Loot boxes: What can gaming firms do to avoid regulatory action
As loot boxes begin to become persona non grata for gambling regulators across the world, what are gaming firms doing to stay out of the bad books of regulators?
The unmistakable trend in the gambling industry in recent years is more stringent and rigorous regulatory requirements. As the line between gambling and gaming has blurred, gaming companies started to attract regulators scrutiny as well. As result of the significant and ongoing interest in esports and emerging trends in console and mobile gaming, more and more countries are taking the decision to ban the use of loot boxes in games completely, countries such as Belgium, The Netherlands and Australia to name but a few.
Other territories, including France and the UK, have taken a different approach and regulated loots boxes as gambling and therefore, their offering, if allowed, requires a license (which is very expensive to obtain and maintain due to strict regulatory and compliance requirements). The reason for this trend is due to the fact that although most games publishers do not allow “cashing out” of virtual items generated by loot boxes, and therefore items have no real-world monetary value, the items can still be traded either within the game or on secondary markets.
Recently, a significant number of European regulators have started to investigate and enforce the prohibition on loot boxes imposing heavy fines upon those found guilty of offering them.
Last April, the Belgium Gaming Commission stated that randomised rewards, meaning in-game items in exchange for real money were in violation of the country’s gambling legislation, thus illegal and may result by a prison sentence of up to five years and a fine of up to €800,000 for those that fail to comply. The Dutch regulator (KSA), has ruled that some loot boxes could be classified as gambling, namely those found in FIFA 18, Dota 2, PlayerUnknown’s Battlegrounds, and Rocket League. Those found to be in breach of the law will face administrative fines of up €830,000, or a portion of worldwide turnover.
Other jurisdictions, while not actively declaring loot boxes as illegal gambling, still instruct legal scrutiny of the matter. The latest state to conduct a review of loot boxes is Sweden, where last month, Swedish authorities initiated a review of lottery-or casino-like elements in games to ensure they are sufficiently protecting customers, particularly children.
The best way to avoid fines and comply with all anti loot box regulations is simply to Geo block access in those territories which have deemed it illegal completely. Such an approach was recently taken by console gaming heavyweights: Nintendo and Valve. In the case of Nintendo, it announced this May that 2 of its leading mobile games Fire Emblem Heroes and Animal Crossing: Pocket Camp would be terminated, in order to avoid potential conflict with the Belgium’s loot box ban. Valve has already made a similar move to comply with the Netherlands’ loot box regulations by disabling item trading and Steam Marketplace transfers for Dota 2 and CS:GO in the country.
Alternatively, in order to avoid regulatory scrutiny, another version of the game could be released without the loot boxes, which is precisely what mega games’ publisher Blizzard has done. Another way, although not as favored is to list those restricted jurisdictions in the company’s terms of use, to prevent players from participating in games with loot boxes.
The least recommended way, for various reasons, is to include an indemnity clause in the company’s terms of use therefore transferring the monetary fines, if imposed, upon those players triggering the non-compliance by participating from restricted states. Although contractually binding, some regulators may still impose fines in such cases since it is the game publisher obligation first and foremost to comply with all compliance requirements. If you are a game publisher or developer currently offering games with loot boxes, it is highly recommended to take an action now, whichever way you may choose to take in order to avoid regulators scrutiny and possible fines and even imprisonment.
Author: Dina Niron, founder and CEO of Sparks Advisory
Dina Niron is the Founder and CEO of Sparks Advisory, a consulting firm, where she consults companies on gaming and gambling compliance and legal requirements in various jurisdictions as well as advises on business strategies.
Niron has previously served as CEO of Playtech’s Juego Online subsidiary, managing Playtech’s B2C operations in Spain. During that time, Dina led some of Playtech’s most substantial M&A deals such as PokerStrategy and the joint venture with Gauselmann.