Traditional web2 video games, or off-chain games, that feature loot boxes have frequently been accused of constituting a form of illegal gambling. Most US courts have ruled that gambling requires the possibility of earning rewards with real-world value and that virtual item prizes that cannot be cashed out into fiat currency don’t constitute such real-world value. In the blockchain game context, however, digital assets generally can be transferred out of the game and exchanged into fiat currency. Therefore, blockchain game companies face a much higher risk than off-chain games that their chance-based mechanics constitute gambling.
This legal update, the fourth in our series exploring US regulations impacting blockchain games, provides an overview of the elements of US gambling regulations, considers how those rules have been applied to loot boxes in off-chain games, and how those rules will likely apply to chance-based mechanics in blockchain games. This legal update also includes a list of actions that can help mitigate regulatory risk associated with chance-based game mechanics in blockchain games.