Understanding The Legal Landscape Of Fantasy Sports And NFT Gaming – Gaming – India – Mondaq

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 guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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