Special Disclaimer: This article is an original work by Attorney Shao Shiwei. It reflects only the personal views of the author and does not constitute legal consultation or legal advice on any specific matter. For article reprints, legal consultations, or business exchanges, please add: sswls66
Introduction
According to reports by WuShuo, personnel associated with the GameFi project Tiny World are suspected of being under investigation by the police. In 2022, Tiny World completed a USD 2.5 million financing round. Tiny World is a game that integrates NFT and GameFi elements, allowing players to collect over 100 Tiny Hero NFTs within the game and earn yields.
When discussing popular GameFi projects, one must mention the blockchain game STEPN from 2022. Its main selling point was “Move to Earn.” After downloading and registering for the app, users would purchase a pair of NFT virtual sneakers using cryptocurrency and then start earning money by running outdoors.
In January 2022, StepN completed a financing round led by Sequoia Capital India and Folius Ventures. In April 2022, it further received strategic investment from Binance. Within just six months of its establishment, StepN grew into a unicorn with a valuation exceeding USD 1 billion.
However, on May 27, 2022, STEPN suddenly issued an announcement on its official social media channels, declaring the commencement of the offboarding of users from mainland China.
According to the official announcement, the STEPN project team emphasized that it had not conducted business in mainland China, carried out a review of mainland Chinese users, and ceased providing GPS and IP address services to users in mainland China as of July 15, 2022.
Mentioning STEPN inevitably brings to mind two other projects, both domestic and international: Qubu and Axie Infinity. STEPN’s “move-to-earn” concept is identical to that of Qubu. Meanwhile, STEPN’s economic model is similar to that of Axie Infinity, which was once the most popular blockchain game in Southeast Asia.
In 2018, the Qubu app claimed to be rooted in the sports and health sector, supported by blockchain technology, “walking can earn money.” In 2019, Qubu’s company was investigated by the Changsha administration for industry and commerce due to suspected involvement in pyramid schemes, fundraising fraud, and other misconduct.
Axie Infinity is a blockchain game released in 2018 by the Vietnamese company Sky Mavis. Its business model is “play to earnUsers purchase, raise, battle, breed, or sell Axies by purchasing in-game virtual currency, thereby exchanging for in-game virtual currency to generate profits;Virtual currency can be exchanged for fiat currency.The documentary Play to Earn noted that this game once served as the primary source of income for villagers in certain areas of the Philippines.
Author: Attorney Shao Shiwei
I. Are blockchain gaming projects lawful in China?
As evidenced by the well-known blockchain gaming projects in the crypto circle mentioned above, Qubu has ceased operations due to suspected pyramid selling and other misconduct; STEPN proactively chose to take drastic measures at the peak of its popularity by exiting Chinese users; and Axie Infinity, as a foreign blockchain gaming project, has not entered the domestic market. This is closely related to China’s regulatory policies on blockchain gaming.
Overview of relevant policies:
On August 24, 2018, the China Banking and Insurance Regulatory Commission and four other departments issued the Risk Alert on Preventing Illegal Fundraising in the Name of “Virtual Currency” and “Blockchain,” emphasizing that some wrongdoers, under the guise of “financial innovation” and “blockchain,” absorb funds by issuing so-called “virtual currencies,” “virtual assets,” or “digital assets,” thereby infringing upon the legitimate rights and interests of the public;
On May 18, 2021, the National Internet Finance Association of China, the China Banking Association, and the Securities Association of China jointly issued the Announcement on Preventing Risks of Virtual Currency Trading and Speculation, clarifying the need to correctly understand the essential nature of virtual currencies and related business activities. Engaging in illegal activities using virtual currencies may also constitute criminal offenses such as illegal fundraising, illegal issuance of securities, and illegal sale of token vouchers;
On February 18, 2022, the China Banking and Insurance Regulatory Commission issued the Risk Alert on Preventing Illegal Fundraising in the Name of the “Metaverse,” warning the public to be vigilant against fraud perpetrated under the banner of metaverse blockchain games. Some wrongdoers bundle the “metaverse” concept, claiming “earn while playing” and “short investment cycles with high returns,” thereby inducing participants to invest by exchanging virtual currencies or purchasing in-game equipment;
On April 13, 2022, the National Internet Finance Association of China, the China Banking Association, and the Securities Association of China issued the Initiative on Preventing Financial Risks Related to NFTs, which listed direct or indirect investment in NFTs and providing financing support for NFT investments as prohibited activities.
In addition, on November 29, 2021, Zhang Xiaojin, Deputy Director of the First Procuratorial Department of the Supreme People’s Procuratorate, stated at a press conference that when using online card and board game software, users should download and install it through official channels; meanwhile,suspected of gamblingapplication software has a notable characteristic, namely that itincludes withdrawal functionality. If you discoversoftware or applications that allow cash withdrawals or the receipt of valuable physical items, please refrain from using them and promptly report them to the public security authorities.
Therefore, in light of the aforementioned regulatory policies and the content of the Supreme People's Court press conference, developing blockchain gaming projects in China must prohibit disguised ICOs for illegal fundraising and the exchange and withdrawal of fiat currency for virtual assets. In short,the financialization of gameplay is prohibited.。
So,can blockchain gaming projects still be operated in China?
The answer is: Yes, but only in astripped-down version。
II. Risks of Operating Blockchain Gaming Projects in China and Recommendations for Mitigation
1. Mitigating the Financial Attributes of Blockchain Gaming Projects
Opt for Issuance on Consortium Blockchains。
In September 2021, the People’s Bank of China, the Office of the Central Cyberspace Affairs Commission, and eight other departments jointly issued the Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading and Speculation, which clarified that virtual currencies such as Bitcoin and Ethereum do not have legal tender status and shall not and cannot circulate or be used as currency in the market.
Public blockchains inherently carry strong financial attributes, which can easily trigger market speculation and create significant value bubbles. By analogy to the localized experimentation with digital collectibles as non-fungible tokens (NFTs) in China, and in light of regulatory compliance considerations, it is advisable to issue blockchain gaming projects on consortium blockchains.
2. Risk of Being Deemed as Disguised Token Issuance
Issue Only In-Game Currency That Is Non-Withdrawable and Do Not Operate a Secondary Market。
The dual-token economic model is a common structure in blockchain games. One primary token is used for governance and security, while the other is a stablecoin used for transactions and value storage.
In September 2017, the Announcement on Preventing Risks Associated with Token Issuance and Financing explicitly stated that “so-called token financing trading platforms shall not engage in exchange services between fiat currencies and tokens or ‘virtual currencies.’” Therefore, if a blockchain gaming platform provides functionality to convert virtual currencies into fiat currencies, it may be suspected of engaging in illegal financial activities and faces the risk of being deemed as conducting disguised token issuance.
Trading on secondary markets can stimulate users’ speculative enthusiasm, with profits accrued by a small number of large holders derived from the losses of the majority of retail investors. If retail investors jointly report the matter to authorities due to their losses, the platform operator may face criminal liability risks.
3. Risks Arising from Failure to Obtain Required Licenses and Qualifications, Such as Game Publication Numbers
To distribute games domestically, applicable laws and regulations, including the Interim Provisions on the Administration of Game Publication, require obtaining a game publication number, software copyright registration, an Internet Publishing Service License, and an ICP License, as well as completing game filing procedures.
In conversations with a domestic blockchain gaming industry participant over the past two days, it was understood that,as of now, no domestic blockchain gaming platform has obtained a game publication license.。
Issuing a blockchain gaming project without the requisite qualifications may give rise to administrative penalties and even criminal liability.
4. Mitigating criminal legal risks such as gambling, fraud, and pyramid schemes
The design of gameplay mechanics must be compliant.
If withdrawals are permitted and the game rules establish certain win rates, thereby involving “probability-based betting,” this may constitute the crime of gambling.
If players are required to pay an “entry fee” (such as purchasing in-game items), and subsequent game rule designs, insider trading, or speculative activities cause item prices to continuously appreciate, followed by platform-established rules that trigger a precipitous decline in item prices after some users sell their items, this may implicate criminal risks such as fraud and pyramid schemes.
Summary
Blockchain technology is of significant importance to promoting the development of China’s digital economy. As the localized practice of NFTs in China, digital collectibles have been successfully implemented and have played a positive role in confirming rights and facilitating the circulation of digital works. Blockchain gaming is still in its early stages of development, and achieving compliance in this industry requires joint efforts and exploration by industry practitioners, legal professionals, blockchain technology developers, and other stakeholders.
