. In light of the general confusion these directions created,
the Central Board of Indirect Tax issued a circular on June 22,
202210 with FAQs on how the deduction shall be
conducted.
7. Information Technology Laws
An online sports platforms and platforms that facilitate trading
of NFTs would qualify as an “intermediary” under Section
79 of the Information Technology Act, 2000. Thus, the platform will
have to comply with the Information Technology (Intermediary
Guidelines) Rules, 202111 which impose due diligence
requirements such as prominently displaying user policies, warning
users against the use of illegal/obscene content, having a
grievance redressal mechanism for complaints, etc.
Conclusion
Even as legislators and regulatory bodies oscillate on VDA
regulation, the domestic demand for NFTs continues to grow. January
2022 saw Indian gaming tech group Quadrific Media launch the 12th
edition of the India Online Poker Championship (IOPC) with prizes
featuring NFTs launched by Spartan Poker.12 However,
issues regarding the cross-border nature of NFT transactions, the
skill aspect of NFT based fantasy sports models, taxation and
intellectual property ownership remain a question mark. Considering
the rapidly evolving space of e-sports, with in-game inventory
becoming marketable assets, developers should keep an eye on policy
to ensure that there exists an efficient model of compliance to
complement an equally efficient model of play.
Footnotes
1 See: https://www.incometaxindia.gov.in/_layouts/15/dit/mobile/viewer.aspx?path=https://www.incometaxindia.gov.in/acts/finance%20acts/2022/102520000000120875.htm&k=
[last accessed on June 28, 2022]
2 K.R. Lakshmanan v. State of Tamil Nadu [1996 SCC (2)
226]
3 Justice K. S. Puttaswamy (Retd.) v. Union of India
[(2017) 10 SCC 1]
4 ICC Development (International) Ltd v Arvee Enterprises
[2003 (26) PTC 245]
5 See: https://sorare.com/terms_and_conditions [last
accessed on June 27, 2022]
6 See: https://ascionline.in/images/pdf/vda-guidelines-23.02.22.pdf
[last accessed on June 28, 2022]
7 See: https://ascionline.in/images/pdf/press-release-gaming-guidelines.pdf
[last accessed on June 28, 2022]
8 See: https://mib.gov.in/sites/default/files/Advisory%20on%20online%20betting%20advertisements%2013.06.2022%282%29.pdf
[last accessed on June 28, 2022]
9 See: https://www.livemint.com/news/india/cryptocurrency-conundrum-gst-council-mulls-imposing-heavy-tax-report-11652153640169.html
[last accessed on June 1, 2022]
10 See: https://www.incometaxindia.gov.in/communications/circular/circular-no-13-2022.pdf
[last accessed on June 28, 2022]
11 See: https://mib.gov.in/sites/default/files/IT%28Intermediary%20Guidelines%20and%20Digital%20Media%20Ethics%20Code%29%20Rules%2C%202021%20English.pdf
[last accessed on June 1, 2022]
12 See: https://www.financialexpress.com/digital-currency/decoding-indias-great-nft-rush-and-the-celeb-connection/2533229/
[last accessed on June 1, 2022]
Originally Published June 2022
The content of this article is intended to provide a general
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