When Gaming Becomes Gambling – Criminal Implications of “Pay to Earn” NFT Gaming – Fin Tech
Online gaming is big business, and is only growing in size.1 An important aspect of this booming market are non-fungible tokens (NFTs), which allow users to buy, sell and trade stakes in in-game assets. The global marketplace for NFTs has enabled an evolution in gaming, from the traditional “pay to play” model (you buy the game, you play) to “play to earn” (you play the game, you earn an NFT, you sell NFT) – most famously, helping villagers in the Philippines make money from home during pandemic shutdowns. The game they played, called Axie Infinity, recently passed $4 billion in total trading volume.2
Making money playing games may sound too good to be true – and in some cases, it is. Where “pay to play” and “game to earn” intersect to become “pay to earn”, the “game” can become a “gambling” for both the user and the operator.
Games of chance generally prohibited under Criminal code
In Canada, games and gambling are primarily regulated as criminal matters under the federal law Criminal code.3
Generally Criminal code prohibits games that are fundamentally based on: (a) payment of money (or money’s worth) by the user; and (b) the possibility that the user can make money (or the money is worth) playing. More particularly, Section 206 i Criminal code prohibits, among other things, the following:
- Games of Chance – It is an offense to dispose of any goods, goods or merchandise at a “game of chance or any game of mixed chance and skill” where the user pays money or other valuable consideration to play.4 While there is no doubt an element of chance in every game, the reference to “sense games” in Criminal code“does not consider the unpredictability that can occasionally defeat skill, but the systematic resort to chance involved in many games such as dice-rolling, card-dealing.”5
- Exchange – It is an offense to carry out any operation of any kind by which any person, in return for the payment of a sum of money, or giving valuable security, shall be entitled to receive a larger sum of money or valuable sums. security than the sum or amount paid or given.6 (In particular, an element of chance is not required in relation to this prohibition.) The term “valuable security” is defined as, among other things, “a document of title to land or goods wherever they are located” and “a stamp or writing” which secures or proves title to or an interest in a chattel”.
Section 202 i Criminal coderelated to, prohibits tipping and the sale of pool.7 Gambling is not the topic of this article, but should be mentioned as we have observed instances of gambling in the online gaming space (especially when it comes to eSports).
It is important that the preceding prohibitions do not apply where the user does not need to pay to play.8 Case law also suggests that the prohibitions will not apply where the “prize” to be won is of minimal value or merely incidental to the game (ie where the dominant purpose of the game is to have fun, rather than to make money or money’s worth).9 The ban on “sense games” will also not apply to “pure skill” games, although it should be noted that “pure skill” games are rare.10
As for whether these prohibitions apply to pay to earn NFT games, the answer is (as is often the case): it depends. NFTs are not specifically described or defined in Criminal code, and the relevant provisions have yet to be interpreted by Canadian courts with respect to pay to earn NFT games. While courts have recognized the need to “interpret legislation in a way that reflects today’s technological reality”,11 suggests that the prohibitions may apply to pay to earn NFT games, the application of Canadian criminal law requires that “prohibited conduct must be fixed and known in advance”.12 Ultimately, the application of the bans on pay-to-win NFT games is an issue that will require judicial determination on a case-by-case basis.
Criminal code implications on pay to earn NFT games
As mentioned above, many online games that require payment to play (such as purchasing in-game tokens for cash) provide an opportunity for users to earn NFTs that can be traded and sold for money or cash.
In such cases, an interesting question may arise as to whether the NFT qualifies as a good, commodity or commodity (as the ban on gambling applies), or as a “valuable security” (as the ban applies). when switching). This is uncharted territory. The mere fact that an NFT is non-fungible, for example, does not mean that it is not a good, commodity or merchandise; just like a unique baseball card or a diamond. And while an NFT is arguably different from a “document” or a “stamp or writing”, the very purpose of an NFT is to prove title over (digital) assets (and as mentioned, courts have recognized the need to interpret legislation in a way which reflects modern technological reality).1. 3
Some pay to earn NFT games may not be caught by
Criminal code, of course, such as games of pure skill (which are rare) which do not constitute “exchange”, or games where the “prize” to be won is of minimal value (which do not constitute betting or pot sales). However, in many other cases that we have observed, we would expect the above Criminal code provisions will apply. Providers of online games should ensure that these prohibitions are duly taken into account, ideally at the concept stage.
For questions regarding these trends or questions related to Canada’s digital asset ecosystem, please contact the members of Osler’s Digital Assets and Blockchain Group and Gaming Group.
Footnotes
1. Many commentators expect the global gaming industry to exceed a value of $300 billion sometime this decade.
2. According to statistics published online.
3. Other laws may also apply, which are outside the scope of this entry. For example, the federal the Competition Act has provisions related to sales promotion competitions.
4. Criminal code at p. 206(f).
5. Ross, Banks and Dyson v. The Queen1968 CanLII 21 (SCC), [1968] SCR 786.
6. Criminal code at p. 206(e).
7. Section 204 i Criminal code explicitly provides that section 202 does not apply to “a private bet between individuals who are not in any way engaged in the business of betting”.
8th (1982), 39 OR (2d) 314 (CA).
9. For example, where the “prize” was a free coffee paid for by the loser of the game: [1986] 1 SCR 250 at para. 29.
10. For example, poker is usually described as a game of “mixed chance and skill”, despite being primarily a game of skill, as the initial distribution of cards is a matter of chance: [1967] 2 OR 420 (CA) in para. 11.
11. Bearing in mind that courts cannot adopt an interpretation which is contrary to the plain meaning, underlying intent or purpose of the legislation. See Canadian Security Intelligence Services Act (CA) (Re), 2020 FC 757 at para. 130.
12. 2013 SCC 25 para 33, citing various authorities.
13. This should not be read as a claim that NFTs are securities according to securities legislation. See also CSA Staff Notice 46-308, Securities Law Implications for Offers of Tokens.
The content of this article is intended to provide a general guide to the subject. You should seek specialist advice about your specific circumstances.
