Loot Box Business and Its Legality

What do you need to know before starting an in-game item business

Video games themselves generate revenue for their creators, but each game publisher seeks to increase the monetization of the project. As a result, video games have generated additional ways of motivation and earning that can exist outside the game and generate income for third parties.

These include:

• loot boxes (random boxes);
• skins;
• in-game items (loots);
• bonuses;
• keys;
• cases;
• in-game currency (coins);
• and other items.

A loot box is a way to monetize computer games, a virtual box that allows you to get random virtual items of various values ​​and purposes. Items can be useful for game progress and carry a decorative function.

The status of loot boxes, skins, and other items within games raises questions and different opinions among regulators around the world, let alone a business built on skins or loot boxes.

Business built on skins and loot boxes and its legality

Loot boxes per se are not an illegal activity in most countries of the world with the exception of Belgium, which has completely banned such random in-game elements. Loot boxes will remain just random boxes as part of the game as long as the following requirements are met:

• The contents of such loot boxes are intended for the game itself (for example, packs in FIFA).
• There is no way to withdraw and exchange items received as a result of opening the box for real money/values.

When it comes to loot boxes outside of games, there is a risk that loot boxes are considered gambling.

In order to avoid the recognition of a project as gambling, it is necessary to turn to the signs of gambling in the specific jurisdiction where the project is conducted.

The main signs of gambling in loot boxes include:

• The probability of getting an item higher or lower than the cost of the box itself.
• Trading of the won items for real cash.

If your project has signs of gambling, you will need to obtain additional permission, a gambling license to legally launch the product.

Trading skins, in-game items: the opinion of the regulator

Skins, loots, artifacts - all these are in-game items, the legal status of which is not defined. The relationship between the creator of the game and the player regarding skins is governed by a digital services license agreement. In-game items as a service for organizing the gameplay were considered by worldwide courts in 2013-2015.

However, outside the video game, skins, internal game currency, and other items have a completely different legal status. For example, CS:GO skins are used as a means of payment, and lawsuits have repeatedly been filed against VALVE as against the organizer of a trading platform with illegal issuance of virtual currency (GG v. Valve Corp 2017, McLeod v. Valve Corp. 2016)

The largest skin trading site was organized by VALVE. Despite the company’s statements about counteracting the exchange of skins outside the game, such an exchange is actively used, skins are even used as a way to pay for some services or other goods.

In 2016, the United States considered the most high-profile case related to CS:GO skins, initiated against the organizer of a lottery for skins. The illegal gambling organizers were defined as gambling thanks to the secondary skin market, although they did not use real money.

A similar situation exists in the European Union. For example, in the UK in 2017, the Gambling Commission recognized a popular site as the organizer of illegal gambling (Game Gold Tradings Limited, Dylan Rigby, Craig Douglas vs. UK Gambling Commission). On this site, the user could play lotteries, bet using the internal currency, which was subject to exchange for the currency of the FIFA game. The FIFA currency, in turn, was exchanged by players for real money in the secondary market.

However, in its decision, the regulator noted that FIFA is not a guilty part since it does not provide the possibility of exchanging its items or currency for real money and is struggling with third-party sites.

Although in-game items and currencies are not real money, they have a monetary value, and therefore the organization of casinos and gambling based on digital items will be equated to a real casino (Kater and others v Churchill Downs Inc, 2018).

The site of loot boxes in the legal aspect

Despite all the described risks, the concept of loot boxes may exist in the legal field and may not have signs of gambling in the form of a random gift store.

With the set cost of the box, the known cost of its contents, and the real value of the item received, the loot box loses all the signs of a gambling game even when it is outside of a computer game.

If the random component and material benefits are integral elements of the project, a license will be required.

To identify the signs of gambling, it is necessary to carefully analyze the project, to identify its key components. Converting a project into a random gift store requires direct supervision by a lawyer who can point out aspects that require special attention since the slightest mistake will increase the likelihood that a loot box project will be considered a game of chance.

To start a business with obtaining a license for gambling, you need to choose a jurisdiction and determine the type of the license. The most popular countries can be found here (link).

Earnings on in-game items: conclusions

The Electronic Software Association (ESA) announced that Sony, Nintendo, and Microsoft, the three largest video game platforms, have agreed to change their approach to loot boxes and other random elements in games. The main requirement is the disclosure of the probability of receiving a particular award.

This approach should be incorporated into any third-party business related to loot boxes for the legitimate conduct of business.

Loot boxes can be random gifts, or they can become a game of chance, and even games without the use of cash can be a game of chance. However, there is no clear and single regulation, each country is looking for its own approach to this new area, law enforcement practice is constantly changing, and it is impossible to do without the help of a lawyer.

L&T benefits

Choosing the right jurisdiction requires expert assessment and experience. Being a legal international company that has been on the market for more than 16 years, our lawyers have extensive experience in establishing a business based on loot boxes, drawing up legal opinions, and determining the legal nature of in-game items and the procedure for their regulation.

Our services

1. Preparation of a legal opinion - a legal and analytical assessment of loot boxes, analysis of in-game items, and their legal nature.
2. Company registration - a selection of a suitable country for company registration for a business with loot boxes.
3. Tax planning and optimization - the development and implementation of a tax strategy through the use of international companies to reduce the tax burden.
4. Opening an account with a foreign bank - selecting a bank based on the quick opening of an account and the minimum service rates. Individual bank selection for business with loot boxes.
5. Connecting processing (merchant account) for receiving payments online - opening an account that allows you to accept and process payments from bank cards via the Internet (VISA, MasterCard, American Express, etc.). An individual selection of processing for a business with loot boxes.
6. Legalization, translation, certification of documents.
7. Substance. The organization of the company's presence is a solution for conducting real business. Search for an office, employees, their employment.
8. Accounting services and audit.
9. Development of a business plan for a business with loot boxes.
10. Registration of a trademark, logo.