GameFi - The Future of Gaming? (Part 2)
Image Credit: Cryptoslate
GameFi platforms have surged in popularity in 2021, and show no signs of slowing down, due to the potentially lucrative earning opportunities. From a regulatory perspective, laws are already on the books in some Asian countries in regards to crypto-gaming. South Korea have long banned game currencies from being converted into cash by Article 32 of Korea’s Gaming Industry Promotion Act, while China has the steepest prohibition on GameFi that bans any gaming element that is transferable to the Chinese Yuan. To understand the potential challenges to players, developers and regulatory bodies, this part of the series will explore the relevant potential legal issues.
Jurisdictional, Securities and Tax Issues
Blockchain ledgers and transactions are well known for their transparency. However, this transparency also entails that users must be well aware of the regulations present in their country of operation. For instance, in GameFi projects, the value gaming tokens and in-game items (often listed as NFTs) are based on real-life cash and physical assets, they can also be exchanged for such assets. Therefore, these in-game tokens and items might be subject to the prevailing asset or securities-based laws in a country. Developers would be required to communicate with regulatory bodies to be well-informed of the local laws to ensure compliance.
Earning in-game tokens which can be exchanged for real-life cash and physical assets also means that players are generating income, and would therefore be taxable. For example, in the Philippines where approximately 40% of Axie Infinity’s players are based, the government has recently announced that any income earned from the game should be reported to tax authorities. This in turn gives rise to challenges for regulatory bodies as to what to tax due to the various kinds non-fungible cryptoassets traded in GameFi games.
Similarly, the marketplaces for these tokens might also be found as security exchanges. The Securities and Exchange Commission in the US has recently issued guidance that some platforms that permits the purchase and sale of digital assets including tokens and NFTs in GameFi projects meet the definition of an ‘exchange’ and the underlying assets. Despite the Financial Conduct Authority has not regulated cryptocurrencies, the UK Government announced the establishment of the UK Cryptoasset Taskforce as part of its wider Fintech strategy that closely monitors the development of blockchain technologies and cryptoassets, which will most likely include those utilized in GameFi projects.
Gambling Similarities
Gambling and gaming have been traditionally considered as distinct activities. However, with the rise of ‘free-to-play’ games, traditional ‘gaming’ games are increasingly integrating real money payments for in-game items. These in-game items are sometimes obtained through chance-based mechanics, which is common among GameFi projects such as CryptoKitties and Axie Infinity. Gambling is defined in the UK Gambling Act as ‘playing a game of chance for a prize’, where a game of chance is ‘a game that is presented as involving an element of chance’. The generation of virtual goods, micro-transactions and chance-based mechanics found in GameFi projects therefore prima facie might meet the legal definition of gambling, at least in the UK.
A study by Scholten et. Al has listed out several criteria to determine whether playing GameFi projects can meet the definition of gambling. These criteria include (1) the exchange is determined by the outcome of a future event by chance; (2) an exchange of money/objects of financial value occurs; (3) losses can be avoided by not taking part in the activity; and (4) real-world money can be obtained by ‘cashing-out’ winnings. Based on some particular mechanics found in highest ranking GameFi projects such as Cryptokitties and Axie Infinity, which include the breeding mechanics, and chance-based rewards found in ‘loot boxes’. Despite these mechanics might be implemented in the future without going against gambling laws, careful consideration would be beneficial to all stakeholders.
We can therefore foresee that GameFi projects can give rise to a multitude of legal issues which pose a challenge to players, developers and regulatory bodies. Despite blockchain proponents claim that the industry is expected to reach USD$2.8 billion by 2028, general consumers should proceed with caution and be aware of the legal uncertainties and risks.
by Hendry Wong