I like the idea. As of how to give the legendary weapons out, not long after the mmo version is released you guys should hold events, one per village, where the only people able to participate are those who have the needed chakra nature. The top two will have the legendary weapons, because they are the strongest/most suitable for these weapons.

Do this 11 times, although it will be a pain, it might be the best way to see who is fit to have such powerful weapons. After this point, whoever kills them or takes the weapon, has it, thus the cycle begins.

As for the Hidden Hill weapons, you could make 2 weapons of random chakra natures or make 5 weapons that are all weaker then the rest, since there are 5.

A way to stop this would have some limit on the amount, so that there wouldn't be 50 people with the same first name, possibly last name if they are in the same clan. Make it where there is like a maximum of 5. Idk, there are tons of names out there so...