Recently, Japan’s Council for the Promotion of Sports Ecosystems (“C-SEP”) established guidelines for both NFT random sales and NFT secondary distribution markets. These policies are welcome additions to the Japanese NFT landscape, given the simultaneous presence of random-type NFT sales services (sales methods where the NFT offered is randomly determined, including package sales, Gacha sales, package sales, disclosure sales, and random generation sales) and secondary distribution markets have seen both experts and political circles having discussions about the legality of gambling. On 26 April 2022, the Liberal Democratic Party Headquarters for the Promotion of a Digital Society issued a “NFT Whitepaper,” which states that “the relevant ministries and agencies should clearly demonstrate that at least certain types of business do not constitute gambling,” that “development of rules from the perspective of protecting consumers who purchase NFTs through casual type sales and secondary distribution markets should be discussed separately ,” and that “guidelines are expected to be developed by traders based on the positions of the relevant ministries and agencies.”
Accordingly, private industry associations developed both the guidelines introduced here to promote the healthy development of NFT business by presenting legal considerations regarding certain types of transactions and by outlining points that target business operators should note and avoid. Although the content of both guidelines is similar to a significant extent, there are some differences in terms of scope etc. In this article, both guidelines are outlined, along with their background and discussion of their points that relevant business operators should bear. in mind.
1. The C-SEP Guidelines
(1) Background for formulation
In recent years in the United States, there has been an increase in the popularity of Dapper Labs, Inc. (“Dapper Labs”) service, “NBA Top Shot”, which provides both NFT package sales and a secondary distribution market for this. In Japan, however, concerns have arisen that platforms such as NBA Top Shot and its services may constitute the crime of gambling (Article 185 and Article 186(1) of the Penal Code). Because of such concern, many corporate operators hesitate to offer NFT package sales and a secondary distribution market in parallel. This hesitation has seriously hindered the development of business using NFT in Japan’s sports industry. In addition, the rights and rules for returning revenue from NFT sales and the secondary distribution market to sports organizations and players, including the method of returning revenue to retired or transferred players and the legal nature of revenue from the secondary distribution market, are not well organized, making the difficulty for the corporate operators to distribute secondary distribution services using player portraits etc. such as NBA Top Shot.
In light of this situation, along with exchanging views with blockchain and gaming industry associations, C-SEP is holding a series of discussions in a working group (including the Sports Industry Office of the Commerce and Service Industry Policy Group of the Ministry of Economy, Trade and Industry ( the “METI Sports Branch office“) among others). Whether a service similar to NBA Top Shot (a service that links the sale of NFT packages to the provision of a secondary distribution market) constitutes gambling was originally a topic of discussion in the “Study Group on Rights for the Expansion of Sports Content and Data Business ” jointly held by the Ministry of Economy, Trade and Industry and the Japan Sports Agency, where Professor Takashi Hashizume of the University of Tokyo Graduate Schools for Law and Politics was the guest speaker, and where the topic was discussed based on his opinion paper entitled “ Questions about gambling offences.” Furthermore, to look at the issue in greater depth, C-SEP invited Professor Hashizume to the aforementioned working group and continued discussions. Recently, C-SEP published “Guidelines for the Parallel Establishment of an NFT Package Sales and Secondary Distribution Market Utilizing Sports Content” (“C-SEP Guidelines”) on September 20, 2022, compiling the results of all these discussions.
(2) Overview
An opinion
The C-SEP Guidelines provide a legal framework for the provision of NFT package sales using sports content and parallel secondary distribution markets, which, among other things, help to identify whether such a combination constitutes a gambling crime, and for profit returns from the secondary distribution market, and present a business model that can be deployed in Japan with regard to consumer protection, where the C-SEP guidelines aim to achieve the healthy development of NFT business in the Japanese sports industry and the proper circulation of funds to sports organizations and athletes.
A. Area of application
The C-SEP guidelines apply to all services in Japan that have both bundle sales and a secondary distribution market for NFTs, such as images that use portraits of athletes and play videos cut from game footage.12
B. Whether the Gambling Crime Ordinance applies
- Basics of NFT (General)
The C-SEP Guidelines take the view that it is initially reasonable to assess the value of NFTs in the primary distribution market based on the actual selling price determined by the selling company, etc., for the following reasons.
- The term “gambling” as used in Article 185 and Article 186 no. 1 of the Criminal Code refers to cases where
persons compete to win or lose property by chance victory or defeat. In this context, “contending to win or lose” means that there must be a two-way relationship of gain or loss where the winner gains property and the loser loses the same. If one party does not lose property, it is not considered that the parties are “competing[d] to win or lose” property.
- NFT is issued independently by each sales company, etc., focusing on their individual characteristics
(such as the rights and content represented by NFT), and the sales price in the primary distribution market is determined by the sales company, etc., at its discretion based on the overall supply-demand situation and other factors. Therefore, in contrast to goods for which a market price has been assumed or stable coins, whose value is linked to legal tender, it is difficult to find an objective index to calculate the value of NFT other than the price set in the act of sale itself.
