The boom in crypto-based business models is sweeping across many industries. So it comes as no surprise that the video game industry has also developed crypto-based games, commonly referred to as “play-to-earn” games. In these games, players can typically acquire in-game assets (e.g., playable characters, equipment, or houses) that can be traded on a blockchain. In addition, by playing the game, players can earn rewards (usually in the form of tokens) using these in-game assets.
In this two-part series, I would like to analyze the potential legal implications of such “play-to-earn” games under Swiss law, using Axie Infinity as an example, as if it were operated from Switzerland. Axie Infinity is very popular, with approximately 2 million players worldwide. The game was developed by Sky Mavis, a company based in Vietnam.
Part 1 provides an overview of Axie’s business model and the tokens involved, as well as the legal classification of these tokens under Swiss law and the potential application of the Swiss Money Gaming Act (BGS).
Part 2 discusses the legal situation with regard to the Swiss Banking Act (BankG), the Swiss Anti-Money Laundering Act (GwG), and the Swiss Financial Market Infrastructure Act (FinfraG).
This assessment of Axie Infinity is based on the Axie Infinity white paper[1].
The gameplay in Axie Infinity involves collecting various pets—known as Axies—breeding them, completing missions, and battling other players. Players earn rewards by breeding, completing missions, and winning battles. In addition, players can buy, sell, or trade land and collectibles.
The entire ecosystem is based on blockchain technology. It runs on the so-called Ronin blockchain, an Ethereum-based sidechain. There are three different tokens used in this system.
To play Axie Infinity, users must use the Ronin Wallet, which is a non-custodial wallet—meaning that only the wallet owner has control over the tokens in that wallet.
It is worth noting that none of the tokens described above grant their holders any claim against or interest in Sky Mavis.
In addition, Sky Mavis operates a marketplace where various in-game NFTs can be traded.
The key question in determining the applicable regulatory provisions is whether or not the token traded on the blockchain qualifies as a security. Depending on the circumstances, classification as a security may trigger various obligations, ranging from the requirement to file a prospectus to obtaining licenses as a securities firm or financial market infrastructure.
According to the FINMA guideline on Initial Coin Offerings (ICOs), there are three different types of tokens:
First: Payment tokens are intended to be used, now or in the future, as a means of payment for the purchase of goods or services, or as a means of storing and/or transferring money or value. Cryptocurrencies do not confer any claims against their issuers.
Second, utility tokens are intended to enable (digital) access to applications and/or services through a blockchain-based infrastructure.
Third, asset tokens represent assets, such as a claim against the issuer. Investment tokens, for example, promise a share in the future profits or future cash flows of the issuer or the platform. In terms of their economic function, these tokens are therefore treated in the same way as traditional stocks, bonds, or derivatives. In general, tokens that enable the trading of tangible assets on the blockchain also fall into this category.
The various token classifications are not mutually exclusive. Both asset tokens and utility tokens can be classified as payment tokens at the same time (so-called hybrid tokens).
The three tokens in the Axie Infinity ecosystem can be categorized as follows:
None of the tokens qualify as asset tokens.
The Money Gaming Act applies to games in which a cash prize or other benefit of monetary value is offered in exchange for a monetary wager or for the conclusion of a legal contract.
To assess the legal requirements for such games of chance, a distinction must be made between lottery games and games of skill. Lotteries are games in which an unlimited number of people, or at least a large number of people, can participate, and in which the outcome is determined by a single random drawing or a similar procedure. Games of skill are games in which the player’s winnings depend entirely or predominantly on the player’s skill.
The distinction between games of skill and lottery games is very important, since the net proceeds from lottery games must be used for charitable purposes. This is not the case with games of skill.
The Intercantonal Gaming Supervisory Authority (GESPA) considers a game to be a game of skill if players have multiple ways to influence the course of the game. Skilled players can achieve higher winnings over a larger number of game rounds than other players. A successful game requires skills of a certain level of complexity. Finally, in games of chance (where the outcome is determined by chance), the probability of winning is low.
If an online gambling game is offered in Switzerland, both the game and the operator must have a license from GESPA. Gambling games offered by foreign operators that are accessible online from Switzerland are not permitted, cannot be licensed, and will be blocked. However, a foreign company may, in principle, collaborate with a licensed Swiss operator to offer an online gambling game.
This license requires that the game be conducted in a safe and transparent manner, that measures be taken to protect against excessive gambling, and that the organizer’s net profits be used for charitable purposes, unless the game is a game of skill.
The operator of such an online gambling game must be a Swiss legal entity and have a good reputation. In addition, the operator must disclose any financial or other interests in other companies and prove the lawful origin of the funds at its disposal. The operator must also have a security and social policy in place, as well as sufficient funds to pay out winnings. If they operate a lottery, operating costs—that is, advertising and salaries—must be proportionate to the funds allocated to charitable causes.
Since games of chance generally carry a risk of harmful addiction, organizers of such games are required to take measures to protect players from excessive gambling and financial ruin. The extent to which such measures must be taken depends on the specific risk of excessive gambling associated with the game. The following criteria can be used to determine this risk: payout rate, game speed, bet amounts, odds of winning, degree of automation, and the presentation of the game.
The operator must implement a social responsibility program that includes the early identification of players at risk of gambling addiction, self-control measures, gambling limits and game moderation, the imposition and enforcement of gambling bans, and the collection of data to assess the effectiveness of the measures taken.
Finally, the organizer of games of chance must ensure that it is able to identify players who are heavily in debt, who are failing to meet their financial obligations, or who are placing bets that are disproportionate to their income and assets.
Even though the BGS was not drafted with blockchain-based games in mind, the definition of a game of chance fits the Axie Infinity business model. To participate in the Axie Infinity game, players must purchase AXS on the marketplace to acquire an Axie pet in the form of an NFT. By playing against other players, completing missions, or breeding Axie pets, players can earn SLP and AXS, which can then be spent in the game to earn more SLP or AXS, or sold on a crypto exchange. Since all the criteria for a game of chance are met, there is a high probability that it would be classified as such under the BGS.
Since success in the game depends primarily on the players' skills and is not largely left to chance, the game would most likely be classified by GESPA as a skill-based game of chance.
Consequently, the game and the operator would need to be licensed. However, Sky Mavis is not headquartered in Switzerland, which is why it is not possible to obtain a license for the game and there is therefore a risk of it being blocked. It should, however, be possible to collaborate with a licensed operator in Switzerland.
However, the question arises as to whether Sky Mavis can be considered the organizer of this game, given that the development of the ecosystem is driven by the community. Currently, Sky Mavis is driving the development of the ecosystem and still holds a majority stake in new projects. In the future, it will lose that majority. From that point on, Sky Mavis will have only very limited ability to influence the ecosystem and will no longer be able to introduce new features on its own.
We are therefore faced with the problem that, in the future, there will no longer be a responsible organization capable of influencing the game and controlling player behavior. Accordingly, the game itself would also require an operator for approval. In such a case, it could be argued—by analogy with financial market laws—that fully decentralized organizations and ecosystems that are community-driven—at least from a certain point in their development onward—are not regulated under the current BGS. It should be noted that there are as yet no court rulings or publicly known decisions by a competent authority.
However, as long as Sky Mavis itself introduces new features, has the majority say in the development of the ecosystem, and develops the game based on its own decisions, it would qualify as an organizer, and the game itself would therefore also be subject to approval in order to avoid being restricted by GESPA.
Given the broad definition of games of chance, the BGS would apply to play-to-earn games in most cases. However, if strictly enforced, the requirements for licensing the game and the operator would, in most cases, negate the characteristics and benefits of a blockchain-based ecosystem. In my opinion, a fully decentralized and community-run ecosystem would not fall under the BGS’s jurisdiction simply because it lacks an operator. Consequently, there is currently a high legal risk that play-to-earn games in Switzerland will be subject to regulation by the BGS.
In order to permit such business models in Switzerland, guidance from GESPA would be required. Since play-to-earn games are not directly comparable to traditional casino games of chance, the risk of addiction is very low, and GESPA could recognize that a play-to-earn game need only restrict and monitor players’ activities to a very limited extent. Such restrictions could easily be implemented in the respective smart contract.
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