April 27, 2018

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Learn from the Orcs: Lessons that Cryptocurrency Should Take from the Recent European Rulings that Video Game Lootboxes Can Constitute Illegal Gambling

By Jason Cassidy, Attorney at Ryley Carlock & Applewhite

The biggest Star Wars story at the end of 2017 was the release of The Last Jedi in theatres. But another Star Wars story from that timeframe may have a larger impact on the world (no, I’m not talking about the upcoming Solo film). In November 2017, EA released the game Star Wars: Battlefront II and launched an international firestorm of controversy. Now, as of April 25, 2018, investigations within the EU have resulted in at least two countries’ determinations that some big name video games violate their gambling laws. Those decisions (and others that are sure to follow in their wake) could have significant ramifications in the cryptocurrency field.

Not long ago and very close to home… The Star Wars: Battlefront controversy.
Much has been written on the Battlefront “lootbox” controversy, so this article will only touch on the essential elements. Think of a lootbox like a pack of baseball cards. You don’t know what it will contain when you open it. You could find a set of third stringers from a lousy team, or it could have a rookie card for one of the most popular players. Similarly, a lootbox is a digital “pack” of items within a game.1 When you open the box (usually accompanied by some fanfare), you receive in-game items, but you never know what you’ll find. Depending on the game, your loot can be entirely cosmetic (such as detailed paint jobs for your weapon or new outfits for your character), in-game currency, or even helpful in-game items.

The core issue in the Battlefront controversy was how players could acquire the lootboxes. As you played the game, you earned in-game currency, which you could use to buy lootboxes. And in Battlefront (which is primarily a game of player vs. player encounters), the lootboxes were important because they could unlock bonuses, abilities, and characters that gave you a significant advantage over other players. So because you could also buy lootbox currency with real money (commonly known as “microtransactions”),2 a gamer willing to pay extra money could buy a better loadout and get an immediate leg up on the competition before any question of skill could come into play.3 The lootbox concept has been a cash cow for video game developers and publishers.4

Long story short, there was a huge outcry and Battlefront removed the ability to buy lootboxes for real world money.5 Many accused game developers of running gambling operations aimed at children. The controversy caught the attention of many government officials, and investigations ensued across the world.

The Belgian and Dutch governments believe that lootboxes can be a form of gambling.
In America, the relevant regulatory body for video games is the non-profit Entertainment Software Rating Board (ESRB). And the ESRB doesn’t believe lootboxes are gambling because, while you’re never sure what you’ll get in a box, you know you’ll always get something, even if it’s not the thing you wanted (see my baseball card analogy above). Compare that to a slot machine, where you can insert token after token and walk away with nothing but a sense of disappointment. The ESRB has, however, begun assigning a special “In Game Purchases” category that must be noted on any game that contains microtransactions.

On April 19, 2018, the Netherlands disagreed with the ESRB.6 The Netherlands Gaming Authority studied the lootbox system in ten different popular (unnamed) games and found that four of those games had lootbox systems that violate Holland’s Betting and Gaming Act. The relevant reasons were that the contents of a lootbox (1) were determined by chance; and (2) had a real market value because they could be traded out of the game. The study also noted that all ten lootbox systems had a “moderate to high addiction risk potential,” depending on how each game chose to present the lootbox. It further noted that children exposed to “game of chance mechanisms” have a “significantly higher risk” of gambling problems later in life.

A week later, on April 25, Belgium issued a press release7 that named three games that violated Belgium’s gambling law. The Belgian Gaming Commission found that the lootbox systems in Overwatch, Counter Strike: Global Offensive, and FIFA 188  were “games of chance” subject to Belgian law based on a four-factor test: the existence of (1) a game element that is (2) a bet that (3) can lead to profit or loss and (4) is based in part on chance. Like the Dutch study, the Belgian Gaming Commission saw winners and losers in those lootbox scenarios and further noted with worry that it is often minors being exposed to gambling without any protections. Belgium ordered that the lootboxes must be removed from those games or “the operators risk a prison sentence of up to five years and a fine of up to 800,000 euros.”

What does this have to do with cryptocurrency?
Let’s start by recognizing that cryptocurrency began in video games, specifically in MMORPGs9 like Ultima Online, Everquest, and World of Warcraft. Those games were really the first ones to leverage the then-nascent internet to connect players from all over the world in a single gamespace in which players could easily trade the game’s digital currency and items with each other. And someone with more money than time (who didn’t mind breaking the game rules) could pay someone else fiat currency to “farm” game currency. Players and farmers figured out what these services were worth and the prices shifted dynamically. Sound familiar?10

Legislators have long struggled to figure out how they could regulate this kind of economy. Virtual products are being sold and traded; should those transfers be taxed? Can I leave my children an in-game item in my will? If someone rips off another person in an in-game deal, is that a crime? Are criminals using games to launder dirty money? Which jurisdiction’s laws should apply? These questions are still relevant today, but few have been well answered.11 

So jump to cryptocurrency today, which is no longer limited to virtual gold within a specific game world. Instead, we acknowledge that there are new kinds of money in the “real world,” even if that money is based on a digital standard. So it is unsurprising that the major focus has shifted away from the digital items into a question of how to categorize these new currencies within the existing regulatory frameworks. Should coins be considered “currencies” or “commodities” under federal law? Is a coin offering actually an unregistered security? Do games like CryptoKitties make these questions easier, or harder?12 The focus of the questions has changed, but the broader issues are not much different from those arising out of the fictional world of Norrath.

Stay a while and listen. Dragons, trolls, and elves have lessons to teach you.
State, federal, and international governments want to rein in digital economies and are looking for ways to do so. It seems as though each regulator is comfortable re-classifying cryptocurrency as needed to bring crypto into its relevant jurisdiction. Cryptocurrency users should look to the past and present issues facing video games for guidance on how governments have tried to control games and how the game companies have reacted.13 For example, crypto companies should watch how Valve revises its thriving CS:GO market to handle Belgium’s threats of criminal prosecution. Will FIFA have to allow gamers to buy the exact virtual athlete they want, or is there a way for EA to keep players coming back to spend money in the virtual market? Cryptocurrencies may not be facing accusations of gambling (yet), but the lessons and corollaries are there if you’re willing to look for them.

One thing is certain: solutions are going to require lawyers. Games with lootboxes are going to have to take a hard look at the substance of gambling laws in the Netherlands, Belgium, the EU, and everywhere else to stay ahead of this wave of regulation. But the legal issues facing game developers sweep more broadly than that: if a game includes a digital marketplace, has it imposed an obligation on the player to track their capital gains on the commodity being exchanged? If your game is planning to create a blockchain cryptocurrency, are you considering whether it will look like a security to the SEC? How detailed must your transactional recordkeeping be? Answers are not easy, but they are relevant to game developers and crypto users alike. The attorneys at Ryley Carlock & Applewhite can help guide your company through these statutory hurdles, be they mythical, digital, or IRL.

About the Author:
Jason L. Cassidy has been an Iksar Beastlord, a Forsaken Warlock, and a Blood Elf Paladin. He is a member of the firm’s Litigation and Cybersecurity practice groups and offers his legal services to game developers across the country. He has experience helping clients resolve disputes involving contract disputes, data breaches, and a wide variety of business issues. Jason can be reached at 602.440.4812 and jcassidy@rcalaw.com.


References:

1 Often the “pack” is actually shaped like a box, hence the name (Blizzard’s game, Overwatch is a good example).
2 Calling it “micro” can be a real misnomer. The Battlefront game itself cost around $60. But the available in-game “micro” transactions ran anywhere from $5 to $100.
3 As early articles reported, if you wanted to play as Darth Vader in Battlefront II, you would need to play the game for 40 hours to earn enough credits to do so. Or you could plunk down a few hundred dollars, open enough lootboxes to find the credits, and be merrily Force-choking your opponents in mere minutes.
4 Activision Blizzard reportedly made $4 billion in revenue from in-game purchases last fiscal year.
5 EA recently re-added microtransactions to the game, but in a limited form. Now you can only buy cosmetic items for cash and you get to pick exactly what you want to buy, no boxes involved.
6 See in particular § 4.4 of the Dutch report: “In-game goods are always obtained when these loot boxes are opened. Some parties use this fact to support their argument that the game is not a game of chance. This argument is not valid. The in-game goods differ and have different market values if they can be traded. It is beyond doubt that the real winner is the person who wins the major, valuable prize with a high market value.”
7 Translated here using Google Translate.
8 Ironically, the changes that EA made to Star Wars: Battlefront II to resolve that controversy meant that Battlefront was the only one of the four studied games that did not violate Belgian law, even though the controversy was the stated catalyst for Belgium’s investigation.
9 Massive Multiplayer Online Roleplaying Games.
10 A few years ago, World of Warcraft actually introduced its own cryptocurrency. A month’s subscription costs $14.99. Alternatively, you can buy a one-month subscription token within the game using in-game currency, the cost of which changes constantly based on the relevant in-game economy. So as a Warcraft player, I can buy a token out of game with fiat money that I can then sell for gold within Warcraft’s in-game market, or I can use my hard-earned in-game gold to buy someone else’s token and save myself the $15 subscription fee in the real world.
11 The IRS did conclude in 2014 that virtual currencies should be considered as property for tax purposes and treated as a capital asset. That said, I’ve yet to hear of someone claiming a capital loss for depreciated value on their Blessed Blade of the Windseeker.
12 Or for another "fun" mental exercise, think about how to make an immutable blockchain record comply with the pending GDPR privacy requirements.
13 It’s an open question as to how much control can realistically be leveraged. For example, based on the stated elements of Belgium’s law, it’s not clear to me how collectible card games would not also be considered gambling. Is Hearthstone next on Belgium’s list? What about Magic: the Gathering (a physical collectible card game)? What about baseball cards? Where does one draw the line?

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