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 advice or a legal opinion on any specific matter. For article reprints, legal consultations, or business exchanges, please add: sswls66
Introduction:
To enhance user engagement in games, many game operators establish points malls where users can redeem in-game points for physical goods or gift cards and vouchers, such as shopping cards and mobile phones. Is this practice lawful?
On July 15, 2023, the Guiyang Procuratorate’s WeChat official account published a case study titled “Operating an Online Casino: Prosecuted! Sentenced! Judgment Effective!”. In the game “Crazy Fishing,” because the game operator added features such as “redeeming game items for physical goods,” Ye Moumou and ten other individuals were sentenced by the Guiyang County People’s Court to fixed-term imprisonment ranging up to five years and four months for the crime of operating a casino.
Does redeeming game points for physical goods or vouchers necessarily constitute a violation of law? Today, we will discuss this issue.
Author: Attorney Shao Shiwei
01
Why Does Redeeming Points for Physical Goods Constitute the Crime of Operating a Casino?
A lawful game may only provide a “points loading” function (where players top up with fiat currency to purchase in-game virtual currency) and must not provide a “points unloading” function (converting in-game virtual currency or virtual items into cash). Otherwise, there is a risk of involvement in gambling-related activities. Relevant legal analysis can be found in my previous articles.《Play-to-earn blockchain games: how to avoid being classified as gambling?》This has also been mentioned.
It is now common knowledge that game operators must not enable cash-out functionality on their platforms, such as directly converting in-game virtual currency or items into fiat currency. However, beyond enhancing the overall gaming experience, allowing players to cash out game currency is indeed an effective way to attract more users and increase revenue for game operators.
Consequently, some game operators have adopted workaround strategies, using point redemption for goods as a marketing tactic to incentivize more users to top up and play. Unbeknownst to them, whether providing cash or physical goods for redemption, the essence remains the same and will be deemed by judicial authorities as “cashing out,” as illustrated in the aforementioned case where a fishing game was ruled to constitute the crime of operating a casino.
So, is the point redemption feature necessarily prohibited by law?
02
Can game operators still offer the option to redeem points for physical goods?
A phrase I often repeat lately—“this is a complex issue”—applies equally here. Let us first examine a relevant legal provision:
Notice of the Ministry of Culture on Regulating the Operation of Online Games and Strengthening Interim and Ex Post Supervision (hereinafter referred to as the “Notice”) (Wen Shi Fa [2016] No. 32)
(9) Online game operating enterprises shall not provide services enabling users to exchange online game virtual currency for legal tender or physical goods;
(10) Online game operating enterprises shall not provide services enabling users to exchange virtual items for legal tender. Where users are allowed to exchange virtual items for small-value physical goods, the content and value of such goods must comply with relevant national laws and regulations.
Although this Notice is no longer in effect, no new regulations have replaced it; therefore, it still retainsa certain degreereference value. We will begin with this provision to provide statutory interpretation and legal reasoning.
These two provisions concern the prohibition on game operators allowing the "reverse exchange" of virtual currency/props. Article 9 prohibits the exchange of virtual currency for fiat currency or physical goods; Article 10 prohibits the exchange of virtual props for fiat currency, but leaves an opening regarding whether they may be exchanged for physical goods.
This raises three questions:
1. Given that there is a provision allowing virtual props to be exchanged for physical goods, does this mean that the exchange function has a legal basis? Why do relevant platforms still face criminal legal risks?
2. If only virtual props are allowed to be exchanged for physical goods, while virtual currency is not, what is the distinction between props and virtual currency? How can one avoid the legal risk of props being classified as virtual currency, thereby leading to characterization as the crime of operating a casino?
3. What kind of exchange services must a platform provide to be considered involving "small-value physical goods"?
Regarding the first question,
We cannot deny that not all platforms offering point-exchange-for-physical-goods functions are deemed to be operating casinos. In practice, for example, the game points in "Tencent Happy Landlord" can be exchanged for third-party products such as JD.com gift cards and mobile phone credit cards. Although the Notice has expired, it indeed retains a certain degree of reference value. Why do we say "a certain degree"?
Because this is indeed an expired regulation; strictly speaking, the statement that props can be exchanged for physical goods no longer has a legal basis.
Regarding the second question,
Concerning the distinction between props and virtual currency, according to the "Guidelines for Supervision and Law Enforcement of Online Game Virtual Currency," issued on November 16, 2010, and currently in effect: "For virtual props (game coins) purchased directly by users with fiat currency and having the function of being exchanged for other game props, game coins, or value-added services provided by the game operating enterprise,they may be referenced as online game virtual currency.management requirements.”
Therefore, it is not sufficient for a game operator to argue, “The redemption function we provide to users is for virtual items, not virtual currency!” in order for such an argument to be accepted by judicial authorities.
The third issue is
Article 9 of the Notice provides that redemption of virtual items for small-value physical goods may be permitted. However, this provision remains relatively ambiguous. What specific regulations are referred to by the requirement that the content and value of the physical goods “shall comply with relevant national laws and regulations”? This is unclear. Nor is there a clear limit on what constitutes “small-value.” Does “small-value” mean within RMB 100, or within RMB 500? Perceptions may vary from person to person. In practice, some platforms use “phone credit cards” as redeemable vouchers. In theory, there should be no difference in public perception of the value of phone credit cards; nevertheless, there have been cases in which parties were convicted of the crime of operating a casino. For example, in Case No. (2021) Xiang 0923 Xing Chu 189, the court held that the redemption mall set up in the game allowed virtual items to be directly redeemed for Youjia virtual cards that could be cashed out, and therefore the platform had the nature of gambling and constituted a gambling website.
03
Lawyer’s recommendations:
Where a platform provides point-redemption services to users, whether through functionalities built into the platform itself or through cooperation with third-party payment aggregators (fund settlement platforms), there will be risks of involvement in gambling activities. Therefore, such practices are not encouraged for platforms.
For game operators that still wish to leverage this functionality to drive user growth, the following recommendations are provided:
1. Avoid, to the greatest extent possible, the legal risk that in-game items may be deemed virtual currency.
For example, ensure that in-game items cannot be purchased directly with fiat currency, and that the items do not have the function of being exchanged for in-game virtual currency, among other measures.
2. Do not cooperate with third-party entities, such as payment aggregators, to provide end-user cash-out services.
How should this be understood? For example: the platform sets up a service allowing in-game virtual items to be redeemed for shopping cards worth RMB 200, and a third-party entity cooperating with the platform then repurchases the shopping cards from users at a price of RMB 150. This ultimately achieves a process whereby the platform indirectly exchanges cash with users, and the platform will inevitably be involved in gambling activities.
