Recently, Japan’s Council for Sports Ecosystem Promotion (“C-SEP”) established guidelines for both NFT random sales and NFT secondary distribution markets. These guidelines are welcome additions to the Japanese NFT landscape, as simultaneous presence of NFT random type sales services (sales methods in which the NFT provided is randomly determined, including package sales, Gacha sales, package sales, reveal sales and random generation sales) and secondary distribution markets has seen experts and political circles alike holding discussions on its legality in relation to gambling. Indeed, on 26 April 2022, the Liberal Democratic Party's Headquarters for the Promotion of a Digital Society released an “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 “the development of rules from the perspective of protecting consumers who purchase NFT through random type sales and secondary distribution markets should be discussed separately,” and that “guidelines are expected to be developed by business operators based on the positions of the relevant ministries and agencies.”
Accordingly, private industry associations developed both the herein introduced guidelines to promote sound development of NFT business by presenting legal considerations regarding certain types of transactions and by outlining points that the target business operators should note and avoid. While the contents of both guidelines are similar to a considerable extent, there are some differences in terms of scope of application, etc. In this article, both guidelines are outlined, along with their backgrounds and discussion of their points that relevant business operators should bear in mind.
1. The C-SEP Guidelines
(1) Background of Formulation
Recent years in the U.S. have seen a rise in popularity of Dapper Labs, Inc. (“Dapper Labs”) service, “NBA Top Shot,” which provides both NFT packages sales and a secondary distribution market therefor. However, in Japan, concern has arisen that platforms like NBA Top Shot and its services may constitute the crime of gambling (Article 185 and Article 186(1) of the Penal Code). Due to such concern, many business operators hesitate to offer NFT package sales and a secondary distribution market in parallel. This hesitation has seriously hindered the development of business utilizing 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, which makes it difficult for the business operators to deploy secondary distribution services using players’ portraits, etc. as NBA Top Shot.
In light of this situation, along with respectively exchanging opinions with blockchain and gaming industry associations, C-SEP hold 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 Industry Office”) among others). Whether a service similar to NBA Top Shot (a service that ties the sale of NFT packages with the provision of a secondary distribution market) constitutes gambling was originally a discussion topic at 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 Japan Sports Agency, where Professor Takashi Hashizume of the University of Tokyo Graduate Schools for Law and Politics was a guest speaker, and where the topic was discussed based on his opinion paper titled “Issues Concerning Gambling Crimes.”. Furthermore, in order to look at the issue in greater depth, C-SEP invited Professor Hashizume to the said 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” (the “C- SEP Guidelines”) on 20 September 2022, compiling the results of all those discussions.
(2) Overview
A. Purpose
The C-SEP Guidelines provides a legal framework for the provision of NFT package sales utilizing sports content and parallel secondary distribution markets, that among other things helps to identify whether such combination constitutes a gaming crime, and for profit returns from the secondary distribution market, and presents a business model that can be deployed in Japan with consideration for consumer protection, by which the C-SEP Guidelines aim to achieve the sound development of NFT business in the Japanese sports industry and the appropriate circulation of funds to sports organizations and athletes.
A.Scope of Application
The C-SEP Guidelines are applicable to all services in Japan that have both package sales and a secondary distribution market for NFT, such as images using portraits of athletes and playing videos that are clipped from game footage.12
B.Whether the Gambling Crime Regulation Applies
The C-SEP Guidelines demonstrate the view that it is basically reasonable to evaluate the value of NFT in the primary distribution market based on the actual sales price determined by the selling company, etc., for the following reasons.
- The term “gambling” as used in Article 185 and Article 186(1) of the Penal Code refers to cases where
persons compete to gain or lose property by fortuitous victory or defeat. In this regard, “compete to gain 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 “compete[d] to gain or lose” property.
- NFT are issued independently by each sales company, etc., focusing on their individual characteristics
(such as the rights and contents represented by the NFT), and the sales price in the primary distribution market is determined by the sales company, etc., at its own discretion based on the overall supply-demand situation and other factors. Therefore, unlike commodities for which a market price is supposed or stable coins, the value of which 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 actual act of sale.
