Just started into the recent edition of Magience...it'd be an awesome game, but it'd require one helluva magnetic resonance imaging scanner...if it could work, though, I'd sign on to design and build it.
Interesting concept, though about tapping REM sleep. The problem is that if you hijack REM sleep you risk upsetting memory and storage in the brain, inducing anterograde amnesia. Although perhaps...if you can separate various neural functions, the idea might be sound. Your gameplay would exist in stage 1, 2, and 3 of sleep...with your conscious functions handled through the headset. However, you'd experience fatigue and have to sleep sometime, so you'd have a genuine sleep session for natural maintenance (deep sleep and REM, usually 2 hours, but extended based on sensor readings).
The system could work, if a close-nerve input-output interface could exist (and yes, I've thought about this seriously for things like prostheses and virtual reality connections). At present, we can induce localized changes in neural activity, and even read the activity of individual neurons...but the apparatus is either bulky or impractical (you have to do surgery to even localize a neuron). But that's today...who knows about tomorrow?
I only hope we don't have a Sword Art Online scenario.