Lockdown conditions and self-isolation has led to increased screen-time and participation in online gaming. Notably, this has coincided with an increase in blockchain gaming, and investment in blockchain gaming companies.
Blockchain games are any games that include or use blockchain technology, whether in relation to how players pay to participate (e.g. by using a cryptoasset, such as an ERC20 token) or their underlying game mechanics (e.g. the recording and transfer of ownership of unique in-game items using non-fungible cryptoassets, such as ERC721 tokens).
The most well-known cryptoasset, Bitcoin, was first released during the 2008 global financial crisis and was intended to be a decentralised store of value and medium of exchange. Typically cryptoasset markets have been immune to factors impacting the performance of more traditional markets and, though cryptoassets' values have not sky-rocketed during this pandemic as many analysts predicted (and many cyrptoasset holders hoped), their value has to date remained relatively stable. Indeed, out of this pandemic blockchain gaming appears to have increased – it has recently been announced that game developer, The Sand Box Gaming, has received an estimated $2.1 million investment in order to develop the blockchain version of The Sand Box.
Blockchain gaming models versus traditional gaming models
Blockchain gaming models differ from traditional gaming models in a number of ways, including:
- Payments - In traditional gaming models, players transact through a third party (e.g. payment processing companies such as Worldpay). This intermediation represents a cost to the gaming company, which is sometimes passed to the end user (i.e. the gamer). In contrast, blockchain gaming models disintermediate the payment process by enabling player to player cryptoassets transactions.
- Decentralised database operations - Traditional gaming models use a centralised operations system, such that the operator of the game retains full control of the game and can unilaterally modify its parameters. This means that players exert no control over the game's underlying database and, if the gaming operator switches off its server (whether because the gaming operator has gone out of business or does not wish to continue to host the relevant game for commercial reasons), the game and the associated in-game 'property' disappear. Using blockchain in-game 'property' can instead be recorded in the form of a cryptoasset on a distributed database, which is not solely controlled by the gaming operator. Accordingly, if the gaming operator elects to switch off its servers, the in-game cryptoassets will survive, although the extent to which they are then capable of transfer and/or exchange in return for money or money's worth will need to be considered from a gambling regulatory perspective to determine if any licence is required under any applicable gambling laws.
- Community - In a number of blockchain games, players are able to create unique virtual avatars to represent themselves and interact with other players in an online community. Perhaps for some people, during the pandemic, these virtual realities have facilitated a sense of escapism. For exam, Second Life refers to its users as “residents” and the creators don’t call it a game. The attraction of virtual realities is not new, Augmented Reality and Virtual Reality are gaining increasing traction with consumers with significant improvements being made to their technology.
- Crypto collectibles - Non-Fungible tokens are tokens that have properties that make them unique digital assets. Two tokens will not have the same attributes and are not equal, for example, CryptoKitties. These are digital cats that each have different digital characteristics; no two cats are the same. However, gaming companies need to be careful as to how their games are structured. If games are not structured properly, some crypto-games which involve crypto-currency or tokens which are transferable, could be caught by gambling legislation. It is important therefore to obtain advice on this before launching a crypto-game or crypto-collectible. Our article on the rise in crypto-collectibles discusses this further.
Investment in blockchain gaming
Blockchain gaming has already seen a number of notable success stories. For example, it has been reported that during 2017-2018 there was a 280% rise in blockchain gaming related investments. Notably:
- Ripple, a banking and cryptoasset technology company, has reportedly combined forces with blockchain gaming company Forte to set up a $100 million fund in order to advance the implementation of blockchain technology in the gaming sector. The fund is understood to be overseen by a number of leading gaming executives including Andreesen Horowitz, Coinbase Ventures and Battery Ventures. Mangrove Capital has reportedly invested $5 million into a blockchain-based esports platform called DreamTeam.
- Cryptoasset company, Tron, has reportedly invested $100 million towards its own blockchain gaming fund, Tron Arcade.
The decentralised virtual worlds of games such as CryptoVoxels, Decentraland and Somnium have also seen an increase in gamers and users during the pandemic, who are using the platforms to meet, socialise and create their own online events. Similarly, War Riders, a blockchain game very much akin to a virtual Mad Max-like experience, is reported to have seen an increase of up to 70% in new players and an increase in the average time spent in the game, while Bitcoin Blast, the flagship app behind Bling, has now passed one million downloads on the Google Play Store.
Investment interest in blockchain gaming had begun to increase prior to the COVID-19 pandemic. This increase has coincided with a movement towards greater accessibility for blockchain games, with operators taking steps such as accepting payment methods other than cryptoassets in an effort to bring their blockchain games to a wider market. We anticipate blockchain gaming investment and M&A activity to grow in the coming months.
Legal issues to consider
Operators should seek expert legal advice in respect of their blockchain games. This will only become more important as the blockchain game market continues to grow. Notably, operators should consider the following:
- Gambling licences - Anyone offering blockchain gaming, crypto-games or crypto-collectibles must take advice to determine if its activities are lawful, or require a licence, under local applicable gambling laws. In 2017, the Gambling Commission reiterated that digital assets "which can be won, traded or sold can be converted into cash or exchanged for items of value, under gambling legislation they are considered money or money’s worth". Any bets or games offered using such a digital asset (which include many types of cryptoassets) either as payment to enter and/or as a prize may therefore constitute a regulated gambling activity. An operator wishing to offer such a game to persons in Great Britain will need to ensure it holds the relevant licences to avoid committing offences under the Gambling Act 2005. Our Betting and Gaming group regularly advise clients on the scope of the Gambling Act, licensing requirements and any associated licence applications.
- Financial regulations - The offer and sale of cryptoassets by blockchain game operators may constitute a regulated activity from a financial regulatory perspective. In the UK, the Financial Conduct Authority has published guidance in relation to the classification of cryptoassets as a security for the purposes of English law. Blockchain game operators should carefully analyse the likely treatment of a relevant cryptoassets by financial regulators. Our Blockchain Group has deep experience of conducting such analysis on behalf of our clients.
- Anti-Money Laundering and Know Your Customer - The use of cryptoassets does not negate the need for operators to conduct adequate AML and KYC checks. Operators should take steps to ensure that they fulfil their legal obligations in this regard.
- Intellectual property - In order to protect their proprietary interest in their games, operators should carefully consider their intellectual property rights position. The suite of protections available to operators differ on a case by case basis, and can range from patents (for example, in respect of certain game mechanics, features and technology) and design rights (which in some circumstances represent an attractive alternative to patents, which are typically difficult and expensive to obtain) through to copyrighting and trade marking. Our award-winning Intellectual Property team are well equipped to review our clients' intellectual property position and provide meaningful and impactful advice to better protect their interests.
- Tax - The tax position of cryptoassets holdings can be complex and HMRC's guidance often requires detailed analysis to unpack and understand. Our Tax team are experts in interpreting HMRC guidance and providing practical advice to clients to ensure that they comply with their obligations fully and in an efficient manner.
The above is not an exhaustive list, as the world of cryptoassets, distributed ledger technologies, and betting and gaming, has a wide-range of legal and regulatory implications that are beyond the scope of this article. Our expert team is experienced in navigating this complex area. If you have any queries, issues or ventures that would benefit from legal advice, please do get in touch – we will be delighted to hear from you.