Special Disclaimer: This article is an original work by Attorney Shao Shiwei. It reflects only the author’s personal views and does not constitute legal advice or a legal opinion on any specific matter. For article reprints, legal consultations, or business exchanges, please add: sswls66
Introduction:
The gaming industry has consistently been one of the fastest-growing and most profitable industries worldwide. In traditional games, game operators retain control over the game environment, resulting in a lack of transparency and trust in the market. In special circumstances such as server shutdowns, players’ interests may not be adequately protected. Compared to traditional games, Web3 games (also known as GameFi or blockchain games),
by leveraging blockchain technology, enable each player to maintain control over their in-game assets. Furthermore, the use of smart contract technology ensures that transactions are open and transparent. Consequently, in recent years, an increasing number of gaming entrepreneurs have focused their attention on Web3 games.
However, due to the financial attributes inherent in Web3 games and their emphasis on the “play-to-earn” model, Web3 games face inherent policy risks in China compared to traditional games.
What issues should Web3 game entrepreneurs pay attention to? This article provides a chronological overview, outlining ten key legal issues that entrepreneurs need to address during the project preparation phase, the pre- and post-launch publicity and promotion phases, with respect to the game content itself, and during ongoing game operations.
Author: Attorney Shao Shiwei
I. If the technical team is based overseas, can domestic legal risks be avoided?
This is the most frequently asked legal question encountered by Attorney Shao during consultations, without exception.
Many Web3 entrepreneurs have a certain understanding of China’s laws and regulations related to blockchain. They often believe that“Given the numerous restrictions on development within China, it would be better to locate the project overseas.”？The first issue to address concerns the individuals involved. Project parties whose personnel are located in China, in an effort to avoid potential liabilities arising from the project itself,
legal risks, they often consider engaging overseas technical teams for development. Alternatively, both the personnel and the project may be located overseas, while the development team engaged is based in China.
In fact, both models may, to a certain extent, mitigate civil and administrative risks, butcriminal risks are difficult to avoidbecause the Criminal Law of the People's Republic of China provides for territorial jurisdiction and personal jurisdiction. Territorial jurisdiction means that China has jurisdiction if either the criminal act or its consequences occur within Chinese territory; personal juris
diction means that China also has jurisdiction over crimes committed by Chinese nationals outside Chinese territory. Therefore, China has jurisdiction whenever a crime is committed by a Chinese national, or when the criminal act or its consequences occur within China.
II. What policy restrictions apply to developing Web3 games within China?
Web3 games centered on "play-to-learn" mechanics generate tokens within the game. Tokens generated by overseas Web3 games can be directly converted into cash on exchanges. However, in China, virtual currency-related activities are classified as illegal financial activities. Issuing tokens, conducting initial coin offerings (ICOs), and allowing token financing trading platforms to engage in exchange services between virtual currencies and fiat currencies, or between virtual c
urrencies, are prohibited, among other restrictions.
Relevant policies include the Risk Warning on Preventing Illegal Fundraising in the Name of "Metaverse" issued by the China Banking and Insurance Regulatory Commission on February 18, 2022, which reminded the public to be vigilant against fraud under the guise of metaverse blockchain games. Some offenders 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, among other methods. 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.
These measures subject Web3 game entrepreneurship within China to strict regulatory oversight.
III. Must a Web3 game obtain a game license number before launch?
This issue must be distinguished based on whether it occurs domestically or abroad.
If a Web3 game is issued domestically, it is required to obtain a game license number under the Interim Provisions on the Administration of Game Publication and other applicable laws and regulations. However, practitioners in the gaming industry are well aware of the significant difficulties involved in obtaining a domestic game license number.
If a Web3 game is launched domestically without a license number or by misusing another game’s license number, it may, at a minimum, entail administrative penalty risks, and, at a maximum, may result in criminal liability forthe crime of illegal business operationsAlthough there remains substantial controversy as to whether launching a game without a license number constitutes the crime of illegal business operations as strictly defined under the Criminal Law, Attorney Shao believes that judicial practice has indeed seen numerous cases in which game operators have been convicted of
the crime of illegal business operations. For relevant legal analysis, please refer to “Is It Permissible to Launch a Blockchain Game (GameFi) Without a Game License Number?,” which will not be reiterated herein.
If a Web3 game is issued abroad, it willnot be subject to the license-number restrictions imposed under PRC law.For example, if a project team lists its Web3 game on Steam, a game distribution platform launched by a U.S. company, there are no domestic license-number restrictions. This leads many enquirers to ask a further question: Is it lawful for games listed on Steam to target
players in China? For relevant legal analysis, please refer to “Is it illegal to publish and distribute games on Steam without a game publication license?In short, from a compliance perspective, regardless of whether games listed on Steam are geo-blocked for the Chinese mainland, it is advisable to maintain a low profile in marketing and promotional activities and refrain from conducting publicity or promotion within China.
4. At the promotional level, remain vigilant against pyramid scheme risks!
Regardless of whether Web3 game servers are hosted domestically or overseas, developers must guard against pyramid scheme risks arising during user acquisition and promotional campaigns before and after launch. A common user-acquisition model operates as follows: User A can generate a personalized QR code or link in product promotional materials; if User B registers through sharing that QR code or link,
User A may receive platform rewards. Such rewards (or referral commissions earned by existing players) are typically calculated as a percentage of new players’ spending after they join the game. Based on the chronological order of joining, a pyramid-like hierarchical structure is formed.
Under PRC law, pyramid schemes refer to activities in which organizers or operators recruit participants and derive illegal profits by calculating and paying remuneration based on the number of persons directly or indirectly recruited by such participants or on their sales performance, or by requiring participants to pay certain fees as a condition for obtaining membership eligibility, thereby disrupting economic order
and affecting social stability. Where an organization has thirty or more participants engaged in pyramid-scheme activities and the hierarchy comprises three or more levels, criminal liability shall be pursued against the organizers and leaders.
5. Gambling-related risks constitute the most significant legal risk that Web3 game entrepreneurs must address.
At a press conference held by the Supreme People’s Procuratorate on November 29, 2021, it was explicitly stated that “a salient feature of applications suspected of involving gambling is the presence of cash-out functionality.” The play-to-earn model inherent in Web3 naturally carries gambling-related risks.
For example, Fomo3D is a gambling game on Ethereum. Its gameplay involves a 24-hour countdown timer; each time a player purchases KEY (an in-game token), the countdown is extended by 30 seconds. As the prize pool grows, the price of KEY increases. The last player to purchase KEY before the game ends can win a substantial
cash prize. In addition, holders of KEY receive proportional dividend distributions.
If a game incorporates chance-based mechanics whereby players can obtain in-game items or token rewards through gameplay, and such rewards can be converted into cash through certain means—for example, by trading on virtual currency exchanges—and the game developer recovers in-game items or tokens from players through direct or indirect methods, then the necessary elements for gambling-related criminal offenses are present.
characteristics. For a more detailed analysis, please refer to “Play-to-Earn Blockchain Games: How to Avoid Becoming Gambling?》。
VI. Legal Risks of Domestic Web3 Games Operating Secondary Trading Markets for Players
As mentioned in the previous section, if a platform provides direct or indirect assistance in the final cash-out of players’ game tokens or items, the game carries risks of being deemed gambling-related. Many entrepreneurs therefore ask whether it is permissible to operate a secondary market that allows players to trade among themselves.
First, if the assets involvein-game virtual currencies, both the Measures for the Administration of Online Games (Draft for Comments) issued on December 22, 2023, and prior gaming regulations expressly prohibit providing services that exchange online game currencies for legal tender. In addition, the 2017 “September 4 Announcement” explicitly prohibits initial coin offerings (ICOs) within China; consequently, token trading may also carry the legal risk of being characterized as a disguised issuance of tokens.
token trading may also carry the legal risk of being characterized as a disguised issuance of tokens.
Second, with respect to players’ NFT assets within games, can a secondary market (consignment market) be opened to enable peer-to-peer trading? From a compliance perspective, reference should be made to State Council Document [2011] No. 38 (“Document No. 38”) and General Office of the State Council Document [2012] No. 37 (“Document No. 37”), which prohibit standardized contract trading through centralized trading methods such as centralized bidding, electronic matching, anonymous trading, and market-making. From the standpoint of judicial practice, the legal risks associated with Web3 gaming platforms operating NFT-related secondary markets can be assessed by analogy to digital collectibles platforms. Attorney Shao has handled numerous criminal cases involving operators of digital collectibles platforms. Where a platform operates a secondary market and user complaints trigger investigations by public security authorities, there have been many cases resulting in the criminal detention of operators.
anonymous trading, and market-making. From the standpoint of judicial practice, the legal risks associated with Web3 gaming platforms operating NFT-related secondary markets can be assessed by analogy to digital collectibles platforms. Attorney Shao has handled numerous criminal cases involving operators of digital collectibles platforms. Where a platform operates a secondary market and user complaints trigger investigations by public security authorities, there have been many cases resulting in the criminal detention of operators.
authorities, there have been many cases resulting in the criminal detention of operators.
VII. Have Web3 Gaming Platforms Become Tools for Money Laundering?
From the perspective of criminals, Web3 gaming platforms can also become instruments for their criminal activities. We illustrate this point using Roblox, the so-called "first metaverse stock" (an online gaming platform aimed at children and adolescents), as an example.
In 2021, the metaverse platform Roblox went public on the New York Stock Exchange. Prior to that, a class-action lawsuit involving the platform revealed that more than 300 users might have been suspected of using Roblox for money laundering. These users "appeared to use the Roblox platform to transfer funds to each other by purchasing fake items, which is a highly inefficient and expensive method of transferring funds."
For instance, one user spent in-platform virtual currency Robux (equivalent to approximately USD 12,500) within a month to purchase the same item from the same seller repeatedly; another user spent the equivalent of USD 6,250 in a single day to purchase items they themselves had listed for sale.
If the platform has serious deficiencies in compliance, it will harm the interests of a broad user base and adversely affect the platform’s long-term development.
If the platform is established within China, pursuant to regulations such as the Cybersecurity Law and the Provisions on the Administration of Blockchain Information Services, internet users are required to provide real-name identity information when registering, logging in, and using internet services. According to regulations such as the Anti-Money Laundering Law of the People's Republic of China and the Regulations on the Administration of Payment and Clearing Institutions, internet
companies providing services related to fund transactions must establish and implement effective Know Your Customer (KYC) systems to ensure the effective implementation of customer identity verification, risk assessment, transaction monitoring, and other relevant procedures.
VIII. When Web3 Game Entrepreneurs Are Accused of "Fraud"
As a criminal defense lawyer deeply engaged in the Web3 industry, the criminal cases involving platforms that I handle often arise from user complaints. Players who incur losses while playing games on the platform typically pursue several avenues for recourse: (1) A small minority of aggressive complainants are often unreasonable in normal discourse. They argue, "I lost money playing on your platform, so the platform is committing fraud.
If it is fraud, I will report it to the police." (2) Another segment of rational users may choose to file civil lawsuits in court, but they often face difficulties in getting their cases accepted; consequently, these users also turn to filing reports with local police stations. (3) The majority of users choose to lodge complaints via the 12345 hotline to administrative departments such as the Market Supervision Administration. The cumulative number of such complaints draws the attention
of public security authorities, and platform operators are highly likely to receive an "invitation for tea" from the police.
Therefore, during operations, platforms must establish effective mechanisms for handling user complaints, enhance customer satisfaction with platform services, effectively appease user emotions, engage in proactive communication, and provide customers with effective solutions.
IX. Web3 Gaming Platforms Must Guard Against Risks of Illegal Fundraising
As noted in the 2022 Risk Alert on Preventing Illegal Fundraising under the Guise of the “Metaverse,” certain bad actors fabricate metaverse-related concepts, such as game development, publicly promote false claims of high returns, and thereby absorb funds from the public, exhibiting characteristics of illegal fundraising. Criminal offenses involving illegal fundraising under the Criminal Law generally include the crime of illegally absorbing public deposits
and the crime of fundraising fraud.
The economic models of early Web3 games suffered from a major flaw: the profits of existing players depended on the entry of new players. Once existing players engaged in large-scale selling of in-game tokens, market participants fell into “FOMO” sentiment, leading to a continuous decline in the user base and ultimately causing the game to enter a “death spiral.” If, from the players’ perspective, the project team consequently
“gave up” or “absconded,” without implementing any risk-control measures, then, based on Attorney Shao’s case-handling experience, some judicial authorities may initiate criminal investigations against the platform for offenses such as fundraising fraud.
10. Risks of Intellectual Property Infringement in Web3 Games
For digital assets within games, such as NFTs, where the underlying works are registered, copyright registration certificates and proof of copyright ownership should be obtained; for unregistered works, the platform should obtain copyright declarations and related undertakings signed by the original rights holders, to avoid placing infringing works on-chain. If a platform, without the permission of the copyright owner, unauthorizedly uses another person’s work to mint NFTs for commercial
purposes, it shall bear civil liabilities under the Copyright Law, including cessation of infringement, elimination of adverse effects, apology, and compensation for losses. In more serious cases, depending on the circumstances, criminal liability may also arise for crimes such as copyright infringement and the sale of infringing copies.
Concluding Remarks:
As the market recovers, Web3 games are regaining momentum, with new development teams continually emerging. However, for Web3 game entrepreneurs in China, operations are subject to the dual constraints of gaming laws and regulations and blockchain-related policies. Attorney Shao has compiled these ten high-frequency legal issues that may arise during Web3 game entrepreneurship,
in the hope that they will be helpful to industry practitioners.
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