The thin line between esports and gambling

Video games have been on the rise for a few years now. In particular, esports have been growing rapidly. The industry is now expected to reach 1.1 billion dollars of global revenue in 2020, with esports events gathering an audience of almost half a billion people (Newzoo, 2020 Global Esports Market Report).

Thin line between eports and gambling - regulatory belgium - video games

Initiatives for a regulatory framework

With this rising popularity, concerns are growing as to the regulatory framework of the industry.  One of the most frequently discussed issues relates to in-game gambling features.

Initiatives in this respect emerge around the globe, notably in China where the government has strengthened its regulation related to in-game gambling. The newly introduced rules have led to the delisting of tens of thousands of mobile games from the App Store in China. Closer to home in 2018, the Belgian Gambling Commission has qualified as games of chance the so-called “loot boxes”, which are virtual objects containing one or more randomly generated in-game items, ranging from aesthetic character customisation to new functionalities. This led to certain video games being withdrawn from the Belgian market.

Following this trend and given its rising popularity amongst younger audiences, esports are now also moving into the spotlight when it comes to gambling restrictions. “Esport” can be defined as “the activity of playing computer games against other people on the internet, often for money, and often watched by other people using the internet, sometimes at special organised events”(Cambridge dictionary definition). Esports tournaments offer players the possibility to compete and win prize money, ranging from small amount tournaments to million-dollar events.

As soon as a competition includes monetary prizes, one could wonder to what extent esports players are considered to be participating in organised gambling activities by competing against each other in a rewarded competition.

Gambling Qualification in Belgium

In Belgium, gambling activities are regulated under the Act of 7 May 1999 on games of chance, betting, gaming establishments and protection of players (Gambling Act). The Gambling Act defines “games of chance” as: “Any game by which a stake of any kind is committed, the consequence of which is either loss of the stake by at least one of the players or a gain of any kind in favour of at least one of the players, or organisers of the game and in which chance is a factor, albeit ancillary, for the conduct of the game, determination of the winner or fixing of the gain”.

Accordingly, esports competitions would qualify as (forbidden) games of chance provided they meet the following four conditions:

1.      “Any game…”

An esports competition is by definition a competition in a video game. Therefore, it would without doubts qualify as a game.

2.      “… by which a stake of any kind is committed”

Players must pay entry fees to compete in many esports tournaments. These fees qualify as a stake under the Gambling Act. Also, membership fees paid to access rewarded competitions could qualify as a stake, even in the absence of individual fees per competition the player participates in. Hence, only free tournaments that involve no entry fees of any kind, would not qualify as “games of chance” as they involve no stake.

3.      “A loss of the stake or a gain of any kind” as a consequence

As long as players have a chance to win a prize, the mere loss of the stake is sufficient for this condition to be fulfilled. Also, to the extent an esports competition includes a monetary prize (including under the form of recovering the entry fee), such prize shall be considered as a gain. The qualification is less evident when the gain takes the form of in-game currency or even in-game items. Nevertheless, it comes out of the report of the Belgian Gambling Commission on the qualification of loot boxes that “a win of any type” must be interpreted broadly. The Gambling Commission has confirmed in its report that even in-game purely aesthetic items are gains in the meaning of the Gambling Act as long as players attach some kind of value to it. On the contrary, rewards that have no monetary value attached to them, such as a player’s rating, are not gain within the meaning of the gambling act.

4.      “In which chance is a factor”

Chance must play a role, be it ancillary, for the conduct of the game, the determination of the winner or for fixing the gain. When it comes to esports competitions, chance is likely to be one of the factors determining the outcome of the competition. Although esports are often presented and perceived as games of skill, it would be hard to argue that chance is completely absent. An exact answer requires a case-by-case analysis of each game at stake. However, when we look at the most popular esports games, each of them includes a chance factor at some point (e.g., the content of the chests in Fortnite are randomly generated, characters in League of Legend or Dota can gain Critical strike chance percentage, Hearthstone’s cards are randomly drawn from the player decks, etc.).

In this context, it is important to note that chance does not need to play a preponderant role, it can just have an ancillary character as well. Physical sports competition that includes an element of chance and that involve a stake and a possibility of a loss of the stake or of a gain would qualify as a game of chance if the Gaming Act did not explicitly exclude them (see further below).

Sports as an exemption: what about esports?

There is an explicit statutory exemption for some activities which, under the application of the criteria set out above, would qualify as games of chance and, therefore, fall within the scope of the Gambling Act.

The practice of a sport is one of such exemptions (when sports activities involve a loss of stake or a gain of any kind whereby chance is a factor). In Belgium, sports are regulated at the community level and so certain nuances exist between the Belgian communities. However, it is generally understood that sport implies a physical activity practised individually or collectively for leisure or competition purposes, framed by a certain number of rules. It is not certain whether esports could qualify as physical activity. Anyway, no type of esports has yet been recognised amongst the official sports federations in Belgium. Consequently, the qualification of esports competitions in Belgium as forbidden games of chance remains possible notwithstanding the sports exemption.

What’s next?

The qualification of esports as games of chance could have a potential negative impact on the industry. More recognition, but also a clear regulatory framework for esports are needed to allow the sector to grow in Belgium as in other places around the world. Certain regulators have already taken the lead in the European Union.  One of the best examples is France, which adopted two decrees in 2017 on the status of esports players and on the organisation of esports competitions. A European harmonisation is unfortunately not in sight at this moment.

The regulation of the gaming industry in general is an important point of discussion that remains somehow unclear without a real leitmotif. In particular, the interaction between this sector and the gambling regulation needs to be clarified by the regulators. Actors of the gaming industry should have clear guidance on what they are allowed to do and how gambling legislation interacts with activities or business models developed in the industry.

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Philippe De Prez and Jorgen Fleussu

For additional information or guidance, please contact the authors:
philippe.deprez@simontbraun.eu
jorgen.fleussu@simontbraun.eu
+32 (0)2 543 70 80

Payments in the video game industry: Regulatory Status in Belgium

Rising importance of payments in the video game industry: Apple v. Epic Games

This summer has brought a major lawsuit in the video game industry with the “Apple v. Epic Games” case. Epic Games, the developer of the popular game Fortnite, introduced the possibility for its iOS users to buy V-Bucks (the virtual currency used in Fortnite) without using the AppStore integrated payment services. This manoeuvre allows iOS users to avoid paying Apple’s commissions on payment transactions processed through its store. Apple considered such practice to violate Epic’s contractual obligations. Consequently, Apple banned Epic Games’ products from its store. Despite a first decision in favour of Apple, the two firms are still engaged in legal proceedings before the competent US courts.

This case is a perfect illustration of the increasing importance of payments and (virtual) currency transactions in the gaming industry in general.

Payment transactions of all kinds are often channelled through so-called “stores” or “gaming platforms”.  Stores can be used to buy games, in-game items or in-game virtual currencies. They play the role of intermediaries processing the payment from the player’s store wallet to the developer’s account.

In the context of in-game payments, stores are even processing payments from players to developers as part of their professional activity. The professional activity of providing payment services in relation to fiat money or e-money is nonetheless regulated by the second Payment Services Directive (“PSD2”) and Electronic Money Directive (“EMD2”), and their respective national implementations in the EU Member States.

In addition to this first trend, developers are more and more issuing virtual currencies to be used in their games as a means of payment. With the recent development of the crypto-assets regulation at the EU level (through the so-called (draft) Markets in Crypto-assets Regulation (“MiCA”)), companies implementing these solutions into their games should be aware of the (soon-to-be) regulatory status of such virtual currencies.

Regulatory Status of In-Game Payments in Belgium

The prudential requirements of the PSD2 and the EMD2 have been transposed in Belgium by the law of 11 March 2018. This law determines a limited number of entities entitled to provide payment services in Belgium and Europe. However, payment services are defined broadly, and notably include the execution of payment transactions and money remittance.

The law also provides for a series of exemptions limiting the scope of its application. The so-called limited network exemption (“LNE”) is probably the most relevant exemption for the gaming industry.

Scope of the Limited Network Exemption (LNE) within the payment regulation

The LNE allows companies providing payment services based on payment instruments to remain outside the scope of the payment services regulation when those instruments can only be used within the scope of a limited network (e.g. only within a gaming platform).

The appreciation of the limited network is a de facto analysis left to the competent national supervisor (i.e. the National Bank of Belgium (“NBB”) in Belgium). A payment instrument is notably deemed to be used within a limited network in case it is only accepted by a limited number of services and/or goods providers or it can only be used to acquire a very limited number of goods or services.

In practice, certain gaming platforms (including important social media companies) can use this LNE exemption to escape from the qualification of regulated payment services and, therefore, also from the need to be licenced as a payment service provider or an e-money issuer. The set-ups vary in practice but a common business model for such platforms uses the following process:

  • The platform collects fiat money from users (gamers), which is then put on a gaming account held by the user on the platform (either in fiat money or converted into e-money);
  • Gamers are then allowed to use these funds to acquire a gaming-related digital content (which qualifies as “very limited goods” required for the LNE) from a series of game developers (which in turn qualify as a limited number of service providers required for the LNE) and which are also present on the same platform.

Nevertheless, even when providing these exempt payment services under the LNE, platforms are still subject to a notification obligation when the amount of the transactions processed in the last 12 months exceeds €1,000,000 per Member State. When falling within the notification threshold, the exempt set-up used by the platform (i.e. the size of the network, the range of goods or services, etc.) needs to be approved by the NBB. Such a notification duty is, however, much lighter than having to file for a licence application as a payment service institution or an e-money issuer under the PSD2 / Belgian law of 2018.

In-game “Virtual Currencies”

Independently from the payment services regulation discussed above (which is applicable when transactions are made in fiat money or its equivalent in e-money), in-game payments are more and more frequently operated by means of virtual currencies like the already mentioned V-bucks in Fortnite. Once players have acquired such a virtual currency, they are free to use it in the game.

The Belgian AML law defines virtual currencies as “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically”.

Until the entry into force of the MiCA anticipated for 2022 and besides a few specific AML applications, the use of virtual currencies remain largely unregulated and, depending on the type of virtual currency concerned, the main attention point is to verify whether it does not (also) fall into another already existing financial regulation. Very often, the borderline between virtual currencies and e-money for example is a thin one. When talking about virtual in-game currencies such as V-bucks in Fortnite or Riot Points in League of Legends, it seems that they are often only accepted by the issuer of this currency itself (and not by third parties), which (at least for now) makes them fall outside the e-money regulation.

Without entering into too much detail at this stage, we can roughly distinguish three types of virtual currencies:

  • Closed virtual currencies: those currencies cannot be obtained with fiat money and do not interact with the “real world.” We can think of most online role-playing game’s “Gold”, which is acquired exclusively through solving quests or by eliminating enemies in a game, and cannot be obtained in exchange of fiat money;
  • Unidirectional virtual currencies: these currencies, on the contrary, are acquired with fiat money, but once obtained cannot be refunded or exchanged back into such “real world” fiat money. This is the case for well-known in-game currencies such as V-Bucks or Riot Points (see above); and
  • Bidirectional virtual currencies: those currencies can both be acquired and exchanged back into fiat money, while at the same time being used in games, and sometimes also in the real world.

The first two types of currencies are generally considered to be unregulated (for now) and are already rather common in video games. Bidirectional virtual currencies are still relatively unusual but already have some classic applications in the video game industry (e.g. Linden Dollars from Second Life which can easily be exchanged back according to a specific rate that fluctuates in time). More recent examples include (online) games allowing the use of a virtual currency which can be freely purchased and sold on virtual currency exchange platforms. Such bidirectional currencies could, in certain cases, qualify as e.g. financial instruments (making them fall into the scope of the MiFID II regulations) as it can no longer be exclusively seen as a so-called “utility token” to be exclusively used in the game, but also allows its holders to speculate and thereby show similarities with (regulated) financial instruments. Such qualification should always be assessed on a case-by-case basis using several criteria, e.g. the liquidity, the use or the purpose of the instrument concerned, etc.

Interesting times lie ahead of us at the crossroads of payments, (virtual) currencies and the video gaming industry.

Do not hesitate to get in touch with our Digital Finance Team for a chat on this exciting topic: +32 (0)2 543 70 80 or digitalfinance@simontbraun.eu