The gambling industry is no stranger to public scrutiny, but now the worlds of gambling and gaming are once again colliding as pressure increases on games publishers’ use of loot boxes amid claims that they could constitute unlawful gambling.
What are loot boxes?
Loot boxes are essentially virtual boxes, crates or chests that contain randomly allocated virtual items that can be used in-game (some items are purely cosmetic whilst some improve in-game performance). So far so good; so why the recent uproar?
The issue many people have with loot boxes is that they generally require a real money purchase, and the chance that you’ll get the item you want (or need) is small. As publishers have so far not considered loot boxes to constitute gambling, there is no requirement for the allocation of the ‘loot’ to be fair or transparent, as the random number generators (RNGs) in online casino games are required to be. This is particularly frustrating for some people, as many suggest that whilst serious gamers could choose to ignore loot boxes previously, many of the big name games releases of 2017 are designed to be all but impossible to complete without the aid of certain in-game items that can only be obtained through purchasing loot boxes.
Are they gambling?
Whilst the Entertainment Software Rating Board (ESRB), which rates the majority of video games sold and published in North America, asserts that loot boxes are not gambling because the player is always guaranteed to receive in-game content (even if it something he or she doesn’t want), whether something constitutes gambling is ultimately a matter of national law, which can vary significantly in this area across jurisdictions).
In Great Britain, the Gambling Act 2005 (the “Act”) defines gambling as ‘gaming, betting or participating in a lottery’. In the case of loot boxes, as they do not involve any prediction and would be hard to categorise as a game in their own right (all a player needs to do is buy it and ‘unlock’ it), if gambling at all, they would in our opinion be most likely to fall within the definition of a lottery.
According to the Act, an arrangement constitutes a lottery if:
- “persons are required to pay in order to participate in the arrangement,
- in the course of the arrangement one or more prizes are allocated to one or more members of a class, and
- the prizes are allocated by a process which relies wholly on chance”.
When applied to loot boxes, it’s not difficult to see why many are claiming that they constitute gambling. The requirement to pay to participate is typically satisfied (where loot boxes must be purchased using real money or virtual currency purchased with real money), and the prizes (the in-game item within the loot box) are often allocated entirely by chance. It is irrelevant that there is always a prize of some description, provided that the prize is of ‘money, articles or services’. Whilst the Act doesn’t specify whether a virtual ‘article’ would be sufficient to constitute a prize, the British Gambling Commission (“Commission“) appears to be concerned only with prizes which are ‘money or money’s worth’ (which is the test for prizes for gaming under the Act, but is likely to be an appropriate measure in respect of virtual items here also).
The Gambling Commission has previously maintained that it does not consider prizes of virtual currency or other virtual items to constitute money or money’s worth, provided that they cannot be ‘cashed out’ or exchanged for real world money or items (despite known markets for these virtual currencies and items).
In its paper ‘Virtual currencies, eSports and social casino gaming’, published in March this year, although the Commission recognises that game publishers intend to provide in-game items in a ‘closed loop’ fashion, it asserts that the ‘volume, variety and sophistication of websites advertising opportunities to exchange in-game items for cash, indicates that to term such circumvention of regulation as ‘occasional’ risks understating the extent of this issue’.
The Commission, specifically in the context of loot boxes, goes on to state that ‘where there are readily accessible opportunities to cash in or exchange those awarded in-game items for money or money’s worth those elements of the game are likely to be considered licensable gambling activities’.
As a result, the existence of third party websites which facilitate the trading of in-game items obtained through loot boxes means that, at least in Great Britain, there is a real risk that loot boxes could be classed as gambling where the in-game items are capable of being ‘cashed out’ through third party websites/networks).
However, even if loot boxes were considered to constitute gambling under English law, as we’ve seen from the prosecution of those behind the Futgalaxy.com skins betting site, the Commission’s enforcement priority is the third party websites providing overt gambling services (such as skins betting) that are often targeted at children and, as such, perceived by the Commission to present a much greater risk of harm. The Commission has stated that ‘the proximity of any facilities for gambling to the means of exchanging items for cash, overt relationships between the two and/or the ease with which such transactions are conducted, are likely to be the key considerations when prioritising our enforcement activity’.
On this basis, whilst there is a risk that loot boxes could constitute gambling, and if so by providing them without a licence games publishers could be committing an offence under the Act, it appears that the Commission currently (and perhaps understandably) has no intention of pursuing the publishers for offences under the Act. The Commission will instead liaise with games publishers and network operators who it considers may ‘unintentionally be enabling the criminal activity’.
Although the Commission sets the enforcement agenda for gambling in Great Britain, it may come under increasing pressure to once again reassess its approach to loot boxes if the UK government decides to intervene. Not content with the Commission’s approach, one MP, Daniel Zeichner, has formally submitted questions relating to the legality of loot boxes to the UK parliament, and an online petition has been established which, as of 26 October 2017, has collected enough signatures to require a formal response from the Government.
That response, published on 26 October, reiterates the Commission’s position from its March 2017 paper but also states:
“The Video Standards Council (VSC) Rating Board is the designated body for classifying video games, and applies the Europe-wide PEGI ratings to video games supplied in the UK. The PEGI criteria currently make provision for games depicting simulations of traditional gambling, and such games would generally attract a minimum PEGI rating of 12. The VSC Rating Board is discussing these issues with the PEGI Council and its Experts Group to determine whether any changes to the PEGI criteria need to be made.”
Aside from potential changes to the PEGI criteria, and an assurance that the Gambling Commission is “keeping this matter under review”, it seems the Government has little appetite to tackle the use of loot boxes through the enforcement of gambling legislation, particularly given its current focus on other areas of the core gambling industry, such as the ongoing FOBT debate.
What about other jurisdictions?
Whilst it seems unlikely that either the British government or the Commission will be looking to take on games publishers offering loot boxes any time soon, as mentioned at the outset of this article, whether loot boxes constitute gambling is a matter of national law and games developers and publishers should be aware that their offering may need to be tailored for each market.
With some jurisdictions seeking to expressly regulate the use of loot boxes (China, for example) and some (like the UK) showing no desire to apply existing gambling laws to such activities, we’ve spoken to some of our colleagues in the Bird & Bird gambling team based in other major markets for their take on the issue:
In December 2016 the Chinese Ministry of Culture issued a notice reinforcing certain restrictions on the operation of network or online games, which came into force in May this year. Amongst the various restrictions mentioned, the notice expressly: (i) bans any random allocation of virtual items or services in game by requiring users that wish to participate to pay by cash or virtual currency – i.e. it is no longer permissible to sell “loot boxes” directly to users; (ii) requires publishers to publicly announce information about the name, property, content, quantity and draw/forge probability of all virtual items and services offered in game, and the results of the random allocation.
To get around the ban, some games publishers now offer loot boxes for ‘free’ when a player purchases virtual currency.
When games are provided on the internet, they are only considered provided in Denmark if they are aimed at the Danish Market, by language, content or otherwise. If a game is provided in Denmark, it will require a licence from the Danish Gambling Authority if it constitutes ‘Gambling’, which it does if all of the following conditions are met:
- The participants in the game have to pay a stake (money or anything else of economic value),
- The participants, who have paid a stake, have a chance of winning a prize (all types of prizes of economic value), and
- The chances of winning has an element of chance.
If a game fulfils the above criteria and is based 100 per cent on chance, then it would be considered a lottery under the current Danish Gambling Act. The current Act does not provide the possibility of issuing a licence to operate lotteries other than to the companies specifically mentioned in the Act (Danish state owned companies), or in case of charity lotteries.
Based on the above requirements, where in-game items can be exchanged for real money or money’s worth, there is a risk that loot boxes could be categorised as gambling, and more specifically an unlawful lottery. The Danish Gambling Authority has not, however, made any public statements in respect of loot boxes, and we are not aware of any current intentions to seek to enforce the Danish Gambling Act against games publishers providing loot boxes to Danish players.
Currently, there are no specific regulations concerning the use of loot boxes in Hungary. Pursuant to the Hungarian Gambling Act, an arrangement will constitute a contest of chance if: (a) payment of cash or other form of consideration is required to participate; (b) receipt of a cash prize or something of value in the event of a certain outcome or a future contingent event; and (c) winning or losing depends exclusively or predominantly on an element of chance. If any one of the conditions above is missing during the process of the game, it would not constitute gambling and, therefore, would not fall under the scope of the licensing requirements of Hungarian law.
Accordingly, based on the practice of the Hungarian courts and gambling regulator, in our view it is only if the items gained in the game can be traded or exchanged outside the game platform for money or other items with monetary value, that the use of loot boxes could require a gambling licence in Hungary. The Hungarian Gambling Supervisory Authority has not yet published any official statement about its opinion on this topic.
It is worth noting that even if this type of game does not trigger the application of the Hungarian Gambling Act, other regulations, especially consumer protection or even financial (e-money) regulations may have relevance and should be considered when entering the market with a new product or service.
The current Polish Act on Gambling Games was adopted in response to a political scandal concerning slot machine games, and aimed to gradually remove slot machine gaming from the Polish market. As a result, and in an attempt to prevent any attempted circumvention of the ban on slot machines, a very broad definition of slot machine games was adopted.
According to the Act, slot machine games are any “games played on mechanical, electrical and mechanical, and electronic devices, including computers, as well as games the rules of which reflect those of slot machine games held via the Internet network, for cash or in-kind prizes, when the game includes an element of chance“. The use of ‘cash’ here would also include anything which may be exchanged into cash or can be obtained by payment of money. By this definition, there is a real risk that the offering of loot boxes to players in Poland could be considered the unlawful provision of slot machine games, especially as the Act declares further that even when there is no cash or in-kind prize, but the game is “organised for commercial purposes” and is “of random nature”, such a game should also be considered a slot machine game. Read strictly, this could even affect loot boxes where the contents do not have any ‘real world’ value (as they cannot be obtained for money or sold).
However, there is currently no indication that the authorities are interested in enforcing the law against games publishers or developers. To do so would have severe consequences for the gaming market in Poland, as slot machines are only permitted to operate in casinos.
Gambling in Sweden is regulated by the Swedish Lotteries Act (although a new gambling law is on the horizon), which defines lotteries as events where one or more participants, with or without a bet, may attain a prize which is larger than that which each of the other participants may receive. A licence is required to lawfully provide a lottery in Sweden.
This law only applies where the prizes in question constitute money or money’s worth. As a result, if the in-game items that may be obtained through a loot box have no monetary value, then the provision of loots boxes would not constitute a lottery. However, if the in-game items were deemed to have a monetary value by virtue of being able to be traded, relatively easily, for money or money’s worth (for example through a third party website), then there is a real risk that loot boxes could constitute unlawful gambling if provided without a licence in Sweden.
However, there is currently no official guidance from the Swedish Gambling Authority in respect of loot boxes. In our view, unless games publishers themselves facilitate the exchange of in-game items for money or money’s worth, then it is seems unlikely that the Gambling Authority would look to enforce the law against games publishers.