Jeff Ifrah and Jessica Feil Quoted on Recent UK Gambling Commission Esports Report
Esports Betting Report
March 27, 2017
Esports Developers Are Playing A Dangerous Game On Gambling, According To UK Regulators
Game developers and publishers need to take time to read the UK Gambling Commission’s recent position paper on “Virtual currencies, eSports and social casino gaming.”
The position paper is available here.
Video game developers may not think their games are gambling. But under certain circumstances they could run afoul of the UKGC’s regulations and UK gambling law.
One critical difference between US and UK law is that jurisdictions can define an activity as gambling even if no “consideration” is paid. In the US, the three elements of gambling are consideration, chance and a prize.
In the UK, the law defines gaming in section 6 of the Gambling Act as “playing a game of chance for a prize.” This is an important difference that the UKGC highlights in its position paper.
In-game activities may qualify as gambling
Paragraph 3.17 of the position paper states that:
“3.17 The payment of a stake (key) for the opportunity to win a prize (in-game items) determined (or presented as determined) at random bears a close resemblance, for instance, to the playing of a gaming machine. Where there are readily accessible opportunities to cash in or exchange those awarded in-game items for money or money’s worth those elements of the game are likely to be considered licensable gambling activities.”
Even in games where in-game items cannot be traded with other players, the opportunity to exchange items for something of “money’s worth” can suggest to the UKGC that there is an element of gambling.
Something can become of money’s worth if players can buy that item from the game publisher’s online store.
With reference to skin gambling (in-game items are generically referred to as skins), the UKGC explains:
“Where a player loses their entire ‘skin’ inventory having staked them unsuccessfully on gambling activities, one option for them is to purchase new ‘skins’ from the games publishers, either for use within the game or for further gambling stakes.”
Even though the financial loss isn’t direct, the consequent purchase of new skins in effect creates a loss.
The issue is exacerbated if players can trade, gamble or exchange skins for money, even on third-party sites.
Is it fair to hold game developers to account for third party transactions?
ESBR reached out to specialist gambling and esports attorney Jeff Ifrah for an opinion on paragraph 3.17:
“U.S. law looks both to the form of payment for the opportunity to win a prize and the form of payment of any prizes. In many games on the market that accept payments to play the chance contests contained within the game, the prize itself has no ‘real world value.’
That is, the prize as provided by the game only has a virtual value within the game. In contrast, this statement appears to say that because the prizes ‘bear a close resemblance’ to gambling, they should be regulated.
It may be that the UK sees these prizes as similar to free play, but the issue is really whether there is real world value for these items. If the games are working to prevent illicit trading or selling of the items on third-party sites, they should not be held responsible for the real world value ostensibly set by such sites they do not control.”
Ifrah makes the important distinction between skins that have a value inside the game and those which only acquire value externally as the result of third parties.
Game developers can control their terms and conditions. But they have little control over third-party websites which may be in other national jurisdictions.
Such sites offer players with tradable skins the opportunity to sell them, or use them for gambling activities such as entry to lotteries or roulette-type games that may offer real money prizes.
Ifrah contends that regulators should not hold the developer responsible for the actions of organizations outside their control.
The UKGC won’t allow developers to waive their responsibility
In paragraph 3.16 of the position paper, the UKGC disagrees with Ifrah:
“However, we are strongly of the view that the video games industry should not be, or perceived to be, passive to the exploitation of their player community by predatory third parties. The significant risk of harm posed by these unregulated gambling websites, whilst unintended, is nonetheless a by-product of the manner in which games have been developed and in-game economies incorporated for commercial benefit.”
In short, if third parties are converting a social gaming activity to gambling, then the developers do bear responsibility.
Ifrah responded directly to the paragraph by suggesting that the type of actions already being taken by game developers such as Valve are sufficient to exonerate them of responsibility:
“This statement makes it seem that game developers will need to go to heroic lengths to prevent unscrupulous parties from exploiting their product.
The developers are already responding to concerns expressed by regulators by closing their APIs, moving to enforce their terms of service, and other efforts. It is impracticable to expect them to stop all third parties that might find a way to profit off their product without permission.
That is like expecting the government to stop all people from engaging in illicit behavior with official currency. Game developers should not be held liable for ‘unintended by-products’ of their perfectly legal product.”
Overwatch would pass the test, but…
Blizzard’s Overwatch game provides a good example of a game that is likely to comply with the UKGC’s strictures. However, it could easily slip into the gambling definition if the developers expand its features.
Overwatch has several features that make it of interest to the UK gambling regulator:
- The game targets children as well as adults.
- Loot boxes contain random prizes.
- Players can purchase loot boxes online.
In Overwatch, players can obtain “loot boxes” in several ways:
- Playing in arcade games.
- As a prize for leveling up.
- Purchased directly from the online store.
Each loot box contains a random selection of four items that can players can use in-game.
From the UKGC’s perspective, Overwatch already contains several elements that contribute to a possible definition of gambling.
Loot boxes contain prizes that the publisher determines by chance. They have a monetary value because players can buy them online. Players can even buy them using World of Warcraft gold. (Users can acquire gold for real money at third-party sites online.)
Overwatch is a game with many players under the age of 18. If any gambling is identified, the UKGC will certainly take legal action.
More with the Overwatch hypothetical
The Overwatch model succeeds in avoiding the definition of gambling. Players cannot trade the in-game items acquired in their loot boxes with other players. There is no way of using them to gamble or exchange them for money on third-party sites.
Blizzard could try to enhance Overwatch by making these items tradable. However, it would risk the UKGC making a determination that the game did qualify as gambling.
Under UK law, Blizzard would then require a gambling license. Overwatch sale and use would then fall within the UK Gambling Act and UKGC regulations.
The line that the UKGC has drawn between gambling and not-gambling is very close to where many video games are currently.
Crossing the line would not only bring reputational risks, but could also be a very expensive mistake. The size and importance of the UK market is very important to video game revenues.