To run online gambling and gaming advertising on Meta / Facebook users are required to obtain written permission to promote online gambling and gaming.[1] Applying for permission requires providing “evidence that the gambling activities are appropriately licensed by a regulator, or otherwise established as lawful in territories they want to target”. In our experience, the evidence is established via a legal opinion or memorandum explaining whether the entity obtains proper licensure for advertising or why the entity does not need a license to advertise. Only then, is permission granted to specific ad account IDs. If approved, the approval is limited to the URLs and territories listed in the approval.[2]

Meta has its own definition of online gambling and gaming which are quite broad. This includes “all forms of online gambling” listed as betting, lotteries, raffles, casino games, fantasy sports, bingo, poker, skill game tournaments, and sweepstakes. Additionally, Meta’s policy states that any game where anything of monetary value is included as part of the method of entry and anything of monetary value is included as part of the prize is online gambling and gambling activity. According to Meta, online gambling and gaming does not include physical, real-money gambling activities or establishments; prize promotions that involve purchasing a product at the usual retail price; and entirely free-to-play games. These items do not require permission to advertise. The policy also does not permit, without approval, ads with landing pages that contain promotions for online gambling or games, such as an affiliate site. Even after permission is granted to advertise on Meta platforms, Meta does not allow users to target people under the age of 18 with online gambling and gaming ads.

X (i.e., Twitter)’s gambling content policy prohibits “the promotion of gambling content, except for campaigns targeting specified countries where it is allowed with restrictions.”[3] Otherwise, stated, promotions of gambling are prohibited on Twitter unless they conform to their country specific policy. The policy’s U.S. specific section clarifies that content on gambling content is permitted but only in line with the following restrictions: (1) the advertiser must be domiciled in the U.S.; (2) the ads must include appropriate disclaimers; (3) ads must comply with all of X’s other ad policies[4]; and (4) ads must be subject to additional requirements at X’s sole discretion.

There are further restrictions that apply to affiliates or aggregators. Affiliates and aggregators must not directly link to gambling operator sites and they cannot provide the ability to place a bet in either the ad text or on the landing page.

X, like Meta, requires all gambling content advertisers looking to promote in a specific market to obtain prior authorization from X.  The process involves “filing a ticket” with the X support team.

X’s policy also outlines what products or services are and are not subject to the gambling content policy. The policy applies to: online casinos, online gambling, sports betting bingo, physical casino establishments, online fantasy sports sites, bonus codes and coupons redeemable for gambling content, E-books or websites facilitating or leading to online gambling related content (including affiliates and other sites that drive traffic to gambling), gambling related software, sites or services providing tips or picks or poker odds calculators, scratch games, lotteries, and games or apps played for money. The policy specifies that it does not apply to hotels with a casino (where the focus is on the hotel), gambling accessories (e.g., poker chips or pachinko machines), or news and information about fantasy sports.

Google has been criticized by regulators and the industry for its lack of effort to remove offshore gambling websites and promotions from its searches. Starting in February 2023 Google updated its Ads Gambling policy for the U.S. According to the policy, advertisers must apply for certification[5]. Obtaining certification to run ads promoting horse racing, sports betting, or online casinos require supplying proof of licensure or a legal memorandum explaining why licensure is not required to run ads in certain jurisdictions.

Certified advertisers must only target Google’s approved list of countries, have a landing page that displays information about responsible gambling, and never target minors.[6] Additionally, in the U.S., advertisers may not target individuals outside the state(s) where they are licensed or approved to promote online gambling content. Advertisers must also include a warning against the dangers of addictive and compulsive gambling and related assistance information on the landing page or in the creative content.

Google has certain details for promoting Daily Fantasy Sports. They are similar to the requirements for promoting online gambling, but the content must not be targeted to those under 18, as opposed to targeting those under 21 for online gambling. Daily Fantasy Sports content also cannot imply affiliations with schools or universities. The Daily Fantasy Sports advertisers that wish to target states that do not require a license, must be licensed in at least one other state that does require a license to promote on Google.

It is good to see that these websites are being proactive in establishing clear policies for advertising in this new industry. However, what remains unclear is to what extent they are enforcing their policies and policing their websites for violators. Offshore sites remain a competitor to the legalized market, it is key for such websites to not only implement but enforce their policies to assist the regulated market.

[1] Business Help Center – About Meta’s Online Gambling and Gaming advertising policy, https://www.facebook.com/business/help/345214789920228?id=434838534925385 (last visited Aug. 25, 2023).

[2] Business Help Center – How to apply for permission to promote online gambling or gaming, https://www.facebook.com/business/help/4740325989340856 (last visited Aug. 25, 2023).

[3] X Business – Gambling content, https://business.twitter.com/en/help/ads-policies/ads-content-policies/gambling-content.html (last visited Aug. 25, 2023).

[4] X Ads Help Center – X Ads policies, https://business.twitter.com/en/help/ads-policies.html (last visited Aug. 25, 2023).

[5] Google Ads Help – Gambling application: Single-country license, https://support.google.com/google-ads/troubleshooter/2893932?visit_id=638284198405500297-3302328143&rd=1#ts=9462165 (Aug. 25, 2023).

[6] Advertising Policies Help – Gambling and games, https://support.google.com/adspolicy/answer/6018017?hl=en#zippy=%2Cunited-states (Aug. 25, 2023).

The post Navigating the High-Stakes World of Online Gaming Advertising: Policies, Permissions, and Enforcement appeared first on IFRAH Law.

    

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While there are certain topics and features that are staples of the lineup at G2E (e.g., payments, regulatory environment), several new ideas and trends will be explored at the conference. These trends highlight the upcoming offerings and challenges for the industry. The G2E conference is also the key meeting place for business representatives to meet and discuss strategic alliances.

New Faces at G2E Include Large Investment Banks

It is noteworthy that representatives from investment banking houses like Blackstone and Jefferies will both be in attendance and presenting at G2E. Blackstone has become a significant player in the online gaming investment community and, over the past few years, it has made a number of investments and transactions in the online gaming industry. For instance, (i) in February 2022 it bought Australia-based casino operator Crown Resorts in a $6.3bn takeover, (ii) in May 2019, it invested $196M to become a minority investor in Superbet (the largest omni-channel sports betting and gaming operator in Romania), and (iii) in July 2017, it acquired Clarion Events (the parent company of iGaming Business). More recently, in May 2023, the Blackstone Group was reportedly considering an initial public offering (IPO) for Cirsa (a renowned Spanish casino operator).

Sportsbook Consolidation Trend

Prior conferences showcased the expansion of legalized sports betting and the associated growth opportunities; however, this year’s conference (with sessions like “Navigating Regulatory Impacts: Mergers, Acquisitions, and Market Entry” and “Capital Financing and Consolidation in a High Interest Rate World”) will likely focus more on the consolidation efforts of the existing operators trying to solidify their market share and strengthening their branding efforts.

For example, we have recently seen a number of major consolidation transactions, such as PlayUp’s complete exiting of the U.S. market (although it had only operated in Colorado and New Jersey). In addition, PointsBet was sold to Fanatics (which still intends to operate a sportsbook, so there wasn’t a loss of an actual sportsbook option). Finally, this past week saw the announcement that ESPN and PENN Entertainment were combining to launch a new branded sportsbook, ESPN BET, which is a rebranding of PENN Entertainment’s current sportsbook (and also the formal end of PENN Entertainment’s partnership with Barstool). Additionally, WynnBET also announced that it was going to close its online sports betting and iGaming platform (mostly in those states in which it does not also have a land-based presence).

WynnBET specifically highlighted the “outsized marketing spend through user acquisition and promotions in online sports betting” required to competitively operate in the online gaming market and instead intended to focus on “the presence of numerous other investment opportunities available to us around the globe.”

In light of these consolidation efforts, it will be interesting to see whether any of the smaller sports betting operators will be able to gain traction in the U.S. Moreover, although there has been significant consolidation within the industry, there remain opportunities for the existing operators and some operators have even shown increased optimism about expanding their market share. For instance, Jason Robins (CEO of DraftKings) has stated that “I think the best days of growth still lie ahead of us.”

Fantasy Sports Challengers

One potentially interesting recent development is the rise of fantasy sports challengers that offer single-game prop styled betting, which seems to have taken market share from the larger sports betting operators.

Nonetheless, these new DFS challengers have recently found themselves under a fair amount of regulatory scrutiny and we expect that trend to continue. For example, Alabama, Maine, and Wyoming have all recently sent out letters to various DFS operators expressing concern about the prop-styled fantasy sports offerings. Further, the Michigan Gaming Control Board has a pending proposed rule set that would prohibit fantasy sports operators from offering “Proposition selection or fantasy contests that have the effect of mimicking proposition selection” or “Any fantasy contests that involve, result in, or have the effect of mimicking betting on sports.”

In an ironic twist, it was merely a few years back that many of the (then startup) DFS companies were challenging the established sports betting industry and arguing that their DFS products were skill-gaming (and not sports betting). Now, the next generation of DFS companies are challenging the existing online sports books (who, a few years ago, were themselves the startup DFS companies arguing DFS was skill gaming and not sports betting) and attempting to argue their products are skill-gaming (and not sports betting).

The rest of 2023 promises to be an exciting time for both the sports betting industry and the fantasy sports industry and, in particular, it is fascinating to watch the battle between the next generation DFS companies and the more established operators- the stakes are high and it’s literally “bet the company” actions at play.

Related: Online Gambling Lawyer

The post G2E 2023: Outlook and Trends appeared first on IFRAH Law.

     

Throughout the Meeting there was an emphasis on responsible gaming and combatting problem gambling. During the first full day of events the committee on responsible gambling approved the NCLGS Responsible Gaming and Problem Gambling Resolution.

The Resolution contains sixteen points with the goal to set forth comprehensive standards to be followed by legislators and regulators in all states to increase protective factors and reduce prevalence and incidence rates and the personal, familial, and societal costs associated with problem gambling. Some of the notable points include:

• Recommending the establishment of responsible gaming and problem gambling regulations for all forms of legalized gaming, tailored as necessary to each form but consistent with jurisdictional policy goals.
• Suggesting that states and operators coordinate gambling exclusion lists to prevent people with gambling problems and others on exclusion lists from problematic play in other states.
• Encouraging policies and programs that enable customers to discontinue their play temporarily or permanently through exclusion programs from gaming activities statewide and across multiple jurisdictions with multiple term lengths.
• Supporting the use of one accredited national problem gambling helpline number within all jurisdictions.
• Recommending integrating problem gambling services and screening into other substance use disorders, mental health and/or behavioral health services to identify, reduce, and prevent problem gambling.
• Emphasizing the need to include access to anonymized player data, research components, and funding for responsible gaming and problem gambling policies to gauge trends, program efficacy, adapt current conditions, and expand evidence-based best practices and new prevention and treatment techniques.

As listed above and discussed throughout the Meeting, a downfall of the multi-jurisdictional approach to problem gambling is the ability of players to move from jurisdiction to jurisdiction, even if they have already self-excluded. A key part of promoting responsible gaming will require a joint effort amongst the jurisdictions. Additionally, instead of setting forth responsible gaming regulations that regulators suppose may cause or impact problem gambling, the Resolutions are clear that approaches and solutions should be evidence-based and extensive research should be conducted.

As discussed in the Resolution’s Preamble, there is little standardization nor a holistic approach on how to tackle problem gambling. The Resolution aims to provide a path for all jurisdictions to follow on how best to utilize and disburse funds to be spent to combat problem gambling.

The post NCLGS Provides Clarity on their Responsible Gaming and Problem Gambling Resolution appeared first on IFRAH Law.

     

Quick to jump onboard the Barbie-marketing train was Circa Resort and Casino in Las Vegas, Nevada. From July 18^th to July 23^rd the Resort glowed Barbie pink in honor of the newly released movie. The resort also offered several Barbie-themed events, including a Barbie pool party featuring pink lighting, B-shaped inflatables, Barbie-inspired cocktails, and life-size Barbie doll boxes for patrons to use for photo ops.

While other branding partnerships have been widely embraced – Barbie’s partnership with the Circa Resort and Casino has raised a few eyebrows. Of particular concern is the fact that Barbie – an iconic children’s toy – is being used to promote an activity from which children and teens are intentionally excluded – gambling.

This isn’t the first time a children’s brand has been used to promote “adult” activities. For example, in 2022 the Pennsylvania Lottery promoted an “Addams Family” scratch off game whereby players scratched off a cartoon image to reveal their potential prize. Similarly, J.R. Reynolds Tobacco Company used a cartoon camel named “Mr. Camel” to promote its cigarettes for nine years.

However, in recent years, regulators have begun to crack down on the use of kid-friendly brands and images to advertise decidedly adult-only brands. The regulation of gambling advertisements has been particularly strict across the pond.  For example, in 2019, the Advertising Standards Authority, UK’s independent regulator of advertising, banned an advertisement for a Monopoly-themed online casino game, based on concerns that the board game’s cartoon mascot might appeal to children.

American regulators and law makers have also begun to take steps to regulate the advertisement of gambling. In April of 2023 the Massachusetts Gaming Commission implemented new regulations that prohibit “advertising, marketing, branding, and other promotional materials,” that “contain images, symbols, celebrity or entertainer endorsements, or language designed to appeal primarily to individuals younger than 21 years old.”[1] Going even farther, in February of 2023 New York Congressman Paul Tonko introduced the “Betting on Our Future Act” –legislation that would ban all online and electronic advertising of sports gambling.

However, in America, the governmental desire to regulate gambling advertisements must be balanced against the First Amendment protection generally provided to commercial speech that (1) advertises legal conduct; and (2) is not misleading. Restrictions on commercial speech are generally governed by a four-part test provided by the Supreme Court in Central Hudson Gas & Electric Corp. v. Public Service Commission of New York.[2] For commercial speech to be protected under the First Amendment (1) the speech must “concern lawful activity and not be misleading[;]” (2) the asserted government interest must be substantial; (3) the regulation must directly advance the governmental interest asserted; and (4) the regulation must be no more extensive than necessary to serve that purpose.[3]

The Supreme Court has considered the scope of First Amendment protection to be provided to the advertisement of “adult” products, such as cigarette ads, that may reach and be viewed by children. For example, in Lorillard Tobacco Co. v. Reilly, the Supreme Court concluded that certain regulations targeting specific cigarette advertising and sales practices violated the First Amendment.[4] In that case, cigarette manufacturers and sellers challenged a Massachusetts regulation that prohibited the outdoor advertising of tobacco products within 1,000 feet of a school or playground.[5] The Court concluded that although the Government had a compelling interest in preventing the underage use of tobacco, the regulations failed to satisfy the fourth element of the Central Hudson test which requires a “reasonable fit between the means and the ends of the regulatory scheme.”[6] In reaching this conclusion, the Court explained,

The State’s interest in preventing underage tobacco use is substantial, and even compelling, but it is no less true that the sale and use of tobacco products by adults is a legal activity. We must consider that tobacco retailers and manufacturers have an interest in conveying truthful information about their products to adults, and adults have a corresponding interest in receiving truthful information about tobacco products.[7]

The Court’s decision in Lorillard embraces the principle that the Government’s interest in protecting children from the advertisement of potentially harmful activities/products “does not justify an unnecessarily broad suppression of speech addressed to adults.”[8] Given these protections, it seems likely that regulations, such as those implemented by Massachusetts, are more likely to survive judicial scrutiny that the outright ban on sports betting advertising proposed by Congressman Tonko.

Perhaps recognizing the trend toward regulation, several players in the gaming industry have voluntarily implemented guidelines to regulate gambling advertisements. In May of 2023, iDEA Growth, an organization comprised of members of the online gaming and sports betting entertainment industry, published its “Responsible Advertising Code.” Under the Code, members of the organization pledged to promote “sports betting and online gaming only to those over the age of 21 (unless the state law is 18+).” To that end, the Code requires the following:

• Advertising should disclose that betting is only for adults 21 years or older (unless applicable state law permits 18+).
• Marketing should not use characters and/or performers (including endorsers and influencers) who primarily appeal to audiences under legal gaming age.
• Sports wagering and online gaming advertising (including company logos) should not appear on media that primarily appeal to an audience under legal gaming age, such as children’s television programming and social networks geared toward youth.
• Promotional products should not be those that typically appeal to children.

Perhaps by voluntarily adopting these regulations, operators and others in the industry are attempting to avoid the imposition of stricter, mandatory regulations by government regulators or congress.

So where does all of this leave Circa’s Barbie pink marketing campaign? Some may argue that casinos should never use brands that could potentially appeal to children to advertise gambling or gambling-related products. Indeed, at first glance, it may seem that the Casino’s promotion of Barbie wouldn’t comply with the general principle that gambling advertisements shouldn’t utilize characters that primarily appeal to audiences under 21. However, the particularities of Circa’s Barbie campaign signal that the Casino’s marketing schtick may comport with responsible advertising principles after all.

As an initial matter, Circa is an adults-only casino and resort. This means that all of its Barbie-themed events are targeted toward and can be attended only by adults over twenty-one. The fact that a child may merely see the building’s pink façade should not be dispositive as to the appropriateness of the campaign.  Additionally, the marketing campaign does not primarily rely on the image of a Barbie doll or cartoon – both of which are more likely to appeal to children than just the use of the Barbie Movie’s logo.  Finally, the Barbie film itself is deliberately not for children. The film features adult language, themes, and puns and is rated PG-13. Thus, although the iconic Barbie doll is a toy for children, this marketing campaign is targeted toward adults who will eventually go see the movie. Given these circumstances, it seems that Circa’s marketing should be permitted – provided that it takes place in an adults-only Barbie world.

[1]205 C.M.R. § 256.05.

[2] 447 U.S. 557, 566 (1980).

[3] Id.

[4] 533 U.S. 525 (2001).

[5] Id. at 532-33, 536.

[6] Id. at 561.

[7] Id. at 564.

[8] Id. (internal quotation marks omitted) (quoting Reno v. American Civil Liberties Union, 521 U.S. 844, 875 (1997)).

The post Come on Barbie, Let’s go Gamble: Is gambling advertising allowed in a Barbie world? appeared first on IFRAH Law.

    

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Another ruling from the Southern District of New York – SEC v. Terraform Labs Pte.Ltd. and Do Hyeong Kwon – has further tapped the breaks on a major change in crypto enforcement. There, the court denied the Defendants’ motion to dismiss allegations that the Defendants defrauded investors and sold billions of dollars in unregistered securities in the form of digital assets.

In fact, the decision directly repudiates the Ripple ruling—U.S. District Judge Jed Rakoff expressly rejected the approach taken by U.S. District Judge Analisa Torres’ approach wherein she decided that Ripple’s public offering and sale of XRP did not constitute unregistered securities because public buyers could not know to whom the funds from the purchase were going and so could not reasonably constitute an investment contract.

In the absence of comprehensive federal legislation dictating the boundaries of authority over digital assets, the legislative and regulatory landscape is being defined by judicial decisions that are incomplete and often contradictory.  The two SDNY decisions amply illustrate the regulatory and judicial uncertainty facing token issuers and purchasers in the United States.

SEC v. Terraform Labs

From April 2018 until May 2022, Terraform Labs offered an inter-connected scheme of cryptocurrencies, some of which included “mAssets,” which were designed to pay returns by mirroring the price of stocks of US companies, and Terra USD (UST), an algorithmic stablecoin that was intended to peg 1:1 to the US dollar and which derived its value through a digital asset token called LUNA, which was also issued by Terraform Labs.  In the case of the UST coin, each coin was pegged to the U.S. dollar and, for a time, could be purchased and sold for $1.00. An owner of a UST coin could swap their coin for $1.00 worth of the companion coin, LUNA (one of the mAssets. Likewise, any holder of a LUNA coin could exchange that coin for $1.00 in UST coin. This fixed relationship theoretically ensured that the value of coins stayed fixed at $1.00. Terraform also offered other types of tokens that, based on Judge Rakoff’s opinion, appear to have been intended for use as an investment.

In May 2022, both UST and LUNA lost nearly all their value when UST lost its peg to the US Dollar.  Prior to the collapse, UST was the 10th largest cryptocurrency with more than $18.5 billion in market cap.

In February 2023, the SEC sued Terraform and its founder Do Kwon, charging the defendants with violating the registration and anti-fraud provisions of the Securities Act and the Exchange Act. The complaint alleges several facts that may ultimately prove fatal to Terraform’s defenses.  If proven true, whether the tokens were securities or not, Terraform may have been engaged in fraudulent statements to its customers.   Indeed, in the SEC’s press release Director of the SEC’s Division of Enforcement, Gurbir S. Grewal stated that “the Terraform ecosystem was neither decentralized, nor finance. It was simply a fraud propped up by a so-called algorithmic “stablecoin” – the price of which was controlled by the defendants, not any code.”

In April, Terraform filed a motion to dismiss, providing supplemental materials after the Ripple ruling in June. In its original motion, Terraform argued that UST was purchased for practical purposes in commerce and not as an investment. Terraform attorneys also capitalized on Ripple in its additional materials, claiming that the ruling “confirms the legal insufficiency of the SEC’s argument that UST, LUNA, wLUNA, MIR, and mAssets were securities because of the way they were allegedly sold.”

Judge Rakoff expressly criticized the Ripple decision, concluding that the manner in which a token is sold has nothing to do with whether it is a security.

But Howey makes no such distinction between purchasers. And it makes good sense that it did not. That a purchaser bought the coins directly from the defendants or, instead, in a secondary resale transaction has no impact on whether a reasonable individual would objectively view the defendants’ actions and statements as evincing a promise of profits based on their efforts. [1]

Judge Rakoff has been a mainstay of the Southern District for decades.  While he has sometimes been a maverick, the SEC is sure to adopt and push this reasoning if and when either of these cases reach the Second Circuit.

In the meantime, companies seeking clarity on the rules applicable to cryptocurrencies in the US have none.  The market continues to be a mess and the SEC continues to attempt to apply a regulatory regime that is seemingly ill-suited to many of the products that it is seeking to regulate.

[1] https://storage.courtlistener.com/recap/gov.uscourts.nysd.594150/gov.uscourts.nysd.594150.51.0.pdf

The post Terraform Labs Ruling Reels Back Ripple Enthusiasm appeared first on IFRAH Law.

     

On its surface, such statistics seem to indicate a worrying lack of integrity in college sports that is the result of sports betting proliferation; the thought behind this being that the now-ubiquity of betting and wagering opportunities increases the probability of match-fixing and manipulation.

Instead, the opposite is true: sports betting legalization and regulation promotes sports integrity by means of superior detection methods via specialized data analytics and integrity monitoring companies, robust Know-Your-Customer procedures, and the reduction of illegal gambling operations’ market shares.

The high number of infractions in the NCAA’s report are a result of the sports betting industry’s increased ability to detect infractions because of sports betting legalization. The notable lack of robust infraction statistics before 2018 are not a result of low infraction incidence but instead the incapacity to detect infractions well, since there were no data integrity companies collecting and analyzing relevant game and betting data to detect anomalies that could be the result of misconduct. Because there were very few legal operators beholden to the regulatory policies of federal and state law, most gambling occurred through illegal off-shore operations, leaving instances of match-fixing, manipulation, or insider information tipping vastly more susceptible to going unnoticed or unreported.

The shift to legal operators has paved the way for companies that specialize in maintaining the integrity of sports and sports betting, as every party involved has a shared interest in doing so, for legal and commercial reasons. As we’ve discussed previously, sportsbooks have a critical commercial interest in ensuring the integrity of the games on which they accept wagers, as match manipulation often results in a disproportionate volume of losses by the company on a side predetermined as a winner. Even so, the sports-betting industry, despite it being against its own financial interest, is likely to be blamed for an unfair outcome, as it is currently in the case of collegiate athletics, which entails customer, handle, and reputation loss.

The entire sports industry suffers if games are not played or wagered on with integrity, so companies that specialize in helping maintain integrity have naturally appeared to fill that need since the legalization of sports betting. Hence, the increased infraction incidence because of the increased incentive to ensure integrity. Not only is technology better but now state gaming commissions and agencies as well as professional sports organizations all maintain a watchful eye on leagues, their players, and sporting events for which there are permitted wagering activities.

The NCAA, for instance, reported that it monitors approximately 13,000 regular and postseason sporting events of all sports and divisions that have wagering offerings in the “global sports wagering marketplace” and has found that less than 0.25% of competitions are flagged for suspicious betting patterns, with a much smaller percentage having specific, actionable information. Most, if not all, major professional sports organizations are engaged in the same or similar efforts to monitor the integrity of their competitions now that sports betting has been legalized.

Supplementing these analytic efforts are robust Know-Your-Customer procedures that require operators to collect the personally identifiable information of customers. These procedures make identifying persons who face restrictions on their sports wagering activity, or persons in some way related to or in relation with them, far easier to surveil or trace in the case of an infraction.

While such regulations streamline the process of identifying offenders, anonymous wagers may still be traced to their source when they are flagged as suspicious. In one of the cases reported on in May 2023, for example, anonymous wagers over $1,000 (which are prohibited by Ohio law) were placed inside the Cincinnati Red’s ballpark in favor of Alabama’s baseball team. When the wagers were flagged and consequently investigated, it was determined that the Alabama head baseball coach, Brian Bohannon, was connected to the wagers.

The legalization of sports betting also diminishes the market share of illegal off-shore operations, which are by definition not subject to the same regulations as their legal counterparts and thus are not in coordination with regulatory bodies and other companies in identifying offenders of betting policy restrictions. This transition from illegal to legal betting broadens the reach of sports betting regulations and protections, extending them to a larger number of customers. As a result, the sports industry becomes more controlled, regulated, and transparent, demonstrating the positive impact of legalization on maintaining sports integrity by decreasing off-shore opportunity for illicit conduct.

That sports betting legalization bolsters sports integrity is backed by data from Sportsradar’s annual Betting Corruption and Match-Fixing Integrity Services Report from 2022, which revealed a 25% decline in the number of suspicious matches in North America from 2021. [1] As we’ve written previously, it seems that the large increase in regulation and rules surrounding sports betting is responsible for the decrease in misconduct, as North America is the only major region that Sportradar reported not only a decrease in suspicious matches but a notably fewer number of those matches compared to other regions as well. The region with the most suspicious matches was Europe at 630 and the region with the least was North America with 24—the next lowest was Africa at 93. [2]

As such, we can only hope that more states look toward legalizing sports betting in order to not only extend the numerous protections and benefits to constituents but also to protect the integrity of the broader sports industry and the athletic events we all cherish.

[1] https://sportradar.com/wp-content/uploads/2023/03/Betting-Corruption-And-Match-Fixing-In-2022.pdf

[2] It should be noted that, per the Sportradar Report, 99.5% of sporting events have no instances of match-fixing and no sport had over a 1% incidence rate per match.

The post The Upside to the College Betting Scandals appeared first on IFRAH Law.

     

This critical decision in SEC v. Ripple Labs Inc. is long awaited and marks the first time a cryptocurrency company has won in a case brought by the Securities Exchange Commission (“SEC”). The ruling provides cryptocurrency and blockchain companies with (some) confidence in further proceedings by appearing to reduce the threat of SEC regulatory action as a result of the fact-specific case. 

While cryptocurrency twitter took off to report the victory, the decision was, in fact, split, as the court determined that institutional sales of XRP constituted investment contracts. According to the ruling, Ripple’s marketing evinced a pitch to investors that consisted of a “speculative value proposition for XRP with potential profits to be derived from Ripple’s entrepreneurial and managerial efforts,” such as its ability to develop blockchain infrastructure using XRP. Further bolstering this finding was that the sale to institutional buyers lacked a consumptive use as a currency or any other utility, with some buyers even agreeing to lockup provisions or resale restrictions based on XRP’s trading volume. 

Further, the court also denied Ripple’s fair notice defense as to institutional sales, which means that the SEC is not obligated to warn potential violators of federal securities law violations in the institutional offer and sale of securities or investment contracts. A potentially underlooked feature of this portion of the decision is that the fair notice defense remains a possibility in the case of public offerings. Fair notice defenses are becoming increasingly common in defense of SEC enforcement actions against cryptocurrency or blockchain companies, as the regulator often ignores company requests for notice of potential violations in the absence of federal legislation.

The most crypto-friendly part of the decision, which undoubtedly bolsters companies offering cryptocurrencies in their struggles against regulators, is that XRP was not determined to be  “in and of itself a ‘contract, transaction[,] or scheme’ that embodies the Howey requirements of an investment contract.” Had XRP been classified as an investment contract outright, regardless of the specific circumstances surrounding Ripple’s different schemes and transactions offering XRP, this would have sounded the death knell for many crypto tokens and projects in both institutional and public offerings. Indeed, the SEC has long taken the position that most tokens constitute investment contracts and are subject to regulation as securities.  

The court similarly determined that XRP offers and sales to the public through public exchanges (what is called “Ripple’s Programmatic Sales” in this instance) were not investment contracts. The basis of this determination was that Howey’s third prong—a reasonable expectation of profits—could not be established because the transactions were “blind bid/ask transactions,” and so buyers “could not have known if their payments of money went to Ripple, or any other seller of XRP.” This feature prompted Coinbase chief legal officer, Paul Grewal to tweet that “…It’s time to relist [XRP].”  That optimism may be too hasty.  Notably, the decision that the Programmatic Sales were not an investment contract relied in part on the determination that buyers could not know if their purchase was being paid to Ripple or a downstream investor.  As a result, the ruling is likely applicable to direct sales to the public, and could only apply to blind sales on an exchange.  

Similarly, the “Other Distributions” of XRP, which encompasses distributions to employees as compensation and to third parties as part of Ripple’s Xpring initiative to develop XRP applications, were also determined to not be investment contracts. Because there was no investment of money in such transactions, the first prong of Howey was not met.

Although the District Court decision is not binding, it puts a serious wrench into the SEC’s planned enforcement works. We expect that the SEC will appeal this decision to the Second Circuit Court of Appeals. With respect to other crypto token sales, the decision makes it more clear that institutional sales, especially any sales that contain conditions related to the market for the token, continue to pose a significant regulatory risk.  We’d argue that such conditions on any sale of tokens continues to carry that risk. Hopefully, however, this bloody nose will force the SEC, and/or Congress, to get serious about clarifying the framework for the regulation of crypto in the United States.  

[1] Under the “Howey Test,” the following characteristics must be present for an investment contract to be evidenced: (1) an investment of money (2) in a common enterprise (3) with a reasonable expectation of profits (4) derived from the efforts of others. While subsequent case law has refined the Howey Test and its application, the essence remains the same.; https://storage.courtlistener.com/recap/gov.uscourts.nysd.551082/gov.uscourts.nysd.551082.874.0.pdf. 

[2] https://twitter.com/iampaulgrewal/status/1679576508036259840?s=20

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First, it is important to be sure that your DFS contests meet the Unlawful Internet Gaming Enforcement Act’s (“UIGEA”) carve out conditions. UIGEA generally prohibits persons from engaging in the business of unlawful internet gaming. The general prohibition under UIGEA hinges on whether the state in which the act occurs prohibits the act because it is considered illegal gambling under the state’s law or another federal law. Although, UIGEA expressly exempts fantasy sports games or contests so long as no fantasy team is based on the current membership of an actual sports team, and: (1) all prizes and awards are established and made known to the participants in advance, and, their value is not determine by the number of participants or the amount of fees paid by participants; (2) all winning outcomes reflect the relative knowledge and skill of the participants and must be determined predominantly by accumulated statistics in multiple real-world sporting or other events; and (3) no winning outcome may be based on: (i) the score, point-spread or performance of any single real-world team or any combination of such teams; or (ii) solely on the single performance of an individual athlete in any single real-world event.[1]

Nearly all states that have implemented laws and regulations legalizing fantasy sports, have a definition for fantasy sports that mirrors UIGEA. Since UIGEA defers to state law for the legality of the acts, it is vital that DFS operator’s contests meet the above criteria.

A new DFS product should also consider the legal and regulatory requirements to operate in a state. Some states require DFS operators to obtain an operator’s license or registration prior to offering their product in the state. Licensing and application fees can range from a few hundred dollars to as much as $85,000. Some states with licensing requirements will also require detailed personal disclosures and the submission of fingerprints from owners, executives, officers, and directors. The states with licensing requirements are Alabama, Arizona, Colorado, Connecticut, Delaware, Indiana, Iowa, Louisiana, Maine, Michigan, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Tennessee Vermont, and Virginia.[2]

Three states, Arkansas, Maryland, and Massachusetts do not require a license but require operators to remit applicable taxes on gross revenues.[3] Further, Maryland and Massachusetts require a notification to the state gaming authorities of the intent to offer fantasy contests in the state.[4] Maryland specifically requires proof that the operator is authorized to do business in the state. Although Maryland law also requires operators to register, the Maryland Lottery and Gaming Control Commission needs to develop a registration process and promulgate regulations to implement changes. For now, so long as Maryland operators notify the Commission of their intent to conduct fantasy competitions, provide proof that they are qualified to do business in the state, and timely remit the operator tax they are following the state’s requirements.[5]

DFS operations are permitted without licensing or registration in the District of Columbia, Kansas, and West Virginia. These three states have specifically excluded fantasy sports from their definitions of sports wagering and/or gambling.[6]

In the remaining states, the legality of DFS depends on whether the contest would be considered a “game of skill” under each state’s relevant legal authority. Generally, a game or contest is considered gambling if it has three elements: prize, chance, and consideration. Therefore, the permissibility of DFS in non-regulated states depends on whether the state would consider DFS a game of chance or a game of skill. There are 20 states that follow the predominant factor test for determining games of chance vs. games of skill: Alaska, California, Florida, Georgia, Illinois, Kentucky, Minnesota, Nebraska, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Texas, Utah, Wisconsin, and Wyoming.[7] DFS contests are generally characterized as games of skill so long as a select number of users win significantly more than would be likely if the outcome was determined by chance. Therefore, assuming that skill is the dominant factor for determining a winner, DFS is permitted without gaming related licenses or registration in these 20 states.

There are four states where it is ill advised to offer DFS. In Hawaii, even games of skill are prohibited gambling.[8] As a result, without further legal authority regarding fantasy sports and gambling, DFS is not permissible. Idaho’s gambling statute only requires wagering activities to be partially based on chance to be considered prohibited gambling.[9] Therefore, DFS products are generally not acceptable under the law. In Montana, the law expressly prohibits paid internet fantasy sports;[10] and, in Washington all forms of internet gambling, even games of skill, are prohibited.[11] For these reasons, DFS is not permitted.

Given the above laws and regulatory requirements for DFS, perhaps the best initial launch strategy for a new DFS game is to begin in the 20 above listed states non-regulated states and the three states that have specifically excluded fantasy sports from their gambling and/or sports wagering definitions. A DFS operator may consider having Arkansas, Maryland, and Massachusetts be a part of their initial launch as well, since the registration and tax requirements are less onerous. After a product has launched and shown success in those states, the operator could consider which of the regulated states they wish to enter. The licensing process varies in each state, and it is important for an operator to consider all licensing requirements and factors before making the decision to enter a market.

Finally, any operator launching or offering a product in the market should continuously monitor laws and regulations in all states they are live (or wish to be live) in. As the number of states with legalized sports wagering increases so does the level of scrutiny that gaming regulators have on DFS products.

[1] 31 U.S.C. § 4362(1)(E)(ix).

[2] Ala. Code § 8-19F et seq.; Ariz. Rev. Stat. at § 5-1202; Colo. Rev. Stat. §§ 44-30-1605, 1606; Conn. Agencies Regs. § 12-865-22; Del. Code Ann. tit. 29, § 4860; Ind. Code Ann. § 4-33-24-15; Iowa Code Ann. § 99E et seq.; La. Rev. Stat. § 27:306; Me. Stat. tit. 8 § 1103; Mich. Comp. Laws § 432.503; Miss. Code Ann. § 97-33-307; Mo. Rev. Stat. § 313.935; NV Gam. Reg. 14.040; N.H. Rev. Stat. § 287-H:2; N.J. Rev. Stat. § 5:20-2; N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 1402; Ohio Rev. Code § 3774.02; 4 Pa. C.S.A. § 311, 321–328; Tn. Code § 47-18-1603(b); 9 V.S.A. Chap. 116, §§ 4186, 4187, 4189; Va. Code Ann. § 59.1-557.

[3] Ark. Code § 23-116-104.

[4] 940 Code Mass. Regs. 34.14.

[5] See Ancillary Responsibilities – Fantasy Competitions, Md. Lottery and Gaming (last visited June 29, 2023), https://www.mdgaming.com/ancillary-responsibilities/fantasy-competitions/.

[6] D.C. Act 22-594(c)(17); K.S.A. 21-6403(a)(9), (d); W. Va. Code §29-22D-3(23)(G).

[7] Morrow v. State, 511 P.2d 127, 129 (1973); Hotel Employees & Restaurant Employees Int’l Union v. Davis, 88 Cal.Rptr.2d 56, 981 P.2d 990 (Cal. 1999); Faircloth v. Cent. Fla. Fair, Inc., 202 So.2d 608, 609 (4th Dist. 1967); Ultra Telecom, Inc. v. State, 288 Ga. 65, 70 (2010); Ill. Att’y Gen. Op. 15-006; Commonwealth v. Bowman, 102 S.W.2d 382, 384 (Ct. App. Ky. 1936); City of St. Paul v. Stovall, 30 N.W.2d 638, 643-44 (Sup. Ct. Minn. 1948); Am. Amusements Co. v. Nebraska Dep’t of Revenue, 282 Neb. 908, 807 N.W.2d 492 (2011); Territory v. Davenport, 124 P. 795, 797 (1912); Joker Club, L.L.C. v. Hardin, 183 N.C. App. 92, 97, 643 S.E.2d 626, 629 (2007); N.D. Att’y Gen. Op. 85-7 (1985); Delano v. State, 82 Okla. Crim. 28, 267 (Crim. Ct. App. Okla. Apr. 24, 1946); State v. Coats, 158 Or. 122, 138, 74 P.2d 1102, 1108 (1938); In re Advisory Op. to Gov., 856 A.2d 320, 328 (2004); Tim Waller, Daily Fantasy Sports Betting Still Legal in South Carolina, WYFF4.com, Nov. 17, 2015, http://www.wyff4.com/article/daily-fantasy-sports-betting-still-legal-in-south-carolina/7018422; Bart Pfankuch, State Lawyer Says SD Unable to Regulate Fantasy Sports, Rapid City J., Nov. 19, 2015, http://rapidcityjournal.com/news/local/state-lawyer-says-sd-unable-to-regulate-fantasy-sports/article_c2aae2af-a7ba-5c33-9878-7a614c5643fb.html; Tex. A.G. Opinion No. GA-0926, May 7, 2012; D’Orio v. Startup Candy Co., 71 Utah 410, 266 P. 1037, 1038 (1928); State v. Dahlk, 330 N.W.2d 611, 617 (Wis. 1983); Frat. Ord. of Eagles Sheridan Aerie No. 186, Inc. v. State ex rel. Forwood, 126 P.3d 847, ¶¶ 43-44 (2006).

[8] State v. Prevo, 44 Haw. 686, 675 (Sup. Ct. Haw. 1961).

[9] Idaho Code § 18-3801.

[10] M.C.A. § 23-5-802.

[11] Wash. Rev. Code Ann. § 9.46.240.

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By way of background, in the spring of 2021, the State of Florida and the Seminole Tribe announced a compact under IGRA purporting to authorize the Tribe to offer online sports betting through the state, including to bettors located outside of tribal land. Although IGRA governs “gaming on Indian lands,” the compact “deemed” all online betting throughout the state to occur in the location of the network servers on tribal land.

After receiving a copy of the compact, the U.S. Secretary of the Interior opted to take no action on it, a decision that amounted to an approval by default. In August and September 2021, multiple groups of plaintiffs—including brick-and-mortar casino owners, Florida residents living and work near existing casinos, and an anti-gaming non-profit organization—sued in federal court challenging the Secretary’s approval under a host of laws, including IGRA, the Unlawful Internet Gambling Enforcement Act (“UIGEA”), the Wire Act, and the Administrative Procedure Act (“APA”).

Following consolidation of the cases, Judge Dabney Friedrich of the U.S. District Court for the District of Columbia granted summary judgment in favor of the plaintiffs, ruling that IGRA does not authorize sports betting outside tribal territory. In reaching this decision, Judge Friedrich concluded that IGRA—and an earlier D.C. Circuit decision in Amador County v. Salazar—requires the U.S. Secretary of the Interior to affirmatively disapprove of compacts that are inconsistent with the statute, which she determined permits only “gaming on Indian lands.” Judge Friedrich further denied the Seminole Tribe’s request to intervene, determining that under Rule 19 of the Federal Rules of Civil Procedure, the case could proceed without the involvement of the Tribe, which is immune from suit. The Tribe appealed the denial of its motion to intervene, and the Secretary appealed the grand of summary judgment for Plaintiffs.

On June 30, 2023, the Court of Appeals issued its decision, granting judgment in favor of the Secretary. In sum, the Court rejected the District Court’s interpretation of the Compact, concluding that the lower court had “erred by reading into the Compact a legal effect it does not (and cannot) have, namely, independently authorizing betting patrons located outside of the Tribe’s lands.” Although the Compact discussed activities taking place outside of tribal lands, it did not approve and/or authorize such activity. The mere discussion of such activities did not constitute legal approval or violate the terms of IGRA.

In reaching its conclusion, the Court boiled down IGRA’s complex regulatory scheme to two main principles. First, IGRA abrogated tribal sovereign immunity for certain gaming activity on Indian lands by regulating gaming activity on Indian lands – but nowhere else. Put simply, IGRA generally does not restrict or regulate tribal, or any other activity, outside of Indian lands. Second, under IGRA’s provisions, a Class III gaming compact to authorize gaming on Indian lands may include discussion of a “litany of other topics,” including “any other subjects that are directly related to the operating of gaming activities.” In other words, IGRA does not prohibit a gaming compact from discussing activities that may or may not take place outside of Indian lands. Mere discussion of such topics, the Court reasoned, did not amount to approval of those activities.

Relying on this framework, the Court reasoned that the Compact at issue did not independently authorize betting by patrons located outside of the Tribe’s lands. The Court highlighted the Compact’s language, which discussed “wagers on sports betting ‘made by players physically located within the State using a mobile or other electronic device,’ which are ‘deemed to take place exclusively where received.’” This language, the Court emphasized, does not say that such wagers are authorized by Compact or any other legal authority. Rather, “it simply indicates that the parties have agreed that they both consider such activity . . . to occur on tribal lands.”  Simply put, the Compact authorized only the Tribe’s activity on its own land and its language had no effect on the lawfulness of any other related activity (such as the placing of wagers from outside Indian lands) under state law or tribal law.

The Court also addressed the Plaintiffs’ non-IGRA arguments, which contended that the Compact was unlawful under (1) the Wire Act; (2) the Unlawful Internet Gambling Enforcement Act (“UIGEA”); and (3) the Fifth Amendment’s Equal Protection Guarantee. All three arguments, the Court concluded, failed on the merits.

The Plaintiffs contended that realistic implementation of the Compact would require use of wire facilities operating in interstate and foreign commerce, thereby violating the Wire Act. The Court rejected this argument for several reasons. First, the Compact did not independently authorize wagers placed by patrons located outside of Indian lands. Furthermore, the Court highlighted, the Compact contained express language that the Tribe “shall ensure” that its sports book operates in strict compliance with the Wire Act. Additionally, under the Plaintiffs’ theory, even online betting by patrons who are physically located on Indian lands would violate the Wire Act, “because some of those bets may be routed off of Indian lands into a state and then back.” The Court ruled that there was “no support” for such a “novel and sweeping” application of the Wire Act. Finally, even if the Compact did independently authorize activity outside of tribal land (which it did not), IGRA does not require the “Secretary to disapprove a compact based on hypothetical violations of federal criminal law that turn on how the Compact is implemented as well as the mens rea of the would-be bettors.” The Plaintiffs’ UIGEA argument failed for largely the same reasons.

Next, the Court turned to the Plaintiffs’ argument that the Secretary’s approval violated the Fifth Amendment’s equal protection guarantee because the Compact “impermissibly grants the Tribe a statewide monopoly over online sports betting.” The Court rejected this argument, reasoning that even if the Compact “authorized” all the activity in the Compact, it would survive rational basis review given the governmental interest in promoting the economic development of federally recognized Indian tribes, which was already recognized as a legitimate legislative purpose.

Finally, the Court upheld the District Court’s denial of the Tribe’s Motion to Intervene, albeit on different grounds than those articulated by the lower court. The Court concluded that given its ruling in favor of the Secretary, the Tribe would suffer little, if any, prejudice, were it precluded from intervening. The Court noted, “there is little practical difference between a Rule 19 dismissal on the one hand, and a judgment for the Secretary on the other.” Simply put, because the Judge had ruled in favor of the Secretary – ultimately upholding the Compact and providing the outcome sought by the Tribe– no prejudice would result from the Court’s denial of the Motion to Intervene.

Although the Court emphasized that its holding was intended to be narrow, the implications of its decision are undeniable. The Court’s interpretation of IGRA and the Compact itself will have a meaningful impact on the availability of sports betting in Florida. Indeed, perhaps other states will take note and utilize similar language in their own Class III gaming compacts.

The post Circuit Court for the District of D.C. Upholds Compact: What this Means for Sports Betting in Florida appeared first on IFRAH Law.

    

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In the initial two blog posts of this series, we explored the fundamentals of the World Wide Web, focusing on its iterative issues and solutions as the technology evolved. We charted the history of the Web briefly, from its early stages of relatively isolated, static, and read-based websites to today’s rather centralized, interconnected, write-based websites, highlighting the underlying reasons and innovations behind the transitions. Moreover, we investigated the present-day challenges of the Web, such as data privacy concerns and lack of user autonomy, analyzing how Web 3.0 technologies aim to overcome them.

Specifically, in the series’ second post, we explored how Web3 innovations were conceived around the ideals of decentralization, non-discrimination, openness, and transparency in named opposition to the Web’s present structure, which is often characterized as controlled by “Big Tech” companies and their internal practices. To this end, we discussed how blockchain technology and its implementations were foundational in this new approach to the Web. Indeed, blockchains serve as the foundation for a variety of Web3 technologies, including cryptocurrencies, non-fungible tokens (NFTs), and decentralized applications (dApps), which collectively offer extensive opportunities for innovation across various Internet-based sectors.

One illustrative example of this potential is found in the burgeoning Web3 gaming industry, which is what we will cover in this installment of the series.

Web3 Gaming At Its Core

At its most basic, Web3 gaming entails permissionless, player-centric control of video-game assets and items, by means of blockchain technology. Because video game assets reside within the player’s wallets, players retain absolute control over the items acquired through their efforts while interacting with the game and its ecosystem. This means that players enjoy outright ownership of purchased or earned assets rather than a mere license to use them in the game as is typical in the video game industry.

In the conventional Web2 gaming experience, there are generally two major restrictions delimiting players’ autonomy over their assets. First, items may be tied to a player’s account permanently. This means that the item may only be bought and sold along with the account itself, which is typically against most, if not all Web2 games’ terms of service. Second, items are typically tied to the in-game ecosystem, which necessitates that they may only be bought and sold through the in-game economy, and never by means of fiat currency or other secondary marketplace. These options are also generally against games’ terms of service. So, if players wish to extract all the time and effort put into the game through a sale of their account and/or its items, players risk a permanent ban and a loss of all items. Players thus are generally incapable of retrieving any time or money that they put into the game in the case that they have no need for their items anymore. Web3 enthusiasts consider this a waste of potential.

The Web3 gaming framework fosters robust, player-driven secondary markets and in-game economies, so users can freely buy, sell, or trade their assets, independent of the game’s developing company. Some Web3 game developers have even further capitalized on this framework by introducing the “play-to-earn” monetization model, wherein games are specially structured to incentivize users to seek a return on purchases through a variety of game mechanics and an eventual re-sale. The model was popularized by the game Axie Infinity, a Pokémon-like battle-collectible game, which has since changed its marketing of the model to “play-and-earn.”

Rhetoric inside of the Web3 gaming industry characterizes this development as rewarding players for the time and energy that they’ve put into the game, which has the concomitant effect of growing the game for developers, ensuring that what users put into the game can always be made liquid  in some capacity and can never be taken away from them. As we saw at NFT.NYC, by instilling a sense of ownership and control in their players, Web3 gaming companies are incentivized to work alongside their players to build a product their community wants. Such a dynamic creates a sense of trust, camaraderie, and long-term partnership between players and developers, ensuring that the players are as devoted to the game and its community as the developers. This way, the game thrives, and so does each party.

Interoperability Between Gaming Platforms

The introduction of blockchain technology into the gaming industry has also introduced greater potential for “interoperability” between games and platforms in use of digital assets. Interoperability is a literal term, defined to mean that something is able to be used between different systems. But in the context of Web3 gaming, interoperability is the capacity for digital assets, or items, to maintain their identity, value, and characteristics as they move between platforms, so that an item obtained in one game could be used in another, bringing continuity and cross-platform engagement to users’ experiences. [1]

Interoperability is possible when games operate on a shared blockchain network or backend tying networks together, which is quite common. But the extent of interoperability is constrained by the design of each game and the company’s readiness to embrace it with other platforms, given that it requires coordination amongst participating companies and high-degree of complexity to implement. However, blockchain technology is a well-suited facilitator of this process, reducing much of the complexity in a number of ways compared to how it would work in the mainstream gaming industry.

With respect to the mainstream gaming industry, interoperability was more of a conceptual possibility than a concrete realization, with very limited cross-platform character promotional events in which companies create new assets to resemble those in other games. Fortnite, for instance, is a popular mainstream game with limited interoperability, as it creates its own assets using the IP of other companies like Marvel.

But with blockchain technology, the potential for interoperability is enhanced because much of the logistical complications—such as verifying, tracking, and sharing item data —is easily accounted for by the nature of the blockchain. There’s no need for companies to independently coordinate the track and storage of player or item data. Such standardization enables game developers to create, for instance, shared in-game experiences and economies seamlessly by using the same assets as held on the blockchain. While a bit of technical work may be required to specifically tailor the asset to a game environment, the process requires much less development than it would have without blockchain technology.

Blockchain’s decentralized structure further eliminates the need for a central authority to validate transactions involving digital assets, as smart contracts—which are autonomous contract protocols built into the blockchain—facilitate the secure transfer of assets without need of a third-party overseer. In essence, interoperability entails a standardized approach to game development that can be used to make gaming more interconnected.

A paradigmatic example of Web3 interoperability is the “Loot” project, which creates digital assets specifically tailored to be used by other platforms in whatever way they see fit. On the Loot website, the following statement appears:

Loot is randomized adventurer gear generated and stored on chain. Stats, images, and other functionality are intentionally omitted for others to interpret. Feel free to use Loot in any way you want.

A wealth of games, derivative projects, tools, NFT collections, and communities have already been built using Loot.

An earlier example of interoperability within Web3 was a 2019 collaboration between the games “CryptoKitties” and “Gods Unchained,” which allowed CryptoKitty owners to purchase a limited edition card pack that granted the owner a unique and tradable “talisman” to represent their Kitty as a statue in Gods Unchained.

Game Interminability

Interoperability and player-ownership of digital assets are not the only boons to the gaming industry blockchain presents. Previously, we’ve written on the uses and abuses of decentralization in gambling by means of blockchain technology, where we described the nature of autonomous, open-source, and decentralized gaming platforms. Additionally, we touched upon how such platforms often advertise that they operate without a “house,” (and so have no need for a house cut) since they use smart contracts to automate transactions. While we’ve already explored the drawbacks and benefits of such an approach to gambling, the use-case highlights an important benefit of the blockchain more broadly in the context of the general gaming industry: no dependency on a centralized developer for the game’s continued existence.

In other words, Web3 games cannot be turned off so long as they are true blockchain games, since their underlying data will never be lost.

Since all game procedures and activities are (generally) recorded and preserved on-chain, there’s no requirement for a centralized game server or database on the backend that must be centrally maintained and controlled. This structure allows games, or at least the data on which they are built, to exist indefinitely, even if the initial developers cease to maintain the project. Players are no longer left out to dry if or when their favorite game dwindles in popularity and servers are shut down by the developing company. Because all data is expressly open to the public, it’s open to being used in whatever manner by the public. Indeed, the open and permissionless nature of the blockchain enables anyone to launch smart contracts that enhance the game’s systems, so gameplay can be iterated upon by further developers even if not necessarily tied to the game’s creators. Players no longer rely on one entity to play their games, but instead, only on each other.

Mainstream Gaming’s Relation to Web3 Gaming

As the Web3 gaming industry continues to mature, traditional gaming companies have been forced to reckon with whether their future endeavors will use blockchain technology or Web3 game development frameworks. The results have varied by company, as each responds to the opinions of their fanbases.

Square Enix and Ubisoft have been the main AAA gaming studios to support Web3, in spite of staunch protest from a large camp of traditional gamers. Square Enix has been at the forefront of traditional gaming companies leading in Web3 developments. An important step Square Enix took was joining Epic Games in partnering with Elixir, a PC Game launcher that includes web3 games alongside normal games to onboard traditional gamers. [2] Additionally, at the beginning of 2023, then-President of Square Enix, Yosuke Matsuda, announced an aggressive investment into blockchain technology. Despite his resignation in March, there has been no apparent change in plans, as the company released Final Fantasy VII NFTs on the Enjin blockchain and showed off a trailer for its new NFT game, “Symbiogenesis,” that same month. [3]

Ubisoft has also leveraged their intellectual property to release a set of NFTs based on their most well-known title, Assassin’s Creed. [4] Other Ubisoft Web3 ventures include in-game NFT items for Tom Clancy and an NFT-powered soccer game spinoff called “One Shot League.” [5] And in February, Ubisoft launched “Rabbids” NFT avatars for the Ethereum metaverse game “The Sandbox.” [6]

On the other side, Valve Corporation has banned games using cryptocurrency and NFTs from its digital storefront, Steam, citing company policy which bans games that offer in-game items with real world value in light of its controversy over CSGO-skin gambling. [7] Likewise, Mojang Studios, the company behind Minecraft, announced that NFTs would not be integrated into or permitted in the game, which the company described as antithetical to the design of the game. [8] And while Epic Games is partnered with Elixir, the company has not announced any public plans to develop its own games using blockchain technology.

Conclusion

In general, traditional gamer sentiments have been less than positive toward blockchain technology and its potential introduction into blockchain technology, generally citing concerns about the potential for over-monetization, scams, or needless barriers-to-entry. However, as we discerned at NFT.NYC 2023, Web3 gaming companies are working harder than ever to appeal to traditional gamers. At the tail-end of a crypto winter, gaming companies in the Web3 ecosystem have evidently refined their approach to make Web3 more palatable—namely, by taking intermediary steps in the introduction of blockchain technology into games, in the hopes that its benefits are made apparent by means of excellent gameplay. The potential benefits are numerous, and how effectively companies capitalize on those benefits will determine the prosperity of Web3 gaming in the long run.

[1] It should be noted that a broader definition of “interoperability” is likely to include instances of cross-platform gaming, such as when the same game can be played on a PS5, an XBOX, or computer, and players from different consoles can play with each other.

[2] https://www.ign.com/articles/square-enix-nft-blockchain-web3-elixir

[3] https://www.videogameschronicle.com/news/square-enix-shows-a-trailer-for-symbiogenesis-nft-game-says-itll-have-10000-characters/

[4] https://www.nftculture.com/nft-news/ubisoft-brings-assassins-creed-nfts-to-web3-the-perfect-blend-of-physical-and-digital-collectibles/

[5] Id.

[6] https://decrypt.co/121872/ubisoft-rabbids-nfts-sandbox

[7] https://www.theverge.com/2021/10/15/22728425/valve-steam-blockchain-nft-crypto-ban-games-age-of-rust

[8] https://www.minecraft.net/en-us/article/minecraft-and-nfts

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