Recently, multiple mainstream art platform have begun to develop or have launched blockchain games with their own art collections, such as HOTDOG, 18 Artworks, etc. It seems that blockchain games have become the next trend in art collections. Developing and operating blockchain games in China requires an understanding of the current regulatory situation and possible legal risks.

Regulatory Situation of Blockchain Games in China

Currently, there is no special legal regulatory system for blockchain games in China. However, the regulatory attitudes towards the elements contained in current domestic blockchain games, namely blockchain technology and online games, are relatively clear.

1. Regulatory Attitude Toward Blockchain Technology in China

Firstly, China’s overall attitude towards blockchain technology is positive. For example, in June 2021, the Ministry of Industry and Information Technology and the Cyberspace Administration of China jointly issued the “Guiding Opinions on Accelerating the Application and Development of Blockchain Technology,” which stated that it is necessary to promote the integrated development of blockchain and new-generation information technologies such as the Internet, big data, and artificial intelligence and build an advanced blockchain industry system.

Secondly, China has adopted strict regulatory measures for virtual currencies and NFTs. On September 4, 2017, the People’s Bank of China and seven other ministries and commissions issued the “Announcement on Preventing the Risks of Token Issuance Financing,” which defined ICOs as illegal public financing without approval, clarified the non-monetary attributes of tokens, and prohibited exchange, trading, pricing, and information intermediary services of all kinds of token exchanges. On August 24, 2018, the China Banking and Insurance Regulatory Commission and four other departments issued the “Risk Warning on Preventing Illegal Fundraising in the Name of ‘Virtual Currency’ and ‘Blockchain’,” emphasizing that some lawbreakers use the banners of “financial innovation” and “blockchain” to absorb funds by issuing so-called “virtual currencies,” “virtual assets,” “digital assets,” and other means to infringe on the legitimate rights and interests of the public. On May 18, 2021, the China Internet Finance Association, the China Banking Association, and the China Securities Association issued the “Announcement on Preventing the Risk of Virtual Currency Trading Speculation,” which clarified the nature of virtual currency and related business activities, and pointed out that using virtual currencies to engage in illegal activities may also involve crimes such as illegal fundraising, illegal issuance of securities, and illegal issuance of token tickets. On April 13, 2022, the China Internet Finance Association, the China Banking Association, and the China Securities Association issued the “Initiative on Preventing NFT-related Financial Risks,” which listed directly or indirectly investing in NFT and providing financing support for investing in NFT as prohibited activities.

In summary, in China, it is currently explicitly forbidden to issue virtual currencies, speculate with virtual currencies and NFTs, or engage in other financial activities related to blockchain games.

2. Regulations on Online Games in China

From the “Notice on Regulating the Order of Online Game Operation and Prohibiting the Use of Online Games for Gambling” issued by the Ministry of Culture and the Ministry of Public Security in 2007, to the “Notice on Strengthening the Management of Virtual Currency in Online Games” issued by the People’s Bank of China and other departments in 2009, and the “Notice on Regulating the Operation of Online Games and Strengthening Mid-term and Post-event Supervision” issued by the Ministry of Culture in 2016, all emphasize that “service providers must not provide services to users that exchange virtual game currency for legal currency or physical goods.”

From this, it can be seen that China’s regulation of online games is constantly strengthening, especially when it comes to virtual currency, which is the focus of attention for blockchain games in China.

Legal Risks

• Administrative Legal Risks

According to Article 7 of the “Regulations on the Administration of Internet Publishing Services” issued by the State Administration of Press and Publication and the Ministry of Industry and Information Technology, online games are considered online publications, and companies engaged in the publication and distribution of online games must obtain an online publishing service license ; According to Article 11 of the “Regulations”, before an online game is published on the Internet, an application must be submitted to the administrative department for publishing in the province, autonomous region, or municipality where the company is located. After the application is reviewed and approved, the application will be submitted to the State Administration of Press and Publication for approval. This is the prior approval for the publication of online games, usually referred to as the online game version number. Once a publication without a version number is charged for, it can be deemed as illegal publication. For illegal operations with a turnover of more than 10,000 yuan, the fine may be between 5 and 10 times the illegal turnover; for illegal operations with a turnover of less than 10,000 yuan, the fine may be up to 50,000 yuan, and in severe cases, criminal liability may be imposed.

According to the “Measures for the Administration of Internet Information Services”, those engaged in commercial Internet information services should apply for an Internet information service value-added telecommunications business operation license from the telecommunications management agency or the competent department of the State Council in charge of information industry ; otherwise, the telecommunications management agency of the province, autonomous region, or municipality may order rectification within a time limit. For those who have illegal gains, the illegal gains will be confiscated, and the fine will be between three and five times the illegal gains; for those who do not have illegal gains or whose illegal gains are less than 50,000 yuan, the fine may be between 100,000 yuan and 1 million yuan; for those with severe cases, the website may be ordered to be shut down.

For blockchain game developers and platform operators, legally operating blockchain games on the Internet requires obtaining a network publishing service license, a network game license, and an internet information service value-added telecommunications business operation license. Otherwise, they may be subject to administrative penalties.

• Criminal Legal Risks

Fraud

In 2021, CCTV’s financial channel reported a news story entitled “Beware of ‘Metaverse’ Scams.” In the report, a Fuzhou company claiming to be the “Metaverse Research Institute” stated that players who participated in the company’s blockchain game “Farmer World” could invest and manage their money simply by buying equipment. To participate in this blockchain game, players first needed to exchange RMB for virtual currency USDT and then exchange it for the virtual currency used in the game. Playing the game could achieve a monthly investment return of nearly 100%. Staff members stated that the game’s daily income reached 3,000 to 4,000 yuan and claimed that no customers lost money in the game. In addition, to invest, you must first be guided by the company and pay a service fee of more than 6,000 yuan. Secondly, you need to split 20% of the monthly income. In fact, this is a new type of scam called the “Metaverse” scam. Essentially, it is a low-cost web game that promotes money management. In reality, it only uses funds paid by latecomers to fill the gap, and players not only cannot earn money, but also lose a large amount of service fees. In essence, it is a classic Ponzi scheme.

Organizing and Leading Pyramid Selling Activities

Many blockchain game projects require the purchase of platform tokens, props, etc. to participate in the game. At this time, if the project party uses MLM methods to develop game players, it is very likely to be suspected of organizing and leading pyramid selling activities. There are practical cases of this (2021 Hu0110 Xingchu No. 1158).

Since 2020, Mou (dealt with separately) has actually operated companies such as Guanjun and Leibe in Yangpu District, Shanghai, Hainan Province, Haikou City, and other places, and developed and operated the “Bor World” APP together with employees. The game projects such as “Million Crocodile” and “Digging Dinosaurs Together” are used as names. They use high returns as bait to attract others to register as members. The “Bor World” APP requires participants to download and register as members through the invitation code provided online. Members are organized into upper and lower levels in order of recommendation, and they must purchase and exchange digital currency used in this APP as a threshold to participate in the above games and obtain value-added digital currency. The “Bor World” APP has three main ways of returning money: static income, dynamic income, and team awards. Directly or indirectly, the number of personnel developed and the amount of digital currency purchased are used as the basis for rebates. According to appraisal, the “Bor World” has a total of more than 3 levels of members, with more than 10,000 participants. During this period, the defendant Zhou was the head of customer service and community at Leibe Company, responsible for company customer service and community docking. The defendant Jiang was a programmer of Guanjun Company, responsible for part of the background program development and maintenance. The court held that the defendants Zhou, Jiang, and others organized and led pyramid selling activities under the name of promoting sales of goods and other business activities, requiring participants to obtain membership qualifications by purchasing goods, and forming levels in a certain order, directly or indirectly, based on the number of personnel developed as compensation or rebates, luring participants to continue to develop others to participate, cheating property, and disrupting economic and social order. Their behavior constituted the crime of organizing and leading pyramid selling activities, and the circumstances were serious.

Gambling Crime/Operating a Casino Crime

If the developer and operator of a certain blockchain game develop virtual currency that accepts bets, join gambling lotteries and competitions, and open chess gambling or blind box games with gambling elements, where players not only use them to buy equipment and props, can exchange the obtained gold coins or props for RMB, in fact, similar to gambling chips, there is a high possibility that such blockchain games are suspected of gambling crimes/operating a casino crimes, and real cases also exist (2018 Gan0102 Xing Chu 585).

Defendants He and Li carried out gambling activities for participants using the “fishing” and “five-in-a-row” games provided by the Chenlong game platform in the process of operating and managing the Pangu company’s game platform. Players consume virtual game coins by shooting fish in the “fishing” game, with each shot consuming 10-9900 game coins. Successful fishing yields a return of 2-100 times the game coins, which are then exchanged for RMB in the “five-in-a-row” game through “silver merchants” (persons engaged in online sale and repurchase of game coins).

The court held that the defendants He and Li opened a casino using the Internet game platform, the circumstances of which are serious, and their conduct has constituted the crime of operating a casino.

Illegal Business Crime/Money Laundering Crime

If the developer or operator of a certain blockchain game builds a blockchain game platform to connect the channels of virtual currency or legal currency recharge and withdrawal for money laundering activities or to help money launderers collect or transfer funds, it is easy to involve illegal business and money laundering crimes, which has also been the case in many real cases.

In June 2022, the Economic Investigation Detachment of the Shanghai Public Security Bureau and the Baoshan Branch found during a comprehensive analysis of virtual commodity transactions in the online game industry that some trading merchants’ bank accounts had large amounts of foreign funds flowing in, and judged that some people were involved in illegal RMB exchange business.

The police quickly set up a joint task force to carry out investigation and prosecution, starting from suspicious fund accounts and tracing them layer by layer, digging out multiple suspicious overseas websites and identifying the actual operator Shi, and thus discovering several illegal online exchange platforms.

After investigation, the criminal gang headed by suspect Shi privately set up an illegal network exchange platform by themselves on overseas servers to seek illegal profits without approval from relevant national departments, and solicited domestic and foreign exchange customers. Through recycling and recharging various types of online game tokens, they provided illegal currency exchange services for others.

According to the police, the gang had clear division of labor, and had multiple departments including management, operation, finance, and customer service. After collecting the customer’s local currency, the gang used domestic and foreign game token acceptors to convert the local currency into the foreign currency required by customers through multiple recharges and acceptance transactions. After deducting a service fee ranging from 5% to 15%, they transferred the remaining funds to the customer’s specified account, thereby providing illegal currency exchange services between local and foreign currencies.

In September 2022, Shanghai police, in collaboration with the foreign exchange management department and with the strong support of police from other provinces and cities, arrested 19 suspects and destroyed 4 illegal network exchange platforms, involving a flow of funds of up to 14 billion yuan.

• Other Legal Risks

Some blockchain games will collect players’ personal information during registration or the game process. Developers and operators of blockchain games should pay attention to compliance with regulations such as the “Data Security Law”, the “Cybersecurity Law”, and the “Personal Information Protection Law” to prevent the risk of player personal information leakage.

In most blockchain games, when players buy NFT-form virtual assets such as characters and equipment, there may be risks of infringing the rights of copyright owners when they copy them, etc. Therefore, developers and operators of blockchain games should also pay attention to whether the NFTs in the game have obtained the authorization or usage permit from copyright owners and whether there are risks of infringing others’ copyright, trademark rights, etc.

Conclusion

In summary, the developers and operators of blockchain games using blockchain technology to promote the transformation of traditional games and explore new gameplay are worth advocating. However, the legal risks faced by the development and operation of blockchain games in China are also relatively severe. Therefore, developers or operators of blockchain games should carefully set game rules and modes, deeply understand China’s regulatory policies and legal provisions for blockchain games, and avoid inadvertently crossing the legal red line.

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