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 firstname.lastname@example.org
At last, a European passport for crowdfunding! As from 10 November 2021, it will be possible for both new and existing crowdfunding platforms to obtain a licence allowing them to carry out their activities in all EU countries. What does it mean in practice for SMEs, start-ups and potential investors? Catherine Houssa clarifies the main takeaways of this major step forward to (finally) boost crowdfunding in the EU.
Without any doubt, it was crowdfunding that launched the Fintech movement. Crowdfunding facilitated access to funding for those who were excluded from the banking system via a digital platform, showing the possibility that finance could be done differently.
The Belgian legislator, like other national legislators, has taken up this new reality and transposed the requirements related to this new activity into Belgian law one step at a time (see our news published in 2016 on this subject here).
However, an inherently digital activity soon finds itself cramped when it is constrained within physical boundaries. The crowdfunding platform approved by the FSMA under the Belgian law of 18 December 2016 must limit its activities to the Belgian territory unless it meets the legal conditions applicable to crowdfunding platforms in each of the various European countries where it wishes to carry out its alternative funding activities.
After a certain enthusiasm, crowdfunding has therefore continued its national activities without going through the spectacular development one could have hoped for. One of the main reasons for this is, in particular, the lack of a European passport linked to national authorisation.
Harmonisation of participatory financing – a single European framework
From 10 November 2021 onwards, a crowdfunding platform will be able to obtain an authorisation entitling it to carry out its activities in all countries of the European Union.
On this date, Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers (ECSP) for business (the “Crowdfunding Regulation“) will become applicable.
By granting a European passport to ECSPs, the Crowdfunding Regulation makes it possible to overcome the barrier of fragmented national regulation. It undoubtedly creates a favourable environment for the emergence of new European crowdfunding players and facilitates the cross-border financing of small structures and startups. In other words, individual investors from different European countries will be able to participate in the financing of projects of companies established in other Member States.
Below, we provide a general overview of this new European regulation.
Scope of application
The project owner may be a natural person who is not a consumer. This is a first difference with the Belgian regulation which limits access to financing intermediated by platforms to legal entities. This will certainly raise questions regarding the Belgian regulation which does not allow the issuance of securities by natural persons.
On the other hand, ECSPs must be legal entities. This is also a difference from the Belgian regulation which also allows natural persons to offer alternative financing services, although it has to be acknowledged that, de facto, this possibility is not being used.
The Crowdfunding Regulation does not apply to participatory financing services provided to project owners who are consumers within the meaning of Directive 2008/48/EC, i.e. any natural person who acts for purposes not related to his commercial or professional activity.
This is a disappointment for peer-to-peer lending platforms which, provided that they are authorised to act as such by their national legislation, will have to pursue carrying out their activities exclusively within their national legal framework without benefiting from a European passport (for the lack of Belgian status of peer-to-peer lending, see our initial analysis of 2016 here).
Maximum amount collected
The Crowdfunding Regulation has opted to set a single collection threshold per project owner instead of per project. This threshold has been set at 5 million EUR over a 12-month period without the need to issue a prospectus.
This amount has been retained because this threshold is used by most Member States – as is the case in Belgium – to exempt the offers of securities to the public from the obligation to publish a prospectus. Moreover, this threshold is calculated to cover all offers made by the project owner, whether through ECSPs – in the form of loans or equity participations – or directly under the general exemptions provided for in the Prospectus Regulation.
A European passport is something you have to earn! The Crowdfunding Regulation introduces extremely precise rules on transparency and investor protection. This Regulation also significantly strengthens the prudential and governance requirements with which platforms have to comply.
Investor protection and transparency
The process of a collection project always starts with the publication by the ECSPs of a Key Investment Information Sheet (KIIS) drawn up by the project owner. This document contains all the information listed in Annex I of the Crowdfunding Regulation, an exclusion of liability clause and a warning on the risks posed by the investment proposed by the platform. It must be kept up to date throughout the entire offer period. The ECSPs are closely involved. They are responsible for verifying the completeness, accuracy and clarity of the information contained in the KIIS. The KIIS must be published 7 days before the online publication of a project that coincides with the start of the collection.
The Crowdfunding Regulation also distinguishes sophisticated and non-sophisticated investors, who benefit from different levels of information and protection.
A non-sophisticated investor benefits from a higher level of information (more in-depth advice and guidance). He must take an appropriateness test to ensure that he understands the level of risk associated with a participatory investment, a test which should be renewed every two years. Unless the ECSP offers a discretionary loan portfolio management service, the non-sophisticated investor is given a withdrawal period of 4 days as from the day he makes an investment offer. If his investment exceeds 1,000 EUR per project or 5% of his assets, the ECSP is subject to additional obligations in terms of information and must obtain the explicit consent of the investor.
The Crowdfunding Regulation imposes many organisational and operational requirements on ECSPs. These include the obligation to put in place procedures to ensure the continuity of their activities. ECSPs must also ensure that they avoid any conflict of interest and, to this end, shall not participate in offers launched on their own platform, nor may their main shareholders, managers and employees act as a project owner of a project offered on the platform. When ECSPs engage in outsourcing, this must be documented and monitored at all times, with the ECSP remaining fully responsible for the outsourced activity. The custody of assets must comply with strict rules.
Evidence of compliance with these rules must be included in the application file submitted for approval to the supervisory authority of the Member State in which the applicant is established.
If the ECSP provides for payment services in relation to participatory financing services, the ECSP is logically obliged to obtain authorisation as a payment service provider within the meaning of Directive 2015/2366 (PSD II).
Finally, it should be noted that the Crowdfunding Regulation offers crowdfunding platforms that have already been approved under their national legislation the ease of not having to provide again the information and documents they have already provided when applying for approval, on the condition, of course, that this information and these documents are up-to-date and available to the competent authority. Platforms which obtain the European passport will have to give up their initial national authorisation, while platforms which do not apply for the European passport will remain subject to their initial national authorisation.
The European authorisation as a provider of participatory finance services was long expected by the industry. Even if it imposes strict rules to ECSPs, this is a necessary evil to give them the credibility they need to finally access the “big league”.
Come and discuss this with our Digital Finance Team!
+32 (0)2 543 70 80
Have a look at the FinTech Belgian Chapter authored by Simont Braun in The Legal 500 Comparative Guide!
It’s a concise, pragmatic and yet comprehensive overview of FinTech in Belgium, and a must-read for all practitioners and actors of the sector.
The Belgian Chapter is available here.
Thank you, in particular, to Catherine Houssa, Philippe De Prez, Joan Carette, Thomas Derval, Jean-Christophe Vercauteren & Charlotte De Thaye for their work on this.
For any question or assistance, do not hesitate to reach out to Simont Braun’s Digital Finance Team: email@example.com
FLASH NEWS | Yesterday, the European Commission issued its new Digital Finance Package presenting a new digital finance strategy and new legislative proposals.
The key takeaways are:
1. Legislative proposals on crypto-assets including a regulated status for previously unregulated crypto-assets;
2. An EU regulatory framework on digital resilience;
3. A renewed strategy for retail payments to foster cross-border payment solutions (instant payments) and a proposal for “Open Finance” framework.
For more information, do not hesitate to contact our Digital Finance team: firstname.lastname@example.org
Simont Braun boosts the capabilities of its Fintech and Financial Services practices by welcoming Partner Joan Carette and Senior Associate Jean-Christophe Vercauteren. These strong additions to the firm enhance our Digital Finance Team’s position on top of the Belgian market.
The highly respected Joan Carette joins our Fintech and Financial Services team as a partner next to Catherine Houssa and Philippe De Prez, where she will reinforce our regulation and FinTech skills and allow to improve our focus on the Tech aspect of our expertise.
Joan Carette has 20 years of experience in FinTech, payments, e-money, AML and more generally banking and financial services and the prudential supervision of financial institutions. She worked as a regulator in the prudential supervision department of the FSMA, and in Belgian and international law firms for over 15 years.
Clients admire her “very flexible, pragmatic approach,” as well as her “deep knowledge of financial regulation.” (Chambers & Partners)
“FinTech, Payments and Financial Services play key roles in our economy and require to combine strong legal knowledge with tech-savviness and proactivity. In this context, I am delighted to join the strongest Digital Finance Team on the Belgian legal market. Together, we will be able to offer the best possible guidance to our clients,” says Joan Carette.
Jean-Christophe Vercauteren has solid regulatory expertise in FinTech, payment services and e-money, AML and more generally banking and financial services. He gathered experience as a lawyer in Belgian and international business law firms, and as a legal counsel in a Belgian bank.
“I could not think of a more stimulating environment than Simont Braun’s Digital Finance Team to further develop my expertise. Being part of the pioneer FinTech law firm in Belgium will be a daily motivation, and I am happy to contribute to broadening its capabilities,” says Jean-Christophe.
“We are proud to welcome top talents like Joan and Jean-Christophe in the team. With them on board, our Digital Finance Team strengthens both its financial services and tech capabilities,” adds Philippe De Prez, partner in FinTech and Financial Services.
Simont Braun’s pioneer Digital Finance Team is one of the best and most-qualified teams in Belgium. “The firm has proven itself as one of the very leading players in the market, having advised on groundbreaking projects involving areas such as alternative lending, micro-savings, robo-advisory, blockchain, ICOs and virtual currencies.” Simont Braun is the only law firm ranked in Band 1 in Belgium in FinTech by Chambers & Partners. The firm is also ranked Tier 1 in FinTech by the Legal 500, and Tier 1 in Financial Services Regulatory by IFLR 1000.