Crypto a/k/a Blockchain Gaming is the FUTURE!

So I have bought some gaming NFTs on a whim, just because the pitch caught my attention somehow. These are all risky investment assets, that’s why I don’t look at them as investments, I look at it as a way to really own a game that I will enjoy playing. That said, I am very much interested in the earning potential and digital economies that can grow as these crypto games become popular. 

One of the games that recently peaked my interest is Bravo Ready 1 Infinite (BR1:Infinite – use my referral link to join up early https://www.br1game.com/?referral=notmylawyer it may have magical powers!) and their whole proposition of a gaming ecosystem where you must buy or rent an NFT to play, then after that you have to pay to spawn into the game, but the better you are at the game, the more you could potentially earn by killing other players. In short, pay to play and kill to earn blockchain or maybe Web 2.5 gaming, since BR1: Infinite seems to be using some web2 elements. 

Of course, after ape’ing in and buying a few Ape and Droid avatars for BR1:Infinite and begging on social media for the chance to beta test the game, I decided to do some research. One of the biggest worries in blockchain gaming is establishing and maintaining a stable economy that allows players to not only have fun, but earn rewards for their efforts. The other concern is Gary and the SEC or any other authorities suing our favorite game makers and platforms. As a participant in many of the discord channels and discussions, I have seen a huge interest around incorporating games of chance as subgames or elements to a larger game. 

Its funny, this is the kind of project I find myself doing often since I have retired from litigation. Think of my as George Clooney in the film “Michael Clayton” except that my clients usually hire me to help them foresee and be proactive in taking steps to avoid getting on any government authority’s radar. Though, I also do my fair share of clean up jobs as well. When I take on clients, its my job to explore every angle from the effect of a divorce on business to the risk of your local attorney general or human rights office coming to raid coffers. If I am doing my job well, we stay out of court and save tons on litigation attorney fees, not to mention stress. That said, I decided to apply my particular set of skills to researching the potential for blockchain or web3 gaming developers being hit with lawsuits or criminal charges accusing them of violating gambling laws. This is just a quick review, between research and writing this article, I did not spend more than 2-3 hours and this is by no means thorough (so please consult an attorney admitted in the relevant jurisdiction with experience handling the relevant issues, DO NOT RELY ON ANYTHING HERE AS LEGAL ADVICE!). 

So I am looking at the Pay to Play and Kill to Earn model. Interestingly, this is not a new concept at all. Is it the same thing everyone has been doing? You bought a gaming platform in the past and paid for a game, played and got rewards. If it was a first person shooter or third person shooter, you likely got rewards based on your kills. The difference here is that you don’t have to access the black market or violate any terms & conditions to cash in on some of those rewards. But, more specifically, my very light research shows that there have been attempts to push this risk based model (where you pay to spawn and if you win (get a lot of kills) you make way more than you paid to enter the game) as early as 2007! This was attempted by “Tournament[dot]com” in collaboration with Valve and teams came together to compete playing Counter-Strike by paying down some cash to enter with the winner taking all (small cut to the House, they always win).

So, if this model is so great, why is there nothing on the “Tournament[dot]com” website? HMMMMM… Surely, this can lead me down a rabbit hole, so I am going to answer this with my gut feelings based on limited research (never recommended when advising people). It appears that the technology was not there yet. Gamers complained that the competition hacked the game or flat out cheated to win. Non-participant gamblers, betting from places where you can actually gamble, complained that hackers were influencing competitions by initiating attacks on individual gamers participating with DDOS attacks, etc. to give their side an advantage. Question now is, did blockchain technology create a solution? We look at Gala Games’ Town Star and think, maybe not? That is a question the techie developers need to think about, it goes beyond my skillset. 

Let us assume, that now, at least 15 years later, the technology has advanced enough to avoid cheaters or hackers. Is the government going to come after us? Maybe, this guy Gary of the SEC is out to CATCH WREK and is down to get his legal team to jump your favorite project World-Star-Style. But I am not going to dive into that rabbit hole either, lets see what happens to the People’s Currency XRP and root for Ripple all the way. I have seen some worry about running afoul of gambling laws and my experience in dealing with the New York Attorney General’s office informs me that they may be quick to file suit or even press criminal charges, if they deem a game to be in violation of gambling laws. 

Again, this is a quick analysis, based on very limited or time constrained research, plus gut feelings. In August 1994, the New York County Criminal Court published a decision that discussed the definition of gambling under the New York State penal laws. In this case, People v. Hunt, 162 Misc. 2d 70 (1994), the defendant was arrested for hustling “three card monty” on the NYC streets. “Pivotal to the case at hand is whether the act of playing three-card monte constitutes "gambling" as defined in Penal Law § 225.00 (2). Gambling occurs when a person "stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome." (Penal Law § 225.00 [2].) A contest of chance is defined as "any contest, game, gaming scheme or gaming device in which the outcome depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein." (Penal Law § 225.00 [1].)” In the end, the court here decided that “three card monty” was a game of skill and dismissed the case, finding that “Absent trickery or deceit on the part of the dealer, i.e., palmed cards, the contest pits the skill level of the dealer in manipulating the cards against that of the player in visually tracking the card. Played fairly, skill rather than chance is the material component of three card monte.”

Looking good so far, as long as we keep out the cheaters, it seems Pay to Play and Kill to Earn can work! The New York State Court of Appeals (highest court in NY) also took a look at a similar issue in March of 2022, in White v. Cuomo, 38 N.Y.3d 209 *; 192 N.E.3d 300 (2022), where they pretty much adopted the penal law definition of gambling in their analysis. In this case, the game in question was a fantasy sports type game where participants draw from their knowledge of the relevant sport, player performance, and histories and although participants are not able to influence athlete performance, the court determined their skill nevertheless plays a substantial role. The Court opined: “Permissible contests for prizes, we explained, share the "essential particulars" that "one of the parties strives with others for a prize; the competing parties pay an entrance fee for the privilege of joining in the contest, and . . . the entrance fee forms a part of the general fund from which the premiums or prizes are paid" (Lawrence, 152 NY at 19). By comparison, bets and wagers are "agreement[s] between two or more, that a sum of money or some valuable thing, in contributing which all agreeing take part, shall become the property of one or some of them, on the happening in the future of an event at the present uncertain" (Harris v White, 81 NY 532, 539 [1880]). In other words, "'[i]llegal gaming implies gain and loss between the parties by betting, such as would excite a spirit of cupidity'" (id. at 539, quoting People v Sergeant, 8 Cow 139, 141 [Sup Ct 1828])—an element that is notably lacking when entrance fees are fixed, and predetermined prizes are awarded by a neutral party whose monetary stake is limited to the payment of the prize. Contests charging entry fees and awarding fixed prizes do not constitute gambling prohibited by article I, § 9 of the Constitution.” YES, the Court cited caselaw from the 1800s!

So it looks like, at least in New York State, Pay to spawn, kill to earn games do not run afoul of gambling laws. This last Court of Appeals decisions is great, but it is also concerning that it had to go through multiple levels of appeal (surely, huge litigation bills) to get to the right decision. This started when Cuomo was AG and battling fan dual and draft kings. Even with this Court of Appeals decision, there was a dissent that argues: That majority misinterpreted the NY Constitution when it used recent criminal cases to form the definition of gambling, especially when there are cases from back in the 1800s and early 1900s that found there was a game of chance even when knowledge and skill played a substantial factor. The dissent opined that these fantasy sports contests were gambling and if the legislature wanted to allow them, they could, but the Constitution otherwise defines them as gambling. 

While this Court of Appeals decision may protect the pay to spawn / kill to earn model, there are still educated minds that are willing to fight this issue. That said, I think there is an even stronger argument that games like BR1: Infinite are solely skill based and there is little chance involved. It is also a privilege to be able to get online and log into the metaverse that is the game map and run around in it for any length of time. So I think we’re good for now, at least in New York. But again, don’t take this as legal advice… this is not a deep dive at all and it is advisable you consult an attorney licensed and familiar with the issue. 

If you want to do further research, you may want to look at the below cases:

Humphrey v. Viacom, Inc. 

3rd Circuit - US District Court Cases United States District Court for the District of New Jersey Jun 19, 2007 2007 U.S. Dist. LEXIS 44679

.. throughout the country, however, have long recognized that it would be "patently absurd" to hold that "the combination of an entry fee and a prize equals gambling," because if that were the case, countless contests engaged in every day would be unlawful gambling , including "golf tournaments, bridge tournaments, local and state rodeos or fair contests, . . . literary or essay competitions, . . . livestock, poultry and ...

NCAA v. Governor of N.J., 730 F.3d 208, 2013 U.S. App. LEXIS 19167 Caution: Possible negative treatment. Click to Shepardize®

Cited by: 730 F.3d 208 p.223

... arise from an expansion of sports wagering to the entire country. The same can be said of the Leagues' promotion of fantasy sports, even if we accept that these activities are akin to head-to-head gambling. 4 We note, however, the legal difference between paying fees to participate in fantasy leagues and single-game wagering as contemplated by the Sports Wagering Law. See Humphrey v. Viacom, Inc., No. 06-2768 (DMC),2007 U.S. Dist. LEXIS 44679, 2007 WL 1797648, at *9(D.N.J. June 20, 2007) ...

Phillips v. Double Down Interactive LLC, 173 F. Supp. 3d 731, 2016 U.S. Dist. LEXIS 39189, 2016 WL 1169522 Caution: Possible negative treatment. Click to Shepardize®

... Finally, Phillips is likewise not a "loser" under the statute. When Phillips bought more chips, she was in essence buying the right to continue playing the games. And Phillips got to do just that: she got to use those chips to continue playing Double Down's online casino games. In other words, she did not "lose" the value of those chips. See, e.g., Humphrey v. Viacom, Inc., 2007 U.S. Dist. LEXIS 44679, 2007 WL 1797648, at *10(D.N.J. June 20, 2007) (dismissing qui tam claim under the ...

NCAA v. Christie, 2012 U.S. Dist. LEXIS 183395 Positive treatment indicated. Click to Shepardize®

Notably, Congress excluded fantasy sports from prohibition under the Unlawful Internet Gambling Act ("UIGEA"), 31 U.S.C. § 5362(1)(E)(ix). In addition, United States District Judge Dennis M. Cavanaugh's decision holding that fantasy sports fall outside the definition of gambling envisioned by New Jersey's qui tam statute, N.J. Stat. Ann. 2A:40-6, lends further support to Plaintiffs' position. See Humphrey v. Viacom, Inc., No. 06-2768, 2007 U.S. Dist. LEXIS 44679, 2007 WL 1797648 (D.N.J. June 20, 2007).

L.A. Turf Club v. Horse Racing Labs, 2017 U.S. Dist. LEXIS 236040, 2017 WL 11634526 Citing references with analysis available. Click to Shepardize®

... Defendant claims that it is "well established that entry fees do not constitute bets or wagers, and the elemental risk of gambling." (Def.'s MSJ 9.) In support, Defendant principally relies on two, unpublished, out-of-Circuit cases: Humphrey v. Viacom, Inc., No. 06-CV-2768,2007 U.S. Dist. LEXIS 44679, 2007 WL 1797648(D.N.J. June 20, 2007) and Langone v. Kaiser , No. 12 C 2073, 2013 U.S. Dist. LEXIS 145941 , 2013 WL 5567587 (N.D. Ill. Oct. 9, 2013) . (Def.'s MSJ 9-11.) In Humphrey , ...

G.G. v. Valve Corp. 

9th Circuit - US District Court Cases United States District Court for the Western District of Washington Jan 07, 2022 579 F. Supp. 3d 1224

Overview: Summary judgment was granted on the mothers’ the Washington Consumer Protection Act, Wash. Rev. Code ch. 19.86, claims to the extent they relied on an affirmative misrepresentation theory because the mothers’ presented no evidence to permit an inference that the line items on their statements were false or otherwise misrepresented the charges.

... Valve was affirmatively representing to parents about its harms and dangers—which was nothing." (Resp. at 13.) They argue that Valve's actionable omissions include "deceptively embedd[ing] a gambling feature in what otherwise appeared to be a typical first-person shooter game"; "conceal[ing] both the true odds of a loot box containing a given item and the value of various items contained within a loot box"; and ...

Posted 10/14/2022 by @notmylawyer