Sony Interactive Entertainment recently made headlines with the publication of an international patent application to make non-fungible tokens (NFTs) transferable between games and consoles.

Despite an initial 2021 popularity boom, 2022 saw a dramatic decline in the trading volumes of NFTs. Whilst the downturn has been touted by some commentators as having “fallen off a cliff”[1], Sony’s patent application may be seen as indicative of a diversification of use-cases for NFTs. Thus far, the gaming industry have adopted a conservative approach to NFTs, having generally refrained from publicly embracing the technology. This makes Sony’s move all the more intriguing. 

The patent, if granted to Sony’s Japanese entity, would set up a framework by which a game’s functionality could be enhanced by giving select players exclusive use of an asset, along with the ability to transfer rights in that asset to others via NFTs. The patent application[2] also indicates that Sony intends for certain NFTs to be used across multiple different computer simulations and/or platforms – not just cross-generationally between Sony’s PS4 and PS5 consoles, and even other non-Sony branded hardware.

A New World Ahead?

Historically, Sony has kept its PlayStation network (PSN) ecosystem isolated from other console makers, its determined resistance to cross-platform gaming was demonstrated in 2018, when Sony blocked Fortnite crossplay on its platforms, despite a number of public pleas from the developer of Fortnite, who even offered to brand its E3 presence with PlayStation[3]. Sony has also refrained from releasing its most popular exclusives (for instance, the God of War, Last of Us and Ratchet and Clank franchises) on other platforms, citing “risks” of exposing Sony players to non-PSN markets[4]. 

Sony is not the only major games developer to do this – Nintendo closely guards its most valuable franchises (although we have seen Nintendo also express an interest in NFTs and the Metaverse[5]). However, the Sony patent application suggests a significant shift in Sony’s approach. Sony’s patent would specifically allow interoperable transfer of NFTs outside the Sony ecosystem, such as to Microsoft’s Xbox or to a “cloud-based video game”[6].  

With the increasing prominence of collectibles in mass-multi-player games, Sony seems to have identified opportunities to harness the power of Metaverse and Web3 technologies to embark towards a new world of interoperability as it develops its vision for the future of gaming. Yet, the use of NFTs within the gaming industries will not come without challenges, and Sony and others should be alert to the legal considerations which surround NFTs.  

Anti-Money Laundering Regulation 

Although NFTs themselves are not specifically regulated, the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 amended the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR’s) to cover businesses that provide services of exchange and custody of cryptoassets. The definition of “cryptoassets” within the regulations bring NFTs within scope of the MLR’s but only as far as being applicable to NFT exchange or wallet providers. This requires them to register with the FCA and to maintain controls and procedures to mitigate the risk of money laundering, such as carrying out customer due diligence checks. 

The international patent application includes exclusive use of an asset, along with the ability to transfer rights in that asset to others via NFTs. The application therefore suggests that the technology could require the use of crypto exchanges and therefore fall under the MLR’s.

Also, if the NFTs described in the patent are deemed to be a work of art, then the 2019 MLR’s extend further to include “art market participants”[7] which covers the sale, purchase or storage of art, including NFTs, and requires those dealing in art amounting to 10,000 euros or more to register with HMRC for supervision and comply with the various money laundering requirements.

Financial Regulation 

As previously mentioned NFTs are not specifically regulated, however its financial regulatory status is dependent on consideration of various features, leading to its identification as a security token, regulated by the Financial Services and Market Act (2000) (Regulated Activities) Order 2001, an e-money token regulated by the Electronic Money Regulations 2011 or an unregulated token. It can be difficult to determine if the NFT falls into one of these regulated identification categories and therefore each NFT should be considered on a case-by-case basis.

Further Regulation

However, NFT traders should be aware that the marketing of crypto assets, including NFTs and any underlying cryptocurrency wallet used to purchase the NFT, are overseen by the Advertising Standards Authority (ASA). The ASA guidance makes clear that, among other requirements, marketing of NFTs should clearly state that crypto assets are not regulated and not within the scope of the Financial Ombudsman Service or Financial Services Compensation Scheme. The guidelines also require marketers of cryptoassets to make clear that the value of cryptoassets is volatile and the value of investments is variable and, unless guaranteed, can go down as well as up.  

Data Protection

Traders should also consider whether NFT transactions will fall within the scope of the General Data Protection Regulation (GDPR) or the equivalent “UK GDPR”. The underlying blockchain ledger, which backs up the NFT, records the stages of ownership on transfer of an NFT. Unless personal data in this ledger is completely anonymised, the GDPR is likely to apply, requiring certain levels of compliance in the trading of the NFT. Blockchain ledgers are also ‘immutable’, so any personal data stored on the ledger cannot be erased; this may put responsible parties at risk of violating the requirements of Article 17 of the GDPR (the right to be forgotten) and Article 16 of the GDPR (the right to rectification). 

Given personal data is processed across thousands of “nodes” (a key principle of decentralisation in the Web3 space) as opposed to being processed on one server where the personal data can be easily located, data subjects may struggle to invoke their right to access a copy of their personal data under Article 15 of the GDPR.  

Intellectual Property

Intellectual property does not automatically transfer when a consumer purchases an NFT. This is because the purchaser receives the digital certificate of authenticity, rather than automatically receiving ownership of the intellectual property in artwork or image itself. Instead, any rights to use, copy, and/or display the NFT (i.e. the artwork or image) will be contained within an underlying arrangement (an agreement setting out what is being purchased and restrictions). A trader of an NFT may want to consider including restrictions in the commercial use of the NFT by the purchaser within such a licence. 

The perils of an NFT buyer not having an underlying licence were demonstrated in a recent high-profile example. When Jack Dorsey sold an NFT of his first tweet for $2.9 million, the purchaser  failed to obtain ownership of the intellectual property rights in the tweet itself and so did not have the rights to commercialise the NFT. The original NFT was later estimated to have dropped in value by 99%, testament to the importance of ensuring that with any NFT transaction, the appropriate mechanisms are put in place to ensure there is clarity around what rights transfer to the buyer (if any at all)[8].

Conclusion

Sony's patent application for the use of NFTs to transfer virtual objects between games and consoles could potentially revolutionise the gaming industry by propelling a move towards a new level of ownership of virtual assets. In his 2022 book, The Metaverse, Matthew Ball notes that “to lead in the Metaverse, Sony will need not just considerable innovation, but unprecedented cross-division collaboration”, to “move outside of its own tightly integrated ecosystems…and connect into third party platforms.”. Perhaps this patent filing gives the first indication that Sony plans to do just that. However, there are important legal issues Sony will need to navigate, some of which we have highlighted in this article. It remains to be seen how Sony will tackle these inherent challenges as it attempts to implement NFTs into its gaming division.  

This article was first published on June 26 in New Law Journal and can be found here.

Resources

1. NFTs Have ‘Fallen Off the Cliff’ as Sales Sink to Lowest Levels in a Year - Bloomberg
2. WO2023039557 NFT FRAMEWORK FOR TRANSFERRING AND USING DIGITAL ASSETS BETWEEN GAME PLATFORMS (wipo.int)
3. Sony really hated PS4 crossplay, confidential documents reveal - The Verge
4. Why Jack Dorsey’s First-Tweet NFT Plummeted 99% In Value In A Year (forbes.com)
5. Nintendo says it’s interested in NFTs and the Metaverse: ‘We feel the potential in this area’ VGC (videogameschronicle.com)
6. Sony Files Patent for NFTs to Allow Transfers Between Games and Consoles (coindesk.com)
7. The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 S4(6)
8. Why Jack Dorsey’s First-Tweet NFT Plummeted 99% In Value In A Year (forbes.com)