Attorney Shao Shiwei | Is Mining in Blockchain Games Legal?

In September 2021, the National Development and Reform Commission and other departments jointly issued the "Notice on Rectifying Virtual Currency 'Mining' Activities" (hereinafter referred to as the "Notice"), effectively prohibiting mining activities in China. Subsequently, blockchain games gained popularity. Is there any correlation between these two phenomena? Some argue thatvirtual currency mining is machine-based mining, while blockchain gaming is human-powered mining, with essentially

no difference. Therefore, against the backdrop of the domestic ban on mining, what legal risks might arise from developing blockchain game platforms?

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Before answering this question, it is necessary to understand two concepts: virtual currency mining and liquidity mining.

1. What is Virtual Currency Mining?

The concept of "mining" in blockchain refers to a reward mechanism for blockchain miners. To incentivize participants to maintain data integrity, blockchain systems establish reward rules. Those who process data most quickly and effectively, and whose work is recognized by the system, receive a corresponding amount of virtual currencies, such as Bitcoin, as rewards. Obtaining virtual cur-

rencies through this method is called "mining," and participants engaged in data processing are known as "miners," responsible for transaction confirmation and data packaging.

2. What is Liquidity Min-ing (Yield Farming)?

Liquidity mining is an application within DeFi (Decentralized Finance) where users provide token assets to support the liquidity of DeFi projects, thereby earning yields. For example, users who deposit or borrow tokens on the Compound lending platform improve the liquidity of the capital pool and receive COMP governance tokens as rewards. Liquidity min-

ing is essentially a token distribution mechanism designed to enhance the usability of DeFi applications and encourage user participation in DeFi activities.

Simply put, it can be understood as earning yields by depositing tokens, a practice termed "mining" that adopts the aforementioned concept of virtual currency mining. The yields from liquidity mining include governance tokens and transaction fees.

For example, when a new bank opens, depositors receive interest income or fees from the bank. To improve capital liquidity, the bank not only pays interest but also provides depositors with stocks issued by the bank. As the bank grows, the stocks held by depositors increase in value; if the bank fails, the stocks become worthless.

As long as there is money in your bank account, you are providing liquidity for the bank's deposit and withdrawal services. In the cryptocurrency sector, this concept is simply referred to as liquidity mining.

3. What is the Relationship Between Playing Blockchain Games and Mining?

Having clarified the above two concepts, let us examine the relationship between blockchain games and mining.

The vast majority of blockchain game projects on the market require players to invest money ("pay-to-play") to participate. There is also a certain threshold for such investment: first, one must register a cryptocurrency wallet (such as MetaMask), purchase virtual currencies like USDT on a virtual currency exchange, and then use these virtual currencies to buy the game tokens of the blockchain game platform. After entering the game, depending on the game type,

players can obtain more game tokens or items by leveling up, defeating monsters, breeding pets, etc. These game tokens or items can then be traded on virtual currency exchanges for other virtual currencies. Subjectively, this behavior of buying and selling game tokens/items on blockchain game platforms and exchanging them for other virtual currencies is driven by

the player's desire to earn while playing. Objectively, it provides liquidity for the exchange of different virtual currencies on exchanges.

For example, Mobox, established in 2020, is a blockchain game platform centered around DeFi liquidity mining. A core gameplay feature of the Mobox platform involves liquidity mining: users provide liquidity for Mobox token and BNB token trading on PancakeSwap (a decentralized cryptocurrency exchange) and stake the received

LP tokens on Mobox to receive airdropped Mbox tokens.

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The common characteristic of virtual currency mining, liquidity mining, and the play-to-earn model in blockchain games is the need to invest labor and resources to obtain proof of work, which is then exchanged for yields. Does the 2021 "Notice" mentioned at the beginning of this article restrict "mining" in blockchain games? The answer is no, it does not.

This is because the Notice targets virtual currency "mining" activities. Virtual currency mining requires purchasing large quantities of mining rigs and computer graphics cards, consuming significant amounts of electricity. In practice, such as in Bitcoin mining, the primary legal violation often involves theft (theft of electricity). Although liquidity mining and blockchain games share theoretical similarities with virtual currency mining, they do not substantially

involve the consumption of large amounts of electricity or the waste of national energy resources.

Without the policy risks restricted by the "Notice," does this mean there are no legal risks? For blockchain game developers, there are two types of high-frequency legal risks to note: the crime of opening a casino and crimes related to illegal fundraising.

For legal analysis regarding the crime of opening a casino, please refer to Attorney Shao's previous article, "How Can Play-to-Earn Blockchain Games Avoid Becoming Gambling?". Today, we will primarily discuss crimes related to illegal fundraising.

Illegal fundraising is not a specific charge; under criminal law, it mainly refers to the crime of illegally absorbing public deposits and the crime of fundraising fraud.

First, the Crime of Illegally Absorbing Public Deposits. According to the "Interpretation of the Supreme People's Court on Several Issues Concerning the Specific Application of Law in the Trial of Criminal Cases of Illegal Fundraising," this crime can be summarized by four characteristics: illegality, publicity, inducement, and non-specificity.

Publicity and non-specificity are characteristics inherent in any blockchain game project, mainly referring to public promotion to society and the absorption of funds from unspecified users. Even if some projects use invitation codes or other methods with certain thresholds to participate in the game, judicial practice generally finds no obstacle in recognizing these as having the characteristic of publicity.

Therefore,if blockchain game platforms wish to minimize the risk of being suspected of illegally absorbing public deposits, they must eliminate "illegality" and "inducement" in their platform gameplay mechanics.To elaborate, "illegality" refers to the prohibition, under the "Announcement on Preventing Risks Associated with Token Issuance and Financing," of platforms engaging in exchange businesses between fiat currency and tokens or "virtual currencies,"

and prohibits buying or selling tokens or "virtual currencies" or acting as a central counterparty in such transactions. "Inducement" refers to promising users principal protection, guaranteed interest, or returns on investment during the game's promotion and distribution process.

Second, the Crime of Fundraising Fraud. This refers to acts committed with the purpose of illegal possession, such as squandering raised funds, using them for illegal criminal activities, concealing them, or evading the return of funds. Although blockchain games are applications based on blockchain technology featuring decentralization and immutability, it is undeniable that developing blockchain games in China cannot be completely decen-

tralized. Among public chains, private chains, and consortium chains, only public chains are highly decentralized.In private chains, within a limited number of nodes, there is theoretically a possibility that organizers may collude with multiple malicious players to harm other players.

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Through the analysis in this article, we can conclude that "mining" in blockchain games does not involve the policy risks associated with virtual currency mining. Entrepreneurs of blockchain game platforms should focus more on legal risks related to illegal fundraising. It is recommended to avoid "illegality" and "inducement" in platform gameplay through compliant promotion and gameplay design. Furthermore, partners internally should also sign

relevant agreements to prevent situations where some shareholders harm the interests of the platform and players, thereby adversely affecting other shareholders.

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