Metaverse Casinos: Regulatory Wild West | Nelson Mullins Riley and Scarborough LLP

A new world of games

The metaverse is an immersive online world on the blockchain where users interact with many digital worlds and with each other. As in the real world, the metaverse offers a variety of activities and entertainment options. The metaverse has become a gaming haven. Users can explore casino “zones”, which offer slot machines, poker, roulette, blackjack and more, go to shows and nightclubs, and even buy real estate, including an entire casino. Some platforms within the metaverse are more sophisticated than others, with their own plots, decentralized government structures, and native tokens. As this space continues to expand into various aspects of daily life, participants in the metaverse ecosystem, and in particular, game players, must proceed with caution as the line between fantasy and reality continues to blur.

The metaverse provides an alternative virtual reality for those who visit, seemingly outside the legal and regulatory structure of the real world. Now, due to the development of digital assets1 Including cryptocurrencies and non-fungible tokens (“NFTs”), visitors can add real-world economic value to certain in-game activities. Players can buy, sell or gamble in the metaverse for digital assets that can be converted into fiat currency, further blurring the lines between virtual and real game experience. What appears to some to be a game will have economic consequences in the increasingly real world for users and companies with whom they participate in the metaverse, leading to greater regulatory scrutiny and legal disputes.

Metaverse Gaming vs. Traditional Online Games

It is useful to distinguish metaverse games from traditional online games. Both games in the metaverse and online games allow users to play casino games with their friends and social networks virtually without the burden and restrictions of physical travel. Unlike traditional online casinos, the metaverse attempts to replicate the full casino experience, allowing users to explore the casino’s digital representation using a unique avatar and virtual reality technology. Through technological advances, users can control their avatar’s behavior in a similar way to controlling their own behavior in the real world. Essentially, avatars are a digital representation of users – they physically walk around, interact with other avatars, including notes on other avatars’ tales and contribute to an authentic casino experience, all from the comfort of home.

Metaverse casinos generally do not accept traditional fiat currencies. The metaverse casino requires the participant to convert their fiat currencies into one of the cryptocurrencies accepted in the metaverse and deposit funds using a crypto wallet. However, users exchange NFTs and the cryptocurrency they earn in the metaverse for real-world fiat currency.

Using cryptography in metaverse games has some obvious benefits. In addition to providing immersive interaction compared to stock-based online gambling platforms, metaverse casinos offer higher levels of security, transparency, and privacy for users. For example, the entire transaction history history can be accessed on the blockchain. Although the transaction is visible on the blockchain, users may remain anonymous without having to reveal certain personal information, thus protecting privacy. Deposits and withdrawals are processed almost instantaneously because there is no third party verifying the transaction.

Regulatory Considerations for Metaverse Games

Casino gaming and sports are one of the most regulated industries in the United States. Regulation is primarily at the state level. Some mistakenly believe that the metaverse is insulated from realistic legal constraints. On the contrary, any gambling and betting activity, which constitutes a game of chance involving the risk of something of value and prize,2 which are offered to US citizens in the metaverse (on an unregulated basis) are likely to catch the attention of regulators.

Despite the popularity of metaverse games, major US operators have largely remained on the sidelines while offshore companies and small businesses dominate the space. This is not surprising for three reasons:

  1. The fact that metaverse games lack a dedicated regulatory framework and that online games are considered legal in a few states;
  2. As we wrote earlierthe reluctance of regulated gaming companies operating in the United States to pursue the legal use of cryptocurrencies due to its volatility, lack of acceptance, and regulatory and/or legislative hurdles; And the
  3. General legal uncertainty.

An operator wishing to offer a gaming platform to US citizens in the metaverse will need to do so with express permission and under the oversight of the gaming commission in each state whose residents they serve. This may also require new legislation and regulatory schemes. For example, Wyoming, an early adopter of cryptocurrency, passed legislation in 2021 allowing sportsbooks to accept “digital, crypto, and virtual currencies.”3 However, in general, regulators and legislators are not known for their speed in adopting new and emerging technologies, and the industry as a whole is still working toward immediate and achievable goals, such as expanding the reach of online legal gaming. Currently, less than 10 states offer online casinos and/or poker.

There is a great deal of regulatory and legal uncertainty surrounding metaverse casinos. For example, which oversight bodies have the power to regulate metaverse casinos? Can users face real-world consequences for their avatars’ actions in metaverse casinos? How are players protected from illegal behavior in metaverse casinos? Can operators be held responsible for this misconduct? Game regulators in the state will have jurisdiction over gaming activity offered to their residents in the metaverse along with other regulators including the SEC, the US Commodity Futures Trading Commission, and the Financial Crimes Enforcement Network, given the use of cryptocurrencies and NFTs.4 At this early stage, there are more questions than answers. The history of the real-world gaming industry indicates that metaverse casinos are very likely to be directly regulated.

New legal parameters are expected about Metaverse games

The competitive nature of the US gaming market, the huge lobbying power of licensed game operators, and large licensing fees suggest that it is not a matter of if, but when regulators will intervene in metaverse games. While the concept of metaverse casinos is exciting and creates an opportunity for significant growth in the gaming industry, like many innovations, it brings additional challenges and risks for operators.

Indeed, earlier this year, Texas and Arizona securities regulators demanded that the metaverse casino developer stop funding its metaverse casino development (and expand metaverse casinos to all other related metaverses) through NFTs for failing to register NFTs as securities. and on the grounds that it was conducting an illegal fraudulent securities scheme.5

About a month later, securities regulators in Texas, Wisconsin, Kentucky, New Jersey, and Alabama sued another Metaverse Casino over its alleged ties to Russia and a fraudulent investment scheme that was operating in violation of securities laws.6 The Texas State Securities Board has expressed concerns about fraudsters’ ability to hide their identities (also referred to as “darkness”), as they claim to have happened here, at Metaverse casinos.

In addition, just a few months ago, 28 members of Congress urged the Department of Justice to work with industry, and other stakeholders to sue offshore sports betting companies operating illegally in the United States.7 Likewise, in the absence of a known regulatory scheme, even a “successful” metaverse casino operation at present does not prevent reversals or future closures due to increased regulatory scrutiny.

While it is unclear how, if, and to what extent, current regulations apply to metaverse games, the actions noted above make it clear that some government regulators take the position that the same rules that apply to real-world investments also apply to investments in metaverse. Risks are not limited to the virtual world, but also expose investors to the potential loss of real money. The above matters also highlight the wide range of risks that government authorities can motivate to address, from international policy implications to financial frauds.

Pioneering Metaverse

Although there are significant barriers to getting gaming platforms into the metaverse, forward-thinking game companies have been wisely preparing to enter this new world when it is safe to do so. If the metaverse is integrated into everyday life as expected, these pioneers will reap the rewards. We recommend game operators in the metaverse to proceed with caution and retain a highly qualified consultant to help them navigate the evolving regulatory landscape.

  1. US regulators, including the Securities and Exchange Commission (“SEC”), use the term “digital asset” to refer to “an asset that is issued and transferred using distributed ledger technology or blockchain.” Statement on Issuance and Trading of Securities for Digital AssetsDivision of Corporate Finance, Division of Investment Management, and Division of Trade and Markets, SEC (November 16, 2018), Available over here. As noted by the Securities and Exchange Commission, digital assets include, but are not limited to, virtual currencies, coins, and tokens. ID. In certain cases, a digital asset may be considered a security under federal securities laws. Although not defined in securities laws, the Securities and Exchange Commission (SEC) often refers to digital assets that are securities as “digital asset securities.” ID.
  2. The question of what is a “thing of value” within the meaning of the state’s anti-gambling law has been the subject of a lawsuit recently. See, for example, Kater v. Churchill Downs, Inc.886 F.3d 784 (9th Cir. 2018) (virtual chips in online games that are considered a “thing of value” for purposes of the illegal gambling law in Washington); Coffee v. Google, LLC, No. 20-CV-03901-BLF, 2022 WL 94986, at *13 (ND Cal. Jan. 10, 2022) (“Loot Box” prizes are limited to use in an in-app game and are not “things of value” in California gambling law illegal).
  3. Pat Evans, Cryptocurrency in Legal Sports Betting: What Next?(9 June 2022), Available over here.
  4. We will discuss the potential role of these federal regulators in future articles.
  5. Dorothy N. Gibbs, et al. The , Texas and Alabama Securities Regulators File Enforcement Actions Against Online Casino Developers Selling NFT to Operate Casinos in the Metaverse(April 29, 2022), Available over here.
  6. Five Countries Enforcement Actions to Stop Russian Scammers Who Commit Metaverse Investment Fraud(11 May 2022), Available over here.
  7. Chris Altroda Congressional group calls on Justice Department to help combat illegal sportsbooks abroad(30 June 2022), Available over here.

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