Recently, several mainstream digital collection platforms have begun to lay out or have already launched blockchain games with their own platform collections as the theme, such as HOTDOG, Shiba Inu digital collection, etc. It seems that blockchain games have become the next trend in digital collection. To develop and operate blockchain games in China, it is necessary to understand the current regulatory status and potential legal risks.
01 Current Regulatory Status of Blockchain Games in China
As of now, although China has not yet established a specialized legal regulatory system for blockchain games, the regulatory attitudes towards the elements contained in domestic blockchain games, namely blockchain technology and online games, are relatively clear.
1. Regulation of Blockchain Technology in China
First of all, China currently holds a generally positive attitude towards blockchain technology. For example, in June 2021, the Ministry of Industry and Information Technology and the Cyberspace Administration of China jointly issued the "Guiding Opinions on Accelerating the Promotion of Blockchain Technology Application and Industrial Development," which pointed out the need to promote the integrated development of blockchain and new generation information technologies such as the internet, big data, and artificial intelligence, and to build an advanced blockchain industry system.
Secondly, China has adopted strict regulatory measures towards virtual currency and NFT. On September 4, 2017, the People's Bank of China and six other departments issued the "Announcement on Preventing the Risks of Token Issuance Financing," defining ICO as an illegal public financing activity without approval, clarifying the non-monetary nature of tokens, and prohibiting the exchange, trading, pricing, and information intermediary services of all types of tokens. On August 24, 2018, the China Banking and Insurance Regulatory Commission and five other departments issued the "Risk Warning on Preventing Illegal Fundraising in the Name of 'Virtual Currency' and 'Blockchain'," emphasizing that some lawless individuals, under the guise of "financial innovation" and "blockchain," illegally raised funds through the issuance of so-called "virtual currency," "virtual assets," "digital assets," etc., infringing on the legitimate rights and interests of the public. On May 18, 2021, the China Internet Finance Association, the China Banking Association, and the China Securities Association issued the "Announcement on Preventing the Risks of Speculative Trading of Virtual Currencies," clearly stating that it is necessary to correctly understand the nature of virtual currencies and related business activities, and that engaging in illegal activities using virtual currencies may also involve criminal activities such as illegal fundraising, illegal issuance of securities, and illegal issuance of token vouchers. On April 13, 2022, the China Internet Finance Association, the China Banking Association, and the China Securities Association issued the "Initiative on Preventing Financial Risks Related to NFT," which listed direct or indirect investment in NFT and providing financing support for NFT investment as prohibited activities.
In summary, currently, engaging in virtual currency issuance, speculation using virtual currency and NFT, or other financial activities in the blockchain game industry in China are explicitly prohibited.
2. Regulation of Online Games in China
From the "Notice on Regulating the Order of Operating Online Games and Prohibiting the Use of Online Games for Gambling" issued by the Ministry of Culture and the Ministry of Public Security in 2007, to the "Notice on Strengthening the Management of Virtual Currency in Online Games" issued by the People's Bank of China and other departments in 2009, and to the "Notice on Regulating the Mid-term and Post-event Supervision of Operating Online Games" issued by the Ministry of Culture in 2016, all emphasized that "no services for exchanging virtual currency in online games for legal tender or physical goods shall be provided to users."
It can be seen that China's regulation of online games is continuously strengthening, especially when it comes to virtual currency, which is a key area of concern for engaging in blockchain games in China.
02 Legal Risks
Administrative Legal Risks
According to Article 7 of the "Regulations on the Administration of Internet Publishing Services" issued by the State Administration of Press and Publication and the Ministry of Industry and Information Technology (hereinafter referred to as the "Regulations"), online game works are considered as online publications. Enterprises engaged in the publication and distribution of online games should obtain an Internet Publishing Service License; according to Article 11 of the "Regulations," before the online publication of online games, an application must be submitted to the provincial, autonomous region, or directly-administered municipality's administrative department of press and publication, and after approval, it must be submitted to the State Administration of Press and Publication for approval. This is a pre-approval for the publication of online games, commonly known as the online game version number. Once a publication without a version number charges fees, it can be deemed as an illegal publication. Those engaged in illegal operations with an illegal turnover of more than 10,000 yuan may be fined 5 to 10 times the illegal turnover, and those with an illegal turnover of less than 10,000 yuan may be fined up to 50,000 yuan. In serious cases, criminal liability may also be incurred.
According to the "Measures for the Administration of Internet Information Services," those engaged in operational internet information services should apply for an Internet Information Service Value-added Telecommunications Business Operation License from the telecommunications management department of the province, autonomous region, directly-administered municipality, or the competent department of the State Council for the information industry. Otherwise, the telecommunications management department of the province, autonomous region, directly-administered municipality may order rectification within a time limit. Those with illegal gains shall have the illegal gains confiscated and be fined 3 to 5 times the illegal gains; those without illegal gains or with illegal gains of less than 50,000 yuan shall be fined 100,000 to 1 million yuan; those with serious circumstances shall be ordered to close the website.
In summary, for developers and operators of blockchain games, legal and compliant operation of blockchain games on the internet requires obtaining an Internet Publishing Service License, an online game version number, and an Internet Information Service Value-added Telecommunications Business Operation License. Otherwise, administrative penalties may be imposed.
Criminal Legal Risks
- Fraud
In 2021, China Central Television's financial channel reported a news story titled "Beware of 'Metaverse' Scams." In the report, a company in Fuzhou claiming to be the Metaverse Research Institute stated that players participating in the company's blockchain game "Farmer's World" could invest and manage finances simply by purchasing equipment. To participate in this blockchain game, players first needed to exchange RMB for the virtual currency USDT, and then exchange it for the virtual currency used in the game. The game claimed to achieve a monthly investment return of nearly 100%. The staff introduced that the game's daily income reached 3,000 to 4,000 yuan and claimed that no customers lost money in the game. In addition, to invest, players had to be guided by the company, pay a service fee of more than 6,000 yuan, and share 20% of the monthly income. In reality, this was a new type of scam disguised as the Metaverse, essentially a low-cost web-based game. It falsely promoted financial management and money-making opportunities, but in reality, it only used the funds paid by latecomers to fill the gap. Players not only could not make money, but the service fee also resulted in a significant loss, essentially a classic Ponzi scheme.
Organizing and Leading Pyramid Selling Activities
Many blockchain game projects require the purchase of platform tokens, props, etc. to participate in the game. If the project party uses pyramid selling methods to develop game players, it is highly likely to be suspected of organizing and leading pyramid selling activities, as evidenced by actual cases (Case No. 2021 Hu 0110 Criminal First Instance No. 1158).
Since 2020, the defendant, Mou (handled separately), has actually operated Crown Jun Company, Lei Bei Company, and other companies in Yangpu District of a certain city and Haikou City, Hainan Province, and recruited employees to jointly develop and operate the "Pole World" app, using game projects such as "Millionaire Crocodile" and "Digging Dinosaurs Together" as the names, using high returns as bait to attract others to register as members. The "Pole World" app required participants to download and register as members through an invitation code provided by the upper-level member. Members formed upper and lower levels according to the order of joining and purchased and exchanged digital currency within the app as a threshold to participate in the above games and obtain value-added digital currency. The "Pole World" app set up three main profit modes, including static income, dynamic income, and team rewards, to provide rebates based on the number of developed personnel and the amount of digital currency purchased, directly or indirectly. According to the appraisal, the total number of "Pole World" members exceeded 3 levels, with over 10,000 participants. During this period, the defendant, Zhou, served as the head of the customer service and community department of Lei Bei Company, responsible for the company's customer service and community coordination. The defendant, Jiang, served as a programmer at Crown Jun Company, responsible for the development and maintenance of some backend programs. The court held that the defendants, Zhou, Jiang, and others, organized and led pyramid selling activities under the guise of promoting sales and other business activities, requiring participants to purchase goods to obtain membership qualifications, and based on a certain order, formed levels, directly or indirectly providing rebates based on the number of developed personnel and the amount of digital currency purchased, enticing participants to continue to develop others to participate, defrauding property, disturbing the economic and social order, and their actions constituted the crime of organizing and leading pyramid selling activities, with serious circumstances.
- Gambling/Operating a Gambling Den
If a developer and operator of a certain blockchain game develop a virtual currency for the game that accepts bets, participates in gambling, lottery, and guessing games, or operates chess and card gambling with games of chance, and players can not only use it to purchase equipment and props, but also exchange the coins or items obtained for RMB, the essence of this kind of blockchain game is similar to gambling chips, and it is highly likely to be suspected of gambling or operating a gambling den. Similarly, there are real cases of this (Case No. 2018 Gan 0102 Criminal First Instance No. 585).
Defendants He and Li, in the process of operating and managing the Chenlong gaming platform of Pangu Company, used the "fishing" and "five-in-a-row" games on the platform for gambling activities. In the "fishing" game, "players" (gamblers) consume virtual game coins by shooting fish with a cannon, with each shot consuming between 10 and 9900 game coins. Successful fishing results in a return of 2-100 times the game coins, and then in the "five-in-a-row" game, the game coins are exchanged for RMB through a "silver merchant" (a person engaged in the online sale and repurchase of game coins).
The court held that the defendants He and Li operated a gambling den using the internet gaming platform, and their actions constituted the crime of operating a gambling den.
- Illegal Business Operation/Money Laundering
If the developer and operator of a certain blockchain game build a game platform to facilitate the exchange of virtual currency or fiat currency for the purpose of money laundering or assisting money launderers in collecting or transferring funds, it is likely to involve illegal business operation and money laundering, and there are many real cases of this in practice.
In June 2022, the Economic Investigation Detachment of the Shanghai Public Security Bureau, together with the Baoshan Branch, found that some trading merchants' bank accounts had a large amount of overseas funds transferred in, indicating that some people were suspected of illegally engaging in RMB exchange operations.
The police quickly formed a joint task force to conduct investigations, starting from suspicious fund accounts, and traced multiple suspicious overseas websites, identifying the actual operator of the websites as Shi, and discovered several illegal online currency exchange platforms.
Upon investigation, it was found that Shi and his criminal gang, in order to make illegal profits, independently set up overseas servers and, without obtaining approval from the relevant national authorities, privately set up illegal online currency exchange platforms, solicited domestic and foreign currency exchange customers, and provided illegal currency exchange services for others through the recycling and recharging of various game tokens, both domestically and internationally.
According to the police, the gang had clear division of labor, with multiple departments including management, operations, finance, and customer service. After receiving the customer's local currency, the gang used domestic and foreign game token acceptors to convert the local currency into the foreign currency required by the customer through multiple recharges and acceptance transactions, and after deducting a fee of 5% to 15%, transferred it to the customer's designated account, thus providing illegal currency exchange services between local and foreign currencies.
In September 2022, the Shanghai police, in conjunction with the foreign exchange management department, with strong cooperation from police in other provinces and cities, arrested 19 criminal suspects, dismantled four illegal online currency exchange platforms, and the amount involved reached 14 billion yuan.
Other Legal Risks
In some blockchain games, personal information of players may be collected during registration or the game process. In this regard, developers and operators of blockchain games should pay attention to compliance with the provisions of the Data Security Law, Cybersecurity Law, Personal Information Protection Law, etc., to prevent the risk of leakage of players' personal information.
In the vast majority of blockchain games, when players engage in behaviors such as copying NFT-form virtual assets, such as characters and equipment, they may infringe on the rights of the copyright owner. Therefore, developers and operators of blockchain games also need to pay attention to whether the NFT in the game has been authorized or licensed by the copyright owner, and whether there are any infringement risks of others' copyright, trademark rights, and other intellectual property rights.
03 Conclusion
In conclusion, it is commendable for developers and operators of blockchain games to use blockchain technology to transform traditional games and explore new gameplay. However, the legal risks faced by developers and operators of blockchain games in China are quite serious. Therefore, developers or operators of blockchain games should carefully set game rules and modes, thoroughly understand China's regulatory policies and legal provisions for blockchain games, and avoid inadvertently crossing legal boundaries.
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