Web3 video games and P2E

Authors

Marc Schuler

Partner

Paris

While Web3-based gaming and decentralised gaming are not quite as talked about now as in recent years, this is still an evolving part of the game industry, with significant investments in the industry in the last 12 months. There is an increasing focus on interoperability, with more games beginning to move from diverse ledger ecosystems to more focussed, bespoke platforms, such as Polygon, Arbitrum, and Immutable.

Web3 is characterised by its decentralised control structures. In the earliest iterations of the internet, content was provided by website owners and consumed by users. Through the social media age, more and more content is provided by users themselves, but still ultimately mediated by centralised platforms. The technological philosophy behind Web3 is an emphasis on user ownership of content, enabled by web applications that run across distributed, decentralised servers with no central control authority. The development of increasingly sophisticated distributed ledger technologies has made this possible through:

decentralised data storage
trust-less verification of ownership
token-based economics, incentive structures, and decentralised finance (DeFi)
user sovereignty
smart contracts
decentralised autonomous organisations.

A Web3 application, which can be anything from a web platform to a video game, can now be built by a group of developers not connected by any traditional corporate structure, financed via tokenomics and DeFi loans/investments, and run via smart contracts.

Why would somebody build a game this way? True ownership by players of in-game assets (such as stuffs, skins, or land); censorship resistance; interoperability between games; community engagement; and, crucially, innovative monetisation (including play-to-earn (P2E) models).

Risks

There are, however, risks associated with any decentralised Web3 application which will apply to a Web3 video game.

Lack of control and accountability

Decentralised Web3 video games have no central control or authority and no entity in control of the game's code. This gives rise to complex legal questions including responsibility for:

contractual performance
dispute resolution, and
regulatory compliance.

This is particularly relevant to video games because they raise a number of legal issues that someone ultimately needs to be responsible for, including online safety and child protection.

Intellectual property

The decentralised nature of Web3 raises questions about the ownership of in-game assets and intellectual property rights. Clarifying these rights in a decentralised environment, especially when assets can be traded outside the game or used in other video games, poses challenges. With user-generated content and the creation of NFTs, there's a risk of infringing third-party IP rights. Monitoring and enforcing IP rights in a decentralised platform is more complex.

Global nature of Web3 games

Web3 games are inherently global and must navigate a patchwork of local regulations concerning online gambling, consumer protection, and digital assets. Their global nature also leads to complicated jurisdictional issues.

Other legal risks inherent to Web3 games

Other risks that should also be taken into account include:

technical risks such as smart contract vulnerability (especially given many smart contracts run on immutable (unchangeable) ledgers)
market risks from the volatile value of some in-game assets impacting the in-game economy and real-world value of a player's assets
social and ethical risks associated with addiction in the context of P2E models
security risks such as hacks and thefts given the high value of some in-game assets
privacy concerns arising from the transparent nature of blockchains and the inability to delete data (raising concerns as to how a Web3 game developer would comply with an erasure or rectification request).

Monetisation of Web3 games

Notwithstanding the risks, Web3 offers the gaming industry a significant opportunity to deliver innovative monetisation models.

Many Web3 games rose to prominence by offering a P2E model in which players are rewarded for participating in the game by receiving cryptocurrencies, in-game assets, NFTs and other digital assets that can be exchanged in and out of the game for in-game money, real-world money or cryptocurrencies, via the application of distributed ledger technologies. Publishers can then create a new source of revenue by recovering a percentage of each transaction made in-game.

The main legal obstacle for P2E models is the possibility of falling within gambling regulations. To the extent in-game rewards or earnings have real-world value, regulators may classify engaging with them as gambling, especially where elements of chance influence outcomes. However, the law has not necessarily adapted to P2E models so there is a lack of clarity in this area.

P2E models raise others legal issues. Cryptocurrencies, NFTs or other digital assets earned through P2E models could be viewed as securities and may trigger a range of financial regulatory compliance issues. In addition, P2E models that allow for the exchange of in-game assets for real-world value could fall under AML regulations, requiring platforms to implement KYC procedures.

Increasing regulatory scrutiny

Given these issues and concerns that certain P2E models could give rise to gambling addiction, some legislators have decided to regulate them.

For instance, France is about to adopt a new law aiming at regulating “video games with monetisable digital items” (i.e. cryptocurrency, in-game assets, NFTs and other digital assets that can reward the gamers) and balancing the need to protect players with ensuring Web3 games will not fall within the scope of gambling regulations.

The law defines monetisable digital items as the game elements which confer on players alone one or more rights associated with the game, and which may be transferred, directly or indirectly, for consideration to third parties.

For a trial period of three years after the law is enacted, games offered online by publishers located in the EU and to some extent in the EEA, which involve players making a financial sacrifice and relying on chance to obtain monetisable digital items will be allowed subject to strict compliance with the statutory provisions. Players will not be able to win real money, and the digital items they acquire will not be permitted to be sold, either directly or indirectly, to the publishing company or anyone associated with it. However, players will be able to trade these digital items for real money to any other third parties.

In addition, Web3 game offers including with a P2E model will be subject to a prior declaration to the “Autorité nationale des jeux” (French gambling authority), which may object to the launch of the offer if it considers that it is not compliant. The authority will be able to access data in relation to players and game events. The offer will also be subject to specific obligations arising from French gambling regulations aimed at protecting minors and preventing excessive or pathological gambling, and from French AML regulations.

Web3 games (like all Web3 applications) are a fast-evolving industry within a multi-faceted global legal framework. For this reason, legal advice should always be sought when building or distributing a Web3 game in order to properly understand the landscape the game finds itself in and help the game developers mitigate risk.