In the manga, Kaiba created Battle Boxes which used Solid Vision to enhance Duel Monsters and made a deal with Industrial Illusions to produce them.
During Death-T (Death Trial), a series of games which Kaiba created to test Yugi, Kaiba used Battle Boxes, to create holograms of the monsters Summoned in Duel Monsters and Capsule Monster Chess. Whoever lost a game, would be subject to the Illusion of Death by virtual reality. He tested this version of Penalty Game on human subjects, finding that the average person went insane after ten minutes of the torture. Which explains how Solomon Mutou was hurt in the manga when Kaiba forced him to play against him.
In the anime, Dueling Arenas were used instead of Battle Boxes and Death-T did not happen.
In the anime, Kaiba was still responsible for the creation of the Dueling Arenas. Throughout the series it is implied that the monsters that are summoned are not just a hologram projections but Solid Visions. This implies that there is some kind of artificial mass that is formed behind the projection. How Kaiba managed to achieve this, is not explained in details, but it is implied that he programmed the dueling system to simulate combat damage, which explains why when monsters attack, there are shock waves that are felt in the air, and why when direct attacks are made on the players, they are pushed and sometimes even physically hurt. This can explain why Solomon Mutou was hurt during his first duel with Kaiba in the very first episode of the anime. Even though direct attacks where not in the rules of the game back then, the shock waves from the attacks between the monsters could still be felt in the air. And the psychological shock of seeing solid vision monsters for the first time, took their tool on the fragile body of Solomon Mutou, who was at that point, a retired old man. In the episode where Kaiba received Obelisk the tormentor from Ishizu, he decided to test the might of the god card while also testing the new dueling disk with the updated game rules. The scientist working for Kaiba, expressed concern about the decision to include direct attacks in the rules, since the solid vision combined with the combat simulation could really hurt the players who participate in the duel. This is shown in the same episode when Kaiba summons Obelisk and uses it to destroy the Blue eyes ultimate dragon, while also dealing 4000 points of damage to the duel bot. The shock from that attack, destroyed the machine. However, if Kaiba didn't summon Obelisk to win the game, he might've been injured by the attacks of the Ultimate Dragon which the duel bot was using against him. The japanese version of the anime, does a better job than the dub version, in explaining how the monsters could push and hurt the players. I guess the real questions to ask here are, how come no one sued Kaiba for creating a technology that can physically damage people and advertise it for a game of cards. And why did kids where given access to posses such a dangerous piece of technology. :D But I guess someone has to write that question and I will do my best to give the best logical answer to that.
I hope my answer was helpful and fun to read. :)