GameFi Crypto Unlikely to Feel Regulatory Heat Anytime Soon

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Models dress up as anime characters at the Thailand Crypto Expo on May 14, 2022 in Bangkok. Visitors… [+] learn more about blockchain and gamefi projects, among others. (Photo by Lauren DeCicca/Getty Images)

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The House Financial Services Committee held a hearing Tuesday into the collapse of FTX, and its once-famous and now highly aligned founder, Sam Bankman-Fried, is now under arrest. Cryptocurrency investors and project managers will all say that more regulation is good for the industry. But there is one sector of the crypto world that is being debated on the regulatory side of things. It’s GameFi. The blockchain gaming segment was a darling of gaming tokens for crypto until this year when the likes of Axie Infinity died down over 90%. Late investors lost almost everything. Why not regulate the GameFi guys as well?

The consensus of all market players I’ve spoken to is that regulation won’t come for GameFi coins in 2023. But the investor risk of buying GameFi games is high, and not much different from giving all your crypto capital to FTX.

I firmly say no to regulation right now, says Mat Paul, chief strategy officer for Unix Gaming in Bali, Indonesia. A title has the expectation of profits based on the effort of others. When a game is designed correctly, game assets are difficult to acquire without actually playing the game. Since you have to put in the effort to acquire these game assets yourself, the majority of them will not be held only by real players of the game and not by speculators who buy coins, he says. Players will play the game for the game, not for financial benefit. Actual ownership of digital assets and the ability to monetize them are game bonuses, but the main attraction (for playing or investing in GameFi protocols) has to be the game itself.

GameFi allows game developers to monetize their games in new ways. Monetizing games through tokens and in-game assets sometimes gets more players involved in the game. But just like XBox is owned by Microsoft, a tradable security, blockchain games are owned by young start-ups, maybe five to 10 years old at the high end, who sell their tokens to investors who more often than not have never played the game, or seen the game in the first place.

If publishers of video games for the Xbox go public, like Activision BlizzardATVI, these companies are all regulated, and investors are protected. No one is immune to mishaps at companies like Vietnam-based venture capital-backed Axie Infinity. The company was only launched in 2018. Anyone can buy Axie tokens on Coinbase. Imagine buying shares in a four-year-old Vietnamese start-up without investor rights? It’s not just a GameFi problem. It’s a crypto problem at this point.

When finance reaches a new market, there will always be a need to establish clear, fair and protective guarantees for investors, says Borja Villalobos, CEO of Banger Games in Madrid. A cooperative framework must first emerge between online security, commerce and finance regulators to understand the nuances of how finance intersects with the gaming (blockchain) community and the types of risks that create for investors.

GameFi is blockchain gaming and decentralized finance rolled into one. Investors who don’t play the… [+] games still invest in game developers’ cryptocurrency anyway, putting them at risk of fraud.

gettyGameFi: The Changing Nature of Gaming and Investing in Game Creators

In the 1990s to the early 2000s, gamers bought console games from major Asian players Nintendo, Sony and Sega. There were many game publishers and a long supply chain of stores selling the game.

In the early 2010s, gamers could then download games directly to their Xbox or mobile device. Some games were less sophisticated. These were free. For harder versions, consumers had to pay. It was like playing for free up to level 9 in The Legend of Zelda, but if you really wanted to save the princess and beat the boss, you had to pay. A new game model developed.

By the late teens, more sophisticated games allowed players to purchase in-game items, whether it was a new golf bag or a new gun.

Enter blockchain games and players can now own these in-game assets. If the game becomes really popular, these asset values ​​increase. Web3 game developers can create, sell, and receive royalties from these assets, often in the form of non-fungible tokens. These assets only have in-game utility, but if the game is popular and players are spending money on these things, then investors will come and want some of that action by buying in-game tokens in the hope that they can reap the rewards of the games popularity.

Considering that these in-game assets can be traded in a free secondary market, they naturally come with price fluctuations and volatility. However, they are likely far from failing the Howey test, says Deng Chao, managing director of HashKey Capital in Singapore. The Howey test stems from a U.S. Supreme Court case that is used to determine whether a transaction qualifies as an “investment contract.” If so, then it would be considered a security and subject to disclosure and registration requirements under the Securities Exchange Act of 1934.

The in-game NFT may not be a security. But if it’s listed on Coinbase and someone can deposit big by owning it, then it probably should be.

If a player uses a token to generate income, it should fall under the purview of financial regulators, says Stefano Riff, co-founder of Pooky, a web3 gamified sports prediction platform in Milan. On the other hand, if a token is purchased to perform an action in a game, it cannot be considered an investment and cannot be regulated. An in-game asset may increase in value due to increasing demand and limited supply, but it is not expected to generate a profit. The only difference is if a game creator advertises or mentions a financial incentive to hold the asset, then I think you should consider that as security, Riff says.

GameFi tokens are popular among cryptocurrency investors. They are down more than 80% this year, worse… [+] than bitcoin.

GettyCrypto regulations will affect GameFi

Web3 gaming sits at the intersection of gaming and finance. It is built on the same blockchain technology and smart contracts as the larger crypto ecosystem that is at the heart of decentralized finance.

Currently, there are no regulations around GameFi in particular. But authorities around the world have stepped up their efforts to regulate crypto. GameFi will not escape it. In-game tokens will be fine. The company that makes them, however, will not only feel the wrath of venture capital backers and retail investors, but also the US government if there are more Luna and FTX-like coin explosions l ‘next year.

There will always be those who exploit and use the lack of regulation to their advantage, says Andreas Christensen, CEO and founder of SuperOne, a blockchain network-based entertainment gaming app in Oslo, Norway. This is the main reason why regulation is good for the industry; this will weed out the bad actors and give space and credibility to the good actors. We welcome him warmly.

Given this year’s crypto crises, the current regulatory trend points to more transparency, more investor protection for all crypto securities, whether investors hold GameFi coins or invest in blockchain alternatives to EthereumETH.

I even think game assets can be titles, so gameFi companies need to be prepared for that, says Villalobos. It will all depend on the nature, function and engagement of these in-game assets. GameFi should be about security, enabling relationships between finance and gaming, rather than pure gamification of finance or financialization of all games. Regulation won’t cripple it, but it will certainly reshape the industry, he says. The goal should be to make any intersection between gambling and finance safe, transparent, and not a source of new systemic risk for crypto markets.

Gaming is eating up the entertainment industry, says Paul of Unix Gaming. Mobile games have overtaken box office movie sales and music in terms of combined total revenue. It’s a huge market. This is why all crypto bros are involved in blockchain gaming. It’s a story of growth.

Premature regulation will likely only serve as an incentive to bend the rules, warns Paul. It will be a temporary blow to the sector, but not a fatal blow.

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