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With minimal regulation, Japan is at the forefront of the gaming industry. The e-sports industry has experienced a steady increase in both the number of players and the frequency of tournaments, with events of various sizes growing in popularity year after year. However, the organisation of e-sports tournaments remains burdened by significant regulatory challenges, particularly in relation to cash prizes.

Gaming industry regulations

Neither game software manufacturing nor creating individual games requires government approval or permits.

There are also no specific legal restrictions on selling games to minors. However, due to the potential impact of game content on minors, many game software manufacturers have voluntarily joined self-regulatory organisations such as the Ethics Organisation of Computer Software (EOCS) or the Computer Entertainment Rating Organisation (CERO).

These organisations have developed an age rating system that categorises games by appropriate age groups and, following their review, the rating is displayed on game packaging.

Since Japanese distributors (including game platforms and hardware providers) typically require this labelling, in many cases it is practically necessary to undergo these reviews.

Staging tournaments

Staging e-sports or gaming tournaments is primarily regulated under the Amusement Businesses Law, the Unjustifiable Premiums and Misleading Representations Act, and gambling regulation under the Penal Code. Notably, the latter two laws raise concerns about the legality of tournaments offering large cash prizes.

To ensure legal compliance, prizemoney must be carefully structured considering participant attributes – such as whether they hold a professional licence certified by the Japan e-sports Union (JeSU) – as well as the structure of participation fees.

Some tournaments also adjust prize amounts based on the winner’s attributes, including whether they possess professional licences, or are minors. Moreover, the limited number of game titles covered by JeSU licences remains a challenge.

Play to earn

In recent years, blockchain games that employ a “play to earn” mechanism have attracted a lot of attention in the gaming industry.

Play to earn means that game items and characters are issued as tokens on the blockchain, and players can earn tokens redeemable with fiat currencies by playing the game – literally “playing” the game to “earn” money.

Since players earn tokens that can be converted into fiat currency through game play, it is sometimes called “GameFi”, as a new type of game that combines elements of game and finance.

In blockchain games, when in-game currency or in-game items are issued as tokens on the blockchain, they are not managed on the game operator’s internal servers, but rather by the users themselves, who manage their own private keys to “hold” these in-game currency or in-game items on the blockchain.

In addition, users can trade in-game items and other items through the blockchain without being restricted by the game operator.

Legal issues

Since blockchain games have not only a game element but also a finance element, a number of legal issues need to be considered.

Payment Services Act (PSA). The issue is whether non-fungible tokens (NFTs) – which represent game items and characters issued and traded in blockchain games – are subject to financial regulation as crypto assets under the PSA, similar to Bitcoin and Ether.

Since NFTs are generally individualistic and irreplaceable tokens, they are not usually considered to be crypto assets because they are not recognised as a means of payment, like Bitcoin.

However, in a blockchain game, it is common to assume that multiple NFTs may be issued for the same character.

Therefore, compared to NFTs representing one-of-a-kind digital art, NFTs representing game items/game characters (Game NFTs) in blockchain games are relatively less unique, and it is necessary to consider whether they could be recognised as a means of payment and be subject to regulation as crypto assets under the PSA.

Gambling under Penal Code. Blockchain games often introduce specifications in which users pay a certain amount of money/crypto assets to obtain Game NFTs that vary in rarity at random, through gachas or random pack sales.

Since Game NFTs acquired through gachas, etc., can be bought and sold on trading platforms, and each Game NFT can have a different value, this raises the question of whether the game operators and players are making so-called “bets”, which may be considered gambling under the Penal Code.

Under the Penal Code, gambling is defined as “an act in which two or more persons compete to gain or lose property or property benefits by winning or losing by chance”, so a detailed examination is required to determine whether it can be considered “competing to gain or lose”.

Unjustifiable Premiums and Misleading Representations Act (UPMRA). It is also important to note conflict with the UPMRA, which restricts businesses from offering excessive premiums in the services they provide. In order to prevent unhealthy competition caused by excessive premiums, the UPMRA limits the maximum amount and total amount of premiums that can be offered, depending on the method of offering them.

In blockchain games, as in traditional online games, tokens could be offered as rewards for certain game play and achievements. If the rewards fall under the category of premiums under the UPMRA, it is necessary to comply with regulations regarding the maximum amount and the total amount.

Therefore, it is necessary to be careful when determining the applicability of the remuneration and setting the amount.

Financial Instruments and Exchange Act (FIEA). In blockchain games, a mechanism called “scholarship” may be established, in which one player purchases Game NFTs and lends them to other players to play games, earning tokens and receiving a portion of the tokens earned.

In this regard, under the FIEA, a scheme – where the investment of others funds the business in which the investment is made with proceeds returned to the investors – falls under the category of collective investment scheme interests (CISIs).

In principle, CISIs cannot be made without registration as a financial instruments business operator under the FIEA (so-called Fund Regulations). Since the scholarship is a loan of purchased Game NFTs to others to earn tokens and acquire a portion of the tokens, it can be questioned whether this scholarship mechanism violates the Fund Regulations.

Generative AI

In the field of Generative AI, it is assumed that the first step in the development of machine learning is to collect data containing copyrighted works, process it as a dataset for training, input it into a training program, and use it to develop and train a generative AI model.

In terms of collection, there may be cases where information scattered on the internet containing copyright material is collected by scraping, or where a dataset is provided by a third party containing copyrighted material.

The act of processing a dataset for learning falls under the category of reproduction and adaptation, which typically only copyright holders were permitted to do. By contrast, AI developers were originally not allowed to do this.

However, flexible rights limitation provisions have since made it possible for AI developers to process datasets for learning, which is why the Copyright Act of Japan is often referred to as a machine learning paradise.

In fact, generative AI is increasingly being used in the Japanese gaming industry. For example, Level-Five, a game software manufacturer of the well-known Yokai Watch, which has sold more than 17 million units worldwide, has publicly announced that it is using generative AI in the production of its games going forward.

On the other hand, many in the Japanese game, manga and animation fan communities have responded with hostility to the use of generative AI in content creation, and many content creators have expressed concerns that their content may be imitated by generative AI.

As a result, the Japanese gaming industry finds itself in a dilemma. It wants to use generative AI for content creation – and has cleared the associated legal risks – but is wary of taking the plunge into full-scale use due to concerns about reputational risks, such as fan backlash.

Anderson Mori & Tomotsune
Otemachi Park Building
1-1-1 Otemachi, Chiyoda-ku
Tokyo 100 8136, Japan
Contact details:
Tel: +81 3 6775 1000
Email: info@amt-law.com