For the last decade or so, the video gaming industry has been witnessing an emergence, and then almost a mainstream adoption of a revenue-generating mechanic similar, if not outright identical, to gambling.
This mechanic is commonly known as a “loot box” and offers players a chance to obtain in-game rewards. These rewards come mainly in the form of cosmetic add-ons (such as hero skins, weapon or map designs, announcer voice packs, etc.) to the base product, i.e. the game that the player has purchased. Methods in which loot boxes generate revenue vary across games, depending on game type and different publishers’ monetization models. Still, in essence, loot boxes represent a set of possible rewards from which a single reward is drawn, not unlike some traditional games of chance.
This practice has drawn the attention of various regulatory bodies, mainly in Europe but also worldwide, for a few reasons:
- Loot boxes are (generally) not free;
- gain or loss is not determined by skill – rather it depends on some random event;
- they are marketed to all ages.
Firstly, loot boxes not being free poses a question of their taxation, i.e. if their purpose is to generate revenue for the developer/publisher of the game, said revenue should be subject to some type of tax. More importantly, even if they are subject to tax, the premium nature of loot boxes is analogue with the criteria that gambling is pay-to-play based, which has been recognized and adopted in most jurisdictions.
Secondly, gambling always depends on luck or an unpredictable element. The randomness of the draw in loot boxes is almost identical to many games of chance, both in method and in presentation.
Thirdly, even though the video game market has grown and now attracts consumers of all ages, video games are still primarily marketed to sensitive age groups. Given that most countries forbid minors to gamble, the loot box mechanic poses an issue even if the video game itself is considered “safe” for sensitive age groups.
However, from a regulatory point of view, the most obvious issue is that it could be interpreted that video games that contain loot boxes are, in fact, offering gambling services without proper licenses or regulatory approvals and without meeting any of the terms and standards prescribed for companies that legally offer gambling services.
While there have been some countries that have addressed this topic, most jurisdictions are yet to take any steps in that direction. Serbia, for example, has adopted the Games of Chance Act in 2019 (“Law“). According to this Law, games of chance “(…) are considered to be games in which participants, for a fee, are given the opportunity to make a profit in money, goods, services, or rights, where the gain or loss does not depend on the knowledge or skills of participants in the game, but on a happenstance or some uncertain event“.
This definition leaves little doubt as to whether loot boxes are, in fact, games of chance. If we compare loot boxes to traditional games of chance such as lottery, the similarities become apparent:
- To participate in a lottery draw, the player must buy a lottery ticket.
- To earn the prize, the numbers that the player selected must be randomly drawn.
- The prize has monetary value, regardless of whether the prize is money, goods, rights, or services.
- The player is the owner of the prize and can do with it as they wish (use it, sell it, give it to someone, etc.).
- To open a loot box, the player must pay a certain amount of money/in-game currency.
- The prize drawn from a loot box is randomly selected from the set of possible rewards via an RNG (randomly generated number) algorithm.
- The prize usually has its value in the form of in-game currency, and in some cases, can be traded within virtual marketplaces.
- The player has broad rights over the prize, which often include unlimited use and transfer. The prize is usually tied to the player’s game account which they use to buy, access, and play video games.
As for now, companies maintain the practice of using legal loopholes to justify the existence of loot boxes, some of which are:
- claiming that loot boxes are not obtained by using real (“fiat”) currencies, but rather via various in-game currencies, which are in turn bought with fiat money;
- claiming that rewards are guaranteed, i.e. there cannot be an outcome that results in the player opening a loot box and leaving empty-handed;
- claiming that rewards are purely cosmetic and have no real value.
Most of these arguments are flawed, at least from the perspective of Serbian Law. Most obviously, the previously mentioned definition of games of chance states that prizes need not only be monetary but can also be goods, rights, and services. Furthermore, the Law provides that certain games of chance can guarantee winnings.
The only argument that holds some merit is that real currency is not used when buying loot boxes, as the Law states that players need to pay a fee to participate in the game. In the case that the “fee” is interpreted to be a monetary fee, loot boxes that work based on the payment of non-fiat currencies would not fit this definition.
However, as is the case in most jurisdictions, competent Serbian authorities (primarily the Games of Chance Administration, hereinafter: “GCA“) are yet to establish their view when it comes to this practice. It may be some time before we see any development in this area, if for nothing else, then for the fact that the Law limits the actions that GCA can take regarding loot boxes. The reason for this is because the Law prescribes only certain types of games of chance. While loot boxes fit the general definition of games of chance, they do not adequately fit any of the definitions of the prescribed game of chance types provided by the Law. As the GCA issues licenses based on the type of a game of chance, and since loot boxes fit none of the types, GCA’s reach, for now, is limited.
This text is for informational purposes only and should not be considered legal advice. Should you require any additional information, feel free to contact us.
By Milan Samardzic, Partner, and Vuk Knezevic, Associate, Samardzic, Oreski & Grbovic