Advising a Gaming Studio on the Issuance of Non-Fungible Tokens

Introduction

The Client, with entities in Europe and the UAE, is a leading independent developer and publisher of high-quality strategy and action games. It has developed a player-v-player game where users fight in arena-style tournaments. The in-game avatars are also issued as Non-Fungible Tokens (“NFTs“) to users who connect their in-app wallets to the game. While the NFTs would be freely given to anyone who connected their wallet, secondary market sales would attract a royalty payment to the Client.

The Client engaged us to conduct a regulatory analysis on the possibility of the issuance of the NFTs from Dubai and the impact of the royalty fee from their secondary sales on the analysis, if any.

Challenge

Since the Client is incorporated in Dubai, it falls under the jurisdiction of the Virtual Assets Regulatory Authority (“VARA”) in Dubai. The primary challenge was determining if the NFT issuance falls under VARA’s regulatory framework.

Strategies, Tactics, and Solutions

Our legal team conducted an in-depth analysis of VARA’s Virtual Asset Issuance Rulebook and other relevant regulations. We outlined the different categories of Virtual Asset issuance under VARA’s framework and the corresponding compliance requirements for each category.

Specifically, we evaluated the threshold of 150 users as a critical factor in determining whether our Client would need to obtain prior approval from VARA for issuing the NFTs. We also advised them to disclose the royalty fee associated with the NFTs and recommended additional terms and conditions to ensure transparency with users. Furthermore, we explored the role of publishers in NFT issuance and their compliance obligations under VARA’s regulations.

Outcomes

Our analysis gave the Client a clear understanding of the regulatory landscape and the specific requirements to fulfil based on the number of users receiving the NFTs.

Since the client was not inclined to undergo VARA’s approval process, we recommended that the client refrain from issuing the NFTs in Dubai.

We proposed that the Client explore issuing the NFTs through another