You normally need firmware support for WPA2.

Obviously the availability of firmware is strongly linked to the hardware, and since firmware isn't open source, adding a big feature like WPA2 if it isn't already there is very hard.

However, I believe there is also the option of capturing raw (encrypted) packets and doing all the encryption fully in software.

I don't think so? Isn't the point of the suplicant model introduced in wpa1 that you can upgrade security in software, so upgrading to wpa2 should be possible for most things that ran wpa1 and had a viable way to get software upgrades.

Newer hardware has accelerators for encryption, but that can be done in software too. AFAIK the physical layer is the same, and WEP/WPA/WPA2 are layers on top, implemented by firmware or host software.

The thing is - and I tried finding out without success - that it’s likely an off the shelf either Realtek or Broadcom WiFi chipset in the PSP that Sony probably omitted features on for stability reasons. Sounds like maybe these folks made it happen :) amazing to see

Nope, for Wi-Fi the security doesn't sit on the physical or link (radio) layer. It's not an accurate comparison but it's similar to how TLS, too, doesn't sit on the physical or data link layer.

Very few of 16-bit PC cards support 11g and/or WPA1, and it was supposed to be hardware/firmware limitation, though I'm not sure of the details either.