A look at where regulatory risk exists, where rules get broken and where game developers might get into hot water in the world of Blockchain Gaming.

Developers should be particularly careful about launching their own tokens and should likely avoid any token that carries governance, voting or staking and other such rights.

In reality, much of what is needed is simply compliant, bi-directional value transfer and deep liquidity for fiat interchange. Keep it simple, stupid, as they say.


The other week, I was on a panel at PocketGamer Connects in London regarding the hot topic of Web3/Crypto/NFTs and Games. Something that cropped up more than once (and to which I contributed some thought) was the regulatory status of NFTs, “game coins” (tokens), DAOs (including their governance tokens) and securities. The lack of clarity in the room and on the panel prompted me to go home and look into this a bit more deeply — from my own experience, I couldn’t recall seeing much more detailed thought on the regulatory status of tokens since the ICO bubble (beyond a few words of warning from new SEC chief Gary Gensler).

For context, I am definitively not a securities lawyer, however I do have a Masters in Finance and, over the course of the six-odd years I spent in Investment Banking as a regulated individual, have taken at least two sets of securities exams, as well as having sat through the quarterly regulatory compliance sessions that investment bankers are mandated to undertake as part of industry regulation to prevent money-laundering and financial crime. Based on this, I would say I have a good understanding of what a security is (and other assets are), and (separately) where money laundering risk arises (layering, placement, etc.).

When I first became deeply interested in Bitcoin and cryptocurrency in 2015, there were many more open questions than there are today — this was the era in which, if you uttered the word “Bitcoin” and someone knew what it was, the very next words to come out of their mouths would usually involve something about drugs, crime and money laundering. In reality, of course, we now know that illicit use of Bitcoin specifically is a minute proportion of overall usage, and that bigger questions around money laundering, market abuse and wash trading in fact arise on the DeFi and NFT markets. This is not stated as some sort of ad hominem attack, as Social Media usually receives such commentary, but rather an objective statement: the issue arises from the fact that one individual can create multiple wallets anon- or pseudonymously, calling into question the authenticity and purpose of any individual transaction. Fortunately, such behaviour is increasingly being spotted by keen-eyed analysts.

A significant moment in the regulatory debate around cryptocurrencies arose in 2016, when Cooley (a reputable law firm) opined that digital assets may not be securities under the Howey Test (more on the Howey Test later, although I won’t explain it for the purposes of this write-up). In my own conversations with securities lawyers today, including at top-tier investment banks, many are concluding that Cooley’s analysis was, in fact, erroneous, calling into question the status of many tokens and digital assets that have been issued since then (including those issued post-ICO mania). Proof-of-Stake, in particular, muddies the waters further — as would any token that conveys voting rights upon the holder.

The reality is that little has changed since the SEC’s original statement on tokens in 2017: that Bitcoin itself is not a security (it is classified as property or a commodity—it is money), Ethereum may well not be due to its ostensible decentralisation (conclusion still to be determined), but that it is likely that all other tokens are securities in some way, shape or form. Importantly, if the decentralisation of a given protocol is the core line of reasoning for an asset not being a security, then an asset can become a security over time (or, conversely, may cease to become a security over time), subject to increasing centralisation (or decentralisation) of the aforementioned protocol. I will revisit this point later, as it is important in the context of video game tokens.

The vast majority of “legitimate” token issuance today happens via a fairly tried-and-tested route to market. To simplify substantially, an independent, not-for-profit Foundation is established in a specific jurisdiction (often Switzerland or the Cayman Islands, for example) as the issuing entity of the tokens and its own governance structure, alongside the stated nature or purpose of the tokens being issued (the marketing and definitions in the legal paperwork) “means” that the tokens are not securities, for now. To be clear, though, this is far from necessarily the view of the SEC and other securities regulators: this method is a regulatory loophole—it is primarily an opportunity for arbitrage (profit) until the loophole is closed. This is why the vast majority of services cannot (or so they say) operate in the USA, including blockchain games themselves (see Axie Infinity).

Investing in Blockchain Gaming

I want to let you into my own thinking on Blockchain & Gaming, which I have been developing since 2015 and was investing against since 2019.

At Lakestar (with whom I am still active), I actively sought to invest in “Blockchain Gaming” and applied my understanding of blockchain to my understanding of gaming. I met with and assessed many projects, including some of the most successful and well-known today. On top of that, Lakestar is actively involved in FinTech investing and the team works as a cohesive unit, so we share knowledge of our sectors with each other — as I was looking into Blockchain Gaming we realised that we were also looking into FinTech in Gaming. The issue at the heart of Epic Games’ dispute with Apple is primarily a Payments issue, for example: across the Internet, the ability to accept or process payments has opened up significantly, and this digitisation of payments is in turn dragging the legacy financial system into the 21st century, although it is an industry that moves painfully slowly (somewhat like Bitcoin, unsurprisingly—we’re dealing with money, here). The vice-like grip that Apple, Google and others maintain over the payments ecosystem on mobile is argued to be a cynical abuse of power to ensure that, when payments do eventually completely open up, these companies already have double-digit market shares by default, but that’s a topic for another day…

I also gained FinTech experience in the brief stint I spent on secondment at the SoftBank Vision Fund in 2018, where I worked with the FinTech team specifically and met with many of the rapidly-growing neo-banks and buy-now-pay-later platforms that have since gone on to become either very large private or publicly-listed companies. Prior to that, at The Raine Group, I worked extensively with not only video games companies but a wide range of Digital Media and Entertainment companies. At the core of any entity that creates content is intellectual property—an intangible asset, the rights to which can capture value. Keep this in mind as you continue to read.

What I am trying to demonstrate without being too boastful is that I have gained exposure and knowledge of existing financial infrastructure, including the payments stack, what FinTechs like Revolut, Affirm, Adyen, TrueLayer and Yapily are doing, as well as what protocols like Bitcoin and Ethereum are enabling, and what is being built on top of them (be it a Layer 2 like Lightning or Polygon, a DEX like Uniswap, or a service like ThorChain). On top of that, I specifically understand the gaming market very well (it is where I come from), the wider digital media landscape reasonably well, and the regulatory environment in which all of the above operates somewhat well.

I want to share my conclusions here, in the public interest, as I believe we need to be more open and transparent about what we’re dealing with, and not to obfuscate in the interest of short-term commercial exploitation at a worrying cost to what could be teenagers and their parents, who just want to play games.

Issuing NFTs, offering tokens and creating DAOs in games

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