GameFi attracts ‘big spenders’, is the road to compliance in blockchain gaming just ahead?

As a team of lawyers providing professional legal services in the field of financial technology and blockchain to users both domestically and internationally, the Sa Team has always had a strong interest in GameFi. We have always believed that the gaming industry is the most likely to give birth to the Web3 version of the “iPhone moment” in terms of application scenarios. However, in recent years, due to various reasons such as high development costs, lack of software and hardware technology conditions, and unclear regulatory rules, the gaming industry has become the most underestimated member of the entire Web3 ecosystem.

Today, when it comes to the gaming industry, people often think of those series of “black market” games that were crudely made around 2021 and dressed in the cloak of blockchain using concepts such as the metaverse and NFTs. On the one hand, these games focus too much on so-called “profits” and therefore lack playability; on the other hand, the points tokens issued by these games have the issue of dual liquidity with fiat currencies. In addition, the high entry price and the need to recruit others to make a profit are also problematic. These types of games not only have a very poor reputation among players but also pose serious legal and criminal risks.

Today, the Sa Team will discuss the future development of the gaming industry in China from a compliance perspective.

• Meme coin is just an NFT without pictures.
• Metaverse to bring $20 billion business opportunities to the tourism industry
• The emergence of ‘Twitter killer’ Threads, can Meta’s metaverse ambitions be supported?

01. What does the large-scale deployment of the regular army in the gaming industry and the birth of exclusive gaming public chains mean?

In July 2023, the gaming-exclusive public chain Oasys gained a lot of attention. From the cooperation list announced by Oasys, we can see that the well-known Korean game company Com2uS announced that it will use its “Summoners War” IP to create a 3A blockchain game called “Summoners War: Chronicles” and launch it on Oasys. Sega Corporation (referred to as “Sega”) and Ubisoft, two traditional old-school companies with many well-known game IPs, also announced that they are developing their first large-scale blockchain game based on the Oasys public chain.

According to information currently available through public channels, Sega is taking a cooperative approach and is collaborating with Double Jump Tokyo (a company with considerable experience in developing blockchain games) to develop a card-based strategy game called “Sangokushi Taisen” based on its well-known “Three Kingdoms” IP.

On the other hand, Ubisoft is taking an independent development approach. It is preparing to develop a PVP mode strategy RPG game called “Champions Tactics: Grimoria Chronicles”. Based on the series of promotional materials released by Ubisoft, the game is well-made and highly playable, generating high expectations.

In addition to the two companies mentioned above that already have semi-finished products available for display, according to Oasys, Square Enix (the development company of the Final Fantasy series), Bandai Namco (the owner of major IPs such as One Piece and Dragon Ball Z: Dokkan Battle), Mixi, and other traditional game companies have conducted in-depth cooperation.

02. The Compliance Road of Blockchain Games in China

(I) “Untouchable Red Lines” for the Development of Blockchain Games in China

When it comes to the risks of blockchain game development in China, it is necessary to mention two well-known documents in the cryptocurrency community: the “Announcement on Preventing Risks of Token Issuance and Financing” (referred to as the 9.4 Announcement) jointly issued by seven ministries and commissions in 2017, and the “Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation” (referred to as the 9.24 Notice) jointly issued by ten ministries and commissions in 2021. These two normative documents clearly state: (1) virtual currency is not legal tender and does not have the same legal status as legal currency; (2) initial coin offerings (ICOs) are prohibited in China; (3) any institution (especially financial institutions) is prohibited from conducting business in China or providing any form of virtual currency-related services to residents of China.

In addition, it should be noted that in 2022, the Supreme People’s Court issued the “Interpretation on the Specific Application of Laws in the Trial of Criminal Cases Involving Illegal Fundraising,” which includes the act of absorbing virtual currency into the objective behavior pattern of the crime of illegal absorption of public deposits.

Considering the handling results of various “gambling” games disguised as blockchain games in 2021, there are some “untouchable red lines” for blockchain games in China.

Firstly, the exchange of tokens/points for legal tender is prohibited. The exchange of points for legal tender carries significant criminal law risks. As mentioned earlier, China has clearly stipulated that “virtual currency is not legal tender and does not have the same legal status as legal currency.” Any form of virtual currency or points can only be used within the game and cannot be exchanged back into legal tender. In practice, some companies explicitly prohibit the reverse exchange of points, but allow users to exchange tokens or points for easily “liquidated” goods such as high-end cigarettes and alcohol, which presents a disguised form of exchange between tokens/points and legal tender. The most common charges for the exchange of tokens/points for legal tender include illegal business operation, running an illegal gambling establishment, fundraising fraud, and illegal absorption of public deposits.

Secondly, the setting of high entry fees is prohibited. Some blockchain games (especially those operated overseas) often require players to invest an initial amount of capital to purchase NFTs or other in-game items in order to start “playing and earning” (P2E). For example, the once-popular StepN required players to “buy shoes” using virtual currency. While setting an entry fee does not necessarily mean the game is a “gambling game,” many “gambling” blockchain games have made a fortune by collecting entry fees and then fleeing, causing regulatory agencies and public security organs to develop PTSD. At the mention of a blockchain game charging an entry fee, their first reaction is to crack down severely. The Sajie team advises that, in practice, the model of charging entry fees for blockchain games is suspected of committing crimes related to illegal absorption of public deposits and fundraising fraud, and the entry fee itself becomes the subject of the investigation. In the process of handling a certain case, the Sajie team has even encountered a case where an entry fee of only 1 yuan was charged, resulting in the case being investigated for the crime of illegal absorption of public deposits.

Finally, it is prohibited to develop game users by offering substantial rewards through pyramid schemes. Attracting new users is a very common practice in games, and many players often develop new game players through game activities, increased promotion, and rewarding new players with a large number of rewards. Attracting new users is originally harmless, but due to the unique “play-to-earn” model of blockchain games, it naturally bears similarities in form and essence to pyramid schemes. In practice, some “pan-handlers” of blockchain games not only receive daily static income from “gold farming” activities (which is generally very low, usually only a few dollars a day in practice), but also offer high dynamic income for attracting new players to encourage user development. On the other hand, if the user does not develop new players, their “withdrawals” will be restricted, forcing them to develop new players. The Sajie team reminds you that such behavior may constitute the crime of organizing and leading pyramid schemes, and there have been similar cases in practice, making blockchain games a high-risk area.

(II) What licenses does blockchain gaming need to develop in China

In addition to avoiding crossing the red line of criminal law, it is also very important for blockchain games to comply with relevant administrative regulations. Currently, blockchain games in China need to obtain the following licenses and administrative approvals:

03. Conclusion

What we can see is that in the current global economic downturn and immense pressure, many game companies have instead calmed down and started to explore a path by combining emerging technologies with traditional games, trying to find a breakthrough. The Sajie team has said before that blockchain, NFT, AR/VR/XR and other emerging cool technologies are just tools, not the ultimate goal. In other words, no matter how well the tools are designed, they are useless without a good application scenario.

For chain games, the game itself is the blockchain, and playability is the core and essence of all games’ competitiveness. Only by making the game well can talking about the blockchain make sense. We believe that the entry of regular troops this time is the first step for the chain game circle to drive out inferior coins. Chain games are a huge blue ocean and a huge cake, but there are countless traps around it. Only the bravest and smartest mice can eat it after going through hardships.

We will continue to update Gambling Chain; if you have any questions or suggestions, please contact us!

Follow us on Twitter, Facebook, YouTube, and TikTok.