RPC Law x Web3: Gambling regulations – Don't Play Games of Chance with the Law
This is part of a series of RPC x Web3 articles designed to help Web3 participants and enthusiasts understand their rights in this rapidly evolving space.
Links to the other articles are set out below.
Article: Ownership of Digital Assets in Web3
Article: Considerations for NFT Founders Building Communities and Providing Utility to Holders
Article: If There's Something Strange in the Web3 World, Who You Gonna Call?
Like it or not, there is currently an inescapable link between Web3 and the possibility of making a quick buck. Consistent with this trend, there has been a proliferation of "play-to-earn" games that reward players with crypto tokens which can fluctuate significantly in value. Rewards may also come in the form of mystery boxes containing contents that vary in rarity and therefore value. There is also a trend in NFT projects for the art associated with NFTs to only be revealed some time after the NFTs are minted. Someone who mints the NFT will not know if his or her NFT contains rare traits (and may therefore be worth more) until some time after the mint.
With the blurring of boundaries between videogames and gambling countries have been updating their laws in order to address gaming activities that resemble gambling. In Singapore, gambling is strictly regulated to maintain law and order as well as to minimise potential harm to the society. Gambling activities are prohibited unless they are exempted or licensed under the law, and the main legislation that governs gambling (other than casinos) is the Gambling Control Act 2022 ("GCA"), which came into effect on 1 August 2022.
In this article, we will examine potential gambling law issues (with a specific focus on Singapore law) that may arise in the context of "play-to-earn" games and the minting of NFTs.
"Play-to-earn" games
While traditional games usually require players to spend time within the game to advance or unlock virtual prizes which cannot be transferred or sold for real world value, "play-to-earn" games are online games that let players earn rewards with real-world value through completing tasks, battling other players and progressing through various game levels. These rewards come in the form of in-game assets such as crypto tokens, or NFTs tied to virtual land, skins, and weapons, which can be transferred and sold outside of the game's virtual world in exchange for either fiat currency or established cryptocurrency. Moreover, some of these games also incorporate in-game micro transactions that can resemble gambling, such as chance-based loot boxes.
Prior to the coming into force of the GCA in 2022, games of chance with virtual prizes were not considered by the Infocomm Media Development Authority as gambling and fell outside the scope of gambling laws as long as there are no in-game monetisation facilities that allow players to exchange virtual prizes for real-world payouts (i.e. money, or items that can be exchanged for money). The GCA has now fine-tuned this position to better address online games of chance that allow virtual items to be transferred out of the game, and potentially be exchanged for money or money’s worth on a third-party hosted exchange. Such games now constitute gambling under the broad definition given to the term under the GCA, although such activities are licensable through a class licensing regime detailed in the Gambling Control (Remote Games of Chance — Class Licence) Order 2022.
However, in order to qualify for a license, pay-to-play games must be deemed compliant with certain conditions, including that the transferable virtual items and features in these games of chance must be designed primarily for use within the same game or a related game. In addition, the class licensee must take all reasonably practical steps to ensure that such virtual prizes and features cannot be readily converted into real world value, except for use in an in-game microtransaction within the same game or a related game. As the Ministry of Home Affairs, Policy Development Division made clear in its public consultation paper on proposed amendments to gambling laws last year, "[o]nline games of chance that allow players to use virtual items from other games as a form of stake on casino games or match outcomes, such as skin-betting sites, will not be allowed". In short, pay-to-play games will only permitted if virtual prizes and features are retained within the context of gameplay and entertainment, as intended by game developers.
As for free-to-play games (i.e. players do not have to pay to play or receive virtual prizes), no restrictions on in-game monetisation facilities have been prescribed i.e. in-game monetisation facilities are allowed. Nevertheless, class licensees must inter alia comply with the condition that materials publicising the game do not contain or refer to specified gambling articles such as English playing cards and Mahjong tiles.
Minting of NFTs
Over the course of the last few years, many artists, digital creators and celebrities have also embarked on NFT projects involving the minting of collections of digital collectibles on the Ethereum blockchain/network. The NFTs minted can fluctuate wildly in value, and are traded publicly on exchanges such as Opensea.
In atypical NFT project, not all NFTs are created equal. The digital collectibles in these NFT projects vary in terms of the rarity of their traits and features and almost every NFT project has a hierarchy in terms of which NFTs are perceived to be more valuable than others.
The concern comes with the fact that users who are given the opportunity to mint NFT projects are often unable to choose the collectible that they get to mint. They usually pay a fixed mint price in return for a randomised NFT that is generated electronically in accordance with a specific algorithm. Thus, the rarity and value of the NFT they receive can vary considerably.
The minting of NFTs is therefore akin to purchasing mystery boxes containing unknown item(s). During the Second Reading of the Gambling Control Bill, the Minister of State, Ministry of Home Affairs and Ministry of Sustainability and the Environment indicated that "[c]reating or trading NFTs is not considered gambling, unless there is an element of chance involved in their creation or trading", and further stated that "gambling services that use NFTs as stake or prize will be covered in our gambling legislation". With this in mind, users and creators alike who mint generative NFT projects should consider if they are potentially participating in or conducting a lottery in contravention of the GCA. Under section 9 of the GCA, a "lottery" is broadly defined to include an arrangement or a scheme for the distribution of prizes where entitlement to participate depends on the payment of or giving of any money or money equivalent or anything else of value by the participant and the distribution "depends on an element of chance", such as lucky draws, raffles and sweepstakes. The term "prize" is also broadly defined in the GCA to include "any money or money equivalent or any thing else of value that may be won… whether or not described as a prize".
Based on how the GCA is framed, the minting of generative NFT collections involving an element of chance in the creation or trading of those NFTs could certainly constitute a lottery and thus gambling under the GCA. While a license can be obtained in other situations, there is no class license regime in place for mystery boxes at the time of writing of this article. While the Gambling Regulatory Authority has indicated that it will be issuing class license conditions for mystery boxes at an unspecified later date, based on the outcome of the public consultations conducted by the Ministry of Home Affairs, it is likely that a prize cap of S$100 will be introduced for mystery boxes, arcade games and claw machines. This would certainly have an impact on the minting of generative NFT collections and the sale of mystery boxes by cryptocurrency platforms.
Conclusion
While there are currently no laws that are expressly target the regulation of Web3 in Singapore, it is important to consider how existing regulations can still curtail activities common within the space. The need to make sure that one does not fall foul of the rules is emphasised by the fact that the GCA contains a series of offences that attract both fines and potential custodial sentences. If you have a Web3 project that involves any element of chance with a potential reward, do get in touch as this is an area we increasingly see clients in the space not realise they need to take into account.