I remember there being a lot of uncertainty about the legality of what and how can('t) be used in training models (especially when used for commercial purposes) - has that been settled in any way? I think there was also a case of not being able to copyright AI generated content due to lack of human authorship (I’d have to look for an article on this one as it’s been a while) - this obviously won’t be a problem if generated assets are used as a base to be worked upon.
In the United States, the Authors Guild v. Google case established that Google’s use of copyrighted material in its books search constituted fair use. Most people agree this will apply to generative models as well since the nature of the use is highly transformative.
I recommend reading this article by Kit Walsh, a senior staff attorney at the EFF from April last year if you haven’t already. The EFF is a digital rights group who recently won a historic case: border guards now need a warrant to search your phone.
Works involving the use of AI are copyrightable, but just like everything else, it depends. It’s also important to remember the Copyright Office guidance isn’t law. Their guidance reflects only the office’s interpretation based on its experience, it isn’t binding in the courts or other parties. Guidance from the office is not a substitute for legal advice, and it does not create any rights or obligations for anyone. They are the lowest rung on the ladder for deciding what law means.
As for illegal content - Valve mentioned it in regards to live-generated stuff. I assume they’re worried about possibility of plagiarism and things going against their ToS, which is why they ask about guardrails used in such systems. On a more general note, there were also cases of AI articles coming up with fake stories with accusations of criminal behavior involving real people - this probably won’t be a problem with AI usage in games (I hope anyway) but it’s another sensitive topic devs using such tools have to keep in mind.
I agree live generated stuff could get developers in trouble. With pre-generated assets you can make sure ahead of time everything is above board, but that’s not really possible when you have users influencing what content appears in your game. If they were going to ban anything, the original ban should have been limited to just this.