play-to-earn gaming legal Archives

Are NFT Collectible Card Games Legal in the United States?

NFT collectible card games are generally legal within the United States, provided that developers and players comply with several key laws. Specifically, these games implicate securities regulations, anti-gambling laws, and tax issues. NFT collectible card games are a natural Web 3.0 extension of over-the-board card games like Magic: The Gathering and have drawn a lot of attention, including from Reddit co-founder Alex Ohanian. These games leverage Non-Fungible Tokens (NFTs) to create scarce and valuable digital cards that players can collect, trade, and use in gameplay. The idea is similar to play-to-earn games that attach real-world value to in-game digital assets. While lucrative from a business standpoint and fun to play, these games create potential legal issues for both players and developers alike.

Gameplay

Before analyzing where NFT collectible card games fit within a legal framework, one must first understand the games themselves. The basic concept is that players purchase or otherwise acquire packs of random cards (with preset rarity distributions) that can be used to play a board/table-top game and also have collector and secondary market value. NFT or “digital” collectible card games are based on the same concept – players purchase or “mint” a pack of cards that they can use to play a game, collect for their own enjoyment, or trade or sell on the secondary market. Of course, the NFT cards do not have a physical component and exist only on the particular blockchain. Integrating NFTs ensures immutable value to these assets, same as physical cards in the old-school table-top games.

Here is a brief overview of a few of the most popular NFT collectible card games:

Gods Unchained

Theme: Gods Unchained is a strategic card game set in a mythological universe. Players become powerful gods battling for supremacy.

Rules: Players start by choosing a god, each with its unique powers and abilities. Next, they build a deck of 30 cards consisting of creatures, spells, and weapons. The game proceeds in turn-based rounds. Each player uses their cards to attack the opponent’s god, defend their own god, or manipulate the game board. The objective is to reduce the opponent’s god’s life points to zero. Gods Unchained utilizes the Ethereum blockchain to mint its cards as NFTs. Players can then trade or sell in various marketplaces.

Splinterlands

Theme: Splinterlands is a fantasy-themed card game. Players summon creatures and cast spells to outwit their opponents in fast-paced battles.

Rules: First, players build a deck by choosing a Summoner and selecting a set of monsters from their card collection. Each card has unique abilities, attack and health points, and mana cost. During a match, players have a limited amount of mana, which they use to summon monsters and cast spells. Players compete in automated combat rounds, trying to defeat the opponent’s team of monsters. As with other NFT collectible card games, players can trade, rent, or sell the various NFT cards to other players.

Skyweaver

Theme: Skyweaver is set in a rich, cosmic universe. Players engage in strategic battles using cards representing creatures, spells, and enchantments.

Rules: In Skyweaver, players initially assemble a deck of 20 cards from a diverse pool of over 500 unique cards. The game categorizes cards into various prisms, each with its unique playstyle and strategy. Players take turns playing cards from their hand. They use their hero’s mana to cast spells, summon creatures, and attach enchantments to other cards. The objective is to reduce the opponent’s hero’s life points to zero. Skyweaver mints cards as NFTs on the Ethereum blockchain, and players can buy, sell, or trade the NFTs on various platforms.

Other popular NFT Collectible card games include:

CryptoSpells
Dark Country
ChainGuardians
Sorare
Axie Infinity (Card-Battler)
Relentless (formerly known as Zombie Battleground)
War Riders
CryptoAssault
Ether Legends
Force of Will (FoW) NFT

Legality of NFT Collectible Card Games

Are these games are legal? NFTs, cryptocurrency, and blockchain technology in general have all attracted significant legal scrutiny. So, are NFT collectible card games legal within the United States? Short answer: it depends.

Are the NFTs used in these collectible card games unregistered securities? I have previously written on the topic of whether play-to-earn games really just sell unregistered securities and it is certainly possible depending on how the particular game is structured. The Securities and Exchange Commission applies the 4-prong Howey investment contract test to any novel NFT/cryptocurrency offering, which is a balancing analysis that asks whether a particular scheme is (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profit, and (4) with the profits derived from the efforts of others. Generally, NFTs that represent digital assets like art, collectible cards, or virtual real estate do not qualify as securities under U.S. law, but this very question is currently being decided in private litigation between the holders of NBA Top Shots digital trading cards and their creator, Dapper Labs. Recently, a federal court denied Dapper Labs’s motion to dismiss, setting the stage for an in-depth court battle to determine the status of the NFTs under federal securities laws.
Is an NFT collectible card game gambling? The question of whether trading cards and collectible cards are “gambling for kids” has been litigated since at least the 1980s when baseball card manufacturers had to defend against allegations of their purported use of gambling mechanics to sell their products. Courts have consistently held that plaintiffs get what they paid for – baseball cards – and suffer no damages from their “disappointment” in failing to get an ultra-rare chase card. More recent cases involving video game loot boxes suggest that the answer may depend on whether the NFTs are considered “things of value” under state gambling laws. In general, gambling is defined as risking something of value on an uncertain outcome to win a prize. A game where players wager real money or valuable NFTs on game outcomes could be subject to state and federal gambling regulations. To avoid a gambling classification, game developers should ensure that their games focus on strategy and skill-based gaming, and that players earn value through skill, rather than chance.
Additionally, what are the tax implications of purchasing and selling NFT collectible card game assets? The IRS has indicated that it will apply a “look-through analysis” in determining how an NFT will be treated for tax purposes. In essence, the IRS is looking beyond the non-fungible token itself and considering the nature of the digital asset it represents. Consequently, the IRS may classify NFT cards as collectibles, which are subject to a higher capital gains tax rate than other property types. Aside from these tax implications for the players themselves, investors and NFT creators must also consider other tax implications of minting and obtaining NFTs.

Securities laws, anti-gambling regulations, and tax issues are all implicated in the rapidly evolving market of NFT collectible card games and digital gaming in general. Legal compliance is critical to not only avoid regulatory actions or tax penalties, but to also secure credible investors, banking, payment, and other technological partnerships.

The qualified and specialized attorneys at Artaev at Law PLLC know gaming and blockchain law – email or call us to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, tax, or investment advice. Every situation is different and has its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

Are Play-to-Earn Video Games Legal in the United States?

Play-to-Earn is Hot, But Rife With Legal Pitfalls.

However, it is the end of 2022, and making money playing video games is a real and viable career choice. Esports and video game tournaments are mainstream events, with their own ESPN page, multi-million dollar teams, and celebrity-status professionals. Many colleges offer esports scholarships. Casual video game tournaments (Call of Duty, FIFA, Gran Tursimo) are also a thing. For the more casual gamer, there are also real-money skill-based games (timed solitaire, bingo, etc.) available on the web or from the App Store. Daily Fantasy Sports giants like DraftKings and FanDuel also offer skilled players an opportunity to win real money by drafting the best fantasy sports teams.

There are also a number of NFT-based collectible card games, horse racing simulators (like Zed.Run), and countless other permutations of games where players are able to own in-game assets that they can sell and trade like their real-world counterparts. This sector of the gaming economy continues to grow, as the relatively low cost of cryptocurrency makes entry a lot more accessible. Many players also see the current “bear” market as a prime opportunity to enter some of these projects at low cost and potentially see significant growth in their in-game assets as the economy rebounds.

Modern play-to-earn games are simply another variation of the real-money gaming business model. Developers in this space fully embrace the concept of a virtual economy and the ability to earn real-world compensation for game play. The most prominent example is Axie Infinity (a Pokemon-type trading, collecting, and battling game), which has integrated blockchain technology (crypto and NFTs). Investors around the world, including Mark Cuban, quickly embraced the play-to-earn gaming model. Even in the times of the “crypto winter,” Axie is still worth many millions of dollars.

Advertising and Onboarding May Require a Legal Opinion.

Any real-money gaming business (including play-to-earn) needs experienced gaming counsel to guide them through various compliance issues. Advertising a real-money game on social media and getting through Apple’s approval process on the App Store requires a legal opinion that the game is truly skill-based and not illegal gambling. Is your game structured so that they are providing a service to you in exchange for compensation? Depending on the nature of your game, you may have unintended labor law obligations and even tax filing (W-2 or 1099) obligations to the IRS and state tax authorities.

Make Sure Your Game is Not Selling Securities.

Another potential pitfall is with the Securities and Exchange Commission (“SEC”). When designing your game and reward system, you must make sure that you are not inadvertently marketing a security and violating federal law. Securities are not just traditional stocks and bonds. An “investment contract” is also a regulated security and broadly includes any scheme where individuals pay money with the expectation that their money will be invested and they will earn a return. In the cryptocurrency world, initial coin offerings (“ICOs”) face heavy SEC scrutiny, especially after several high-profile cryptocurrencies turned out to be pyramid schemes.

The “investment contract” analysis is highly specialized and requires a thorough legal opinion. Each game is different, the laws are quickly changing in this area, and regulatory agencies are especially sensitive to crypto-related businesses in light of the numerous 2022 failings, bankruptcies, and rug pulls – with FTX being only the most recent example.

Beware Tax and Other Regulations If Your Game Uses Cryptocurrency or Other Blockchain Tech.

Speaking of crypto, if you are utilizing cryptocurrencies, tokens, NFTs, or other blockchain technologies as part of your game, there are more legal issues in play. Tax reporting and tracking are essential because the IRS considers cryptocurrencies to be property subject to capital gains tax. Does the game involve any crypto staking? If so, is your company now considered a bank subject to the FDIC’s jurisdiction? Are you involved in the business of money transmission and required to be licensed in each state where you do business?

Despite the slow regulatory change in this area and continued lack of centralized regulation, this area remains in the public eye and something of continued interest to regulators.

The bottom line is whatever your game and whether you are a veteran or just starting out, an experienced gaming attorney is a necessary asset to your business team.

Contact Artaev at Law PLLC to set up your initial consultation. We are Michigan’s gaming law firm and we specialize in the unique concerns that you may encounter as a game developer.