Make Sure Your Virtual Currency Doesn't Enter Illegal Gambling

E-print | from Paybefore Magazine | Fall 2012

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In Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.

Gamblification describes the intersection of social media

In the United States, the slowly and gambling, playing on the evolving legal jurisprudence in this concept behind “gamification.” area is lagging behind the rapidly advancing use of gamblification. As gamification involves the use A recent U.S. Department of Justice (DOJ) decision, however, of game mechanics for nongame has paved the way for states to purposes, gamblification uses gambling permit most forms of online gambling (but not sports betting). mechanics for non-gambling purposes. This has led to a frenzy of state legislative activity, with some states (e.g., Nevada, California and New Jersey) seeking to permit and Zynga offers Slingo (a cross can be used to enter contests others (e.g., Utah) expressly trying between slots and bingo) and or sweepstakes to win virtual to prohibit various forms of online Zynga Slots. or real goods. gambling. Mini-Games: Some social Marketing & Customer Companies need to be aware of the networking games incorporate Acquisition: Sites like Cash complex legal issues and significant mini-games in which, through Dazzle offer users a spin of a risks involved when gamblification skill and/or chance, players prize wheel in exchange for par- techniques aren’t crafted and imple- may obtain in-game items, ticipating in sponsors’ offers. mented properly. Criminal penalties such as virtual goods, power- exist for unlawful online gambling ups, virtual currency, etc. Fantasy Sports Leagues: activities, as shown by 2011 federal Some of these involve spin- Many fantasy sports platforms indictments against illegal online ning a wheel or other random run the duration of a sports poker sites operating in the United activity but are legal because season. Some more recent offer- States. Some payment processors they only provide virtual goods ings are based on single games were caught up in the scandal, usable in-game. or even single plays, coming which involved using what appear- close to the line of sports bet- ed to be legitimate e-commerce Player-to-Player Wagering ting, but avoid crossing it by transactions but were actually Platforms: Virgin Games and using virtual currency models purchases of online poker chips.3 others provide platforms to that don’t offer cash out. enable gamers to wager What Is Gamblification? against each other on the Select Legal Issues Overview Businesses are employing a wide outcome of game play. State Law: For the most part, the range of contests, sweepstakes and activities above involve two major gambling-like techniques to attract Tournaments: Many companies legal issues, legality and compli- users and monetize applications. host gaming tournaments in ance. Whether an activity is legal is Examples include: which users pay a fee, in real largely governed by states. In some or virtual currency, to compete cases, laws address contests, sweep- Casino-Like Social Games: and win prizes. stakes and lotteries. Not all illegal Zynga Poker, one of Zynga’s lotteries are gambling; some states most profitable social games, Virtual Currency Sweep- have specific anti-gambling laws. lets users buy virtual poker stakes: Some sites reward chips (but not redeem them) certain user activity with a Many of these laws were written to play an online poker game. form of virtual currency that long before the rise of the Internet,

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much less the proliferation of social 3. Award/prize, something of value money to participate in an activity games and virtual currency. There is (e.g., a raffle) and receiving a chance a dearth of legal precedent. Some In general, if all three elements are (e.g., random drawing) to win a cash state attorneys general opinions present, that offering may be an ille- prize or valuable tangible goods exist, but a few of the AGs have flip- gal lottery and may be considered (e.g., a car). In this situation it’s easy flopped on their positions. Some gambling. If any of these elements is to see that consideration and states now are crafting specific legis- removed, the offering will generally chance are present and that there lation to address online gambling. fall outside the anti-lottery/gambling is a prize or award of real value. laws. If payment of consideration is But when virtual goods or curren- Federal Law: Until a recent DOJ eliminated, the result is typically a cies are used, determining if there memo, the Wire Act was interpreted sweepstakes. If chance is eliminated, is a payment or prize can be more to prohibit states from enacting the activity can be a lawful skill- complex. A challenge for many is certain legislation involving online based contest. While these three the lack of a detailed understand- gambling (despite a federal court elements seem to be fairly simple ing of virtual goods and virtual opinion to the contrary). Now the definitions, interpretation is not. currency business models. Some Wire Act is interpreted as primarily categorically think that because prohibiting sports betting. Other Their meaning varies from state to they are virtual, these items never federal statutes facilitate enforce- state, as detailed below, and under have value. When using contests, ment against activities that violate federal law. Not all illegal lotteries sweepstakes and other gamblifica- state gambling and illegal lottery constitute illegal gambling. Gam- tion techniques in social games laws. Federal agencies with jurisdic- bling typically involves making and online media, a thorough tion include DOJ, the U.S. Postal a wager or a bet. For certain pur- understanding of legal and regula- Service, Federal Communications poses, Congress has defined “bet or tory issues of virtual goods and Commission and Federal Trade Com- wager” to include staking or risking currency is critical.4 mission. (See sidebar on page 103.) something of value upon the outcome of a contest of others, a Defining the Terms The disparity in state laws makes sporting event or a game subject Consideration: This usually means determining legality and ensuring to chance, upon an agreement or a player must pay something of compliance complex. Many state understanding that the person or “value” to be eligible to participate. laws include similar terms to define another person will receive some- A payment of cash for the activity gambling activities, such as “prize,” thing of value based on a certain itself most always will constitute con- “chance” and “consideration,” but outcome. Congress excluded the sideration. However, if a player pays the meaning of and test for these following from this definition: to acquire something of value and terms can vary widely by state also gets a chance to win some- (and under federal law). Assuming “participation in any game or thing, particularly if there is an an activity is legal, compliance contest in which participants do alternative means of entry that requirements differ by state. not stake or risk anything of value doesn’t require purchase, then this other than (i) personal efforts of cash “payment” may not be deemed What the States Say the participants in playing the to be consideration. But many states Elements of Gambling: Most states game or contest or obtaining take a much broader view of what regulate these activities by prohibit- access to the Internet; or (ii) constitutes payment of value. In ing illegal lotteries. In states where points or credits that the sponsor some cases, states have found that lotteries are legal, they typically of the game or contest provides consideration may exist if partici- authorize state-run lotteries but to participants free of charge and pants are required to expend sub- prohibit private-sector lotteries. that can be used or redeemed stantial time or effort to participate. In most states, an illegal lottery or only for participation in games or gambling involves three elements: contests offered by the sponsor.” Under federal law, Congress has expressly excluded payments for 1. Payment of some form The points or credits may cover Internet access and certain types of consideration by user various forms of virtual currency. of virtual currency from the scope of consideration in connection with 2. Result determined by chance In a traditional scenario, consider- certain federal gambling regulation. ation would involve a user paying

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Chance: The meaning of this a chance to win virtual goods, has element varies widely. In some he paid consideration and/or receiv- states this element is satisfied ed value? The answer may depend, if the outcome is determined by in part, on whether the virtual any element of chance. In other currency/goods have “value.” This is states, the test involves whether a seemingly simple inquiry, but in chance or skill predominates. reality the answer is not always This is perhaps one of the most simple. The analysis may depend on: complex elements to assess. Regulatory Compliance Some legislators and regulators How the player acquired the Even if an activity is permissible, view poker as a game of chance. virtual currency (e.g., whether online gambling within a specific Professional poker players vehe- it was paid for with real cash state, various licensing and other mently disagree. Courts sometimes or earned through game play); compliance steps still may be consider other factors, such as necessary. The thrust of many whether the activity involves What he can do with the virtual compliance provisions is to ensure playing one hand of poker or a currency (e.g., cash it out for winners receive their prizes, protect longer duration of play (e.g., a real money or physical goods against defrauding consumers multitable tournament). Massively or just use it in a game to through rigged gambling and pre- multiplayer online (MMO) and video acquire virtual goods, which vent money laundering and other game players would argue that themselves may or may not financial crimes. Assuming an their play requires skill. But some have extrinsic value); and activity doesn’t constitute illegal mini-games or individual game gambling, certain compliance issues features may involve chance. If a With whom can it be used may still apply. For example, if an user purchases an in-game weapon (e.g., the virtual currency issuer activity is a skill-based contest or that may give the user a better or third parties). sweepstakes, some states may “chance” to accomplish a goal (e.g., require registration of the contest, slay an in-game monster) and gain Some social games and apps filing a bond to cover any prize more virtual currency or other include “dual-currency” models, amount, specific written and posted virtual goods as a result, is that which permit buying one form contest or promotion rules and “chance” under the various state of virtual currency that may be used maintenance of records of winners, laws or is it just part of game play? only for certain transactions, but among other things. earning another form of virtual Prize or Award: This means some- currency for other transactions. Other Legal Issues thing of value that a player wins. Further complicating the analysis Social Platforms and App Prizes can include money and can be the use of dual-currency Stores: As social networking valuable physical goods (e.g., a models and/or whether secondary sites and app stores become car or iPad), but can also include markets exist for the virtual items. the delivery method of choice something else of value. In one In their terms of service, most social for social games and apps, case involving the NCAA lottery games and social media applica- companies must develop their system for awarding tickets to Final tions prohibit players from selling gamblification strategies with Four games, winning through the or trading virtual goods, virtual these platforms in mind. Some lottery, a right to buy a set of currencies or player accounts. of these services preclude tickets, was not deemed to be a Nonetheless, a number of unauth- certain gambling-related prize. Few cases address this issue. orized secondary markets enable activities. Ensuring conformity players to do so. To the extent with these distribution models The Impact of Virtual Items on these markets exist and involve from the outset can save time, the Legal Analysis: The increasing real money purchases, this may effort and money. use of virtual goods and currency be relevant to the determination in social games and other online of whether the virtual goods or Intellectual Property: New gamblification scenarios makes currency have value. However, in at business models and tech- these determinations more difficult. least one case, a court found that nologies are created by pio- For example, if an online game the existence of a secondary market neers and innovators. Then player puts up virtual currency for did not mean a “prize” had value. they’re copied. In developing