Attorney Shao Shiwei | Legal Risks of Blockchain Game Mining: New Coin Mining

Author: Shao Shiwei

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Binance Launchpad is a method for investing in virtual assets. For project teams, it allows them to sell their tokens on the Launchpad platform to raise funds for their projects; for investors, it offers the opportunity to purchase newly listed tokens at lower prices.

Portal is a Web3 gaming platform that lists more than 200 games, covering various genres such as MMORPGs, strategy games, and survival games. Portal Gaming aims to connect games and players across different blockchain networks based on LayerZero, establishing a unified Web3 gaming ecosystem and providing players with access to and distribution opportunities for a wide range of games.

Game distribution opportunities.

Portal Coin is the native token of the Portal Gaming platform and can be used for platform governance, buying and selling in-game items, and other purposes.

By staking Binance platform tokens BNB and FDUSD, users can receive PORTAL token rewards. The PORTAL mining period lasts for seven days. As of February 27, 2024, according to data from the Binance official website, the PORTAL mining pool had staked over USD 8 billion in assets, including more than 16 million BNB (approximately USD 6 billion) deposited into the BNB mining pool;

The FDUSD mining pool has deposited more than 200 million FDUSD tokens (approximately USD 2 billion).

Exchanges such as Binance, Huobi, and OKX have launched multiple Launchpad offerings. For example, in addition to Axie, Binance previously launched Web3 gaming projects such as The Sandbox and StepN, which delivered substantial returns.

For exchanges, launching Launchpad projects encourages more users to purchase the exchange’s platform token on the exchange, which also helps support the platform token’s price. For project sponsors, this approach serves as a channel for user acquisition and token distribution. For users, it creates the potential for future gains from selling the newly issued tokens. A triple win.

So, is there a risk of loss when investing in new-token mining for Web3 gaming projects?

Participation in a Launchpad requires holding the exchange’s platform token. For example, in the Portal new-token mining project, users must deposit BNB and FDUSD. During the staking period, if the value of the platform token held by the user declines, the user may incur a loss on the platform token even though they receive project token rewards after the mining cycle ends. Of course, the larger the investment, the greater the loss.

the greater the loss.

Assuming the platform token’s price remains stable, if the token rewards obtained through participation in the Launchpad are akin to airdrop farming, then regardless of the project token’s value, the user effectively enjoys a risk-free profit. However, if the user must use the platform token to purchase the new tokens, whether the user profits or incurs a loss will depend on the price at which the new token is sold after its listing.

If the listing price is lower than the subscription price, the user incurs a loss; if the listing price is higher than the subscription price, the user realizes a profit.

The short answer: the risks are borne by the investor.

In Attorney Shao’s earlier article, “What Are the Legal Risks of Overseas Proxy Investments in ICO Projects?”The article analyzes initial coin offerings (ICOs). The white paper of an ICO project is virtually the sole source of information for investors to understand the project, and the risk of the project operators absconding is extremely high.

A Launchpad is, in essence, an initial exchange offering (IEO). Because a project may only be launched on an exchange after the exchange has conducted its review, the risks are indeed somewhat lower compared to an ICO.

However, both ICOs and IEOs entail policy-related risks in China. The Announcement on Preventing Risks Associated with Token Issuance and Financing, issued on September 4, 2017, states that initial coin offerings (ICOs), which raise bitcoin, ether, and other so-called “virtual currencies” from investors, are, in nature, unauthorized and illegal public fundraising activities. Some wrongdoers also issue tokens under ever-changing guises such as ICOs,

IFOs, and IEOs, which exhibit strong concealment and are highly misleading.

In other words, because such investment activities themselves lack legality in China, users find it difficult to assert their rights and seek remedies even if they suffer investment losses or if the platform operators abscond.

For project sponsors, the most significant risk arising from policy-related risks is criminal liability. If a project conducts an IEO targeting customers in China, it may constitute the crime of illegally absorbing public deposits. The elements of illegality, public nature, inducement by promise of returns, and targeting of unspecified persons under this offense are fully satisfied by both ICOs and IEOs—namely, public promotion to unspecified users,

which violates domestic policies. As for inducement by promise of returns, it is precisely because there is a possibility of profit that users pledge platform tokens to obtain new tokens.

Conclusion

Using Binance’s recently listed Web3 game project, Portal, as an example, this article briefly analyzes the mechanics and legal risks of new-token mining. In the next article, we will discuss staking-for-mining in Web3 games.

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