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Farsite, an outer space-themed multiplayer online adventure game, will soon debut on the Ethereum Blockchain featuring an economy based on Non-Fungible Tokens (NFTs) and collateral Non-Fungible Tokens (cNFTs). NFTs can uniquely identify or recognize digital items such as artwork, skins, or objects, making each NFT a collectable. In Farsite, players craft items, most notably spaceships, that become NFTs with an assigned value backed by ERC-721 (the Ethereum NFT standard). These NFTs have a number of in-game and out-of-game applications.

In-game, players can exchange their NFTs for “Credits,” Farsite’s primary currency for buying and selling items in-game. Players can also stake their NFTs as collateral for borrowing Credits or items from other players. This is known as a cNFT and it allows one player to lend something to another player secured by the underlying value of the staked cNFT, which could be a spaceship created by the player. Out-of-game, players can trade their NFTs on external marketplaces like OpenSea, which adds an actual financial component to the gameplay.

In-game currency is not a revolutionary idea; many games have what is termed a “grind currency” – a currency that players can obtain by playing the game, and a “premium currency” which usually only can be obtained by purchase with fiat. For instance, FIFA, made by EA Sports, has been using virtual currency for years in their online Ultimate Team feature that allows users to trade player cards for coins . But Farsite’s use of NFTs means that each item is unique or one-of-a-kind, which gives players an incentive to create items because they could make something of value that could bring financial gain. The NFTs used by Farsite are a departure from the usual “grind currency” in that they serve to enrich the game environment when players create new ships or skins.

LEGAL TOKENS

The regulatory landscape regarding NFTs is still uncertain. There are questions about whether an NFT in this context could be deemed to be a “security” or “commodity” for regulatory purposes, which would place it under the purview of either the Securities & Exchange Commission or the Commodity Futures Trading Commission. In April 2021, a rulemaking petition went out to the SEC asking them to resolve some of these ambiguities about the regulatory status of NFTs. Additionally, there are copyright, contract, and intellectual property questions that arise whenever one party sells an NFT to another. In the context of videogames, these legal issues will become particularly pertinent when NFTs created in-game are sold on external marketplaces for profit. When an NFT is used solely for in-game transactions, some of these questions may have less relevance.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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Anthony Tu-Sekine | Partner

As the head of Seward & Kissel’s Blockchain and Cryptocurrency Group and a frequent commentator on all things crypto, Anthony advises clients on a wide range of evolving topics, including how to structure and issue security and utility tokens, registered and unregistered offerings of security tokenstoken custody, transfer and liquidity issues, non-security opinions, and investments in crypto assets by funds and other investors. A recognized leader on physical precious metals funds, Anthony represented APMEX Inc. and alternative asset manager Sprott Inc. in connection with the launch of OneGold.com, which allows investors to own gold documented on blockchain.

You can work with regulators or you can really try to piss them off… If you really want to do the latter, then you should expect that they will bring every tool they have against you.

Anthony’s thoughts on BitMEX indictment, as published in Law360 article “BitMEX Case Seen as Blessing in Disguise for Crypto Sector”