Are GameFi and P2E the future of gaming?

NFTs in the world of gaming: Are GameFi and P2E the future of gaming? | Dennis Lange from Annerton on PayTechLaw | Cover picture: Tom Eversley

The use of decentralized, blockchain-based capabilities seems to be the new trend in the gaming industry. GameFi has been the subject of much discussion, and not just since Ubisoft CEO Yves Guillemot announced his intention to make the well-known publisher one of the main players in the field of blockchain-based games.


What is GameFi?

GameFi is a combination of the terms gaming and decentralized finance (DeFi) and describes the integration of blockchain applications in the gaming sector for monetization purposes, among other things. Smaller publishers in particular use the possibility of monetizing their games by issuing tokens. The tokens are usually based on the ERC-20 standard of the Ethereum blockchain and are issued as part of an Initial Coin Offering (ICO). This serves to finance the costs incurred in the development of the game. Using smart contracts, gamers receive automated tokens from the publisher in exchange for a payment with existing cryptocurrencies and can use them in the game that is developed later.

In addition, gamers should be given the opportunity to participate in the monetization of the game by playing it. This is a significant difference to conventional video games, where only the publisher profits. “Play to earn” (P2E) is the name given to this concept, as gamers receive tokens for achieving certain in-game goals, which – depending on the design – they can exchange for other cryptocurrencies or fiat money or use to purchase game content.

GameFi also offers another exciting field of action with the tokenization of this game content. Non-fungible tokens (NFTs) give gamers the unique opportunity to acquire “ownership” (or copyright or exploitation rights) of in-game content and to transfer their collected content to friends or even across games. This opens up far-reaching usage possibilities that should also be of interest to large tech companies in view of their involvement in the so-called metaverse.


Will publishers soon need a license because of GameFi?

For publishers of blockchain-based games, meanwhile, it is worth taking a look at how the issue of tokens and NFTs is to be evaluated from a regulatory perspective. In particular, the issuance of tokens as part of an ICO is no longer uncharted regulatory territory.

In addition to prospectus obligations, there are also numerous licensing obligations. The regulatory obligations to which token issuers are subject differ depending on the type of token and must be considered on a case-by-case basis.

Type of token decisive

Tokens that are endowed with rights under the law of obligations or rights similar to membership in a company are referred to as Securitiy Tokens. Due to their proximity to conventional securities, security tokens can trigger various regulatory obligations, for example from the German Securities Trading Act (WpHG), the German Securities Prospectus Act (WpPG), the German Investment Act (VermAnlG) or the German Money Laundering Act (GwG). Currency tokens that are structured as alternative means of payment are classified as financial instruments by regulatory practice and may lead to consequential obligations under the German Banking Act (KWG).

If, on the other hand, the tokens are pure utility tokens that do not grant the purchasers any financial or corporate claims against the publisher and have no exchange or investment purpose (so-called “pure utility tokens”), such obligations largely do not apply. This circumstance is due to the fact that utility tokens, analogous to vouchers, are only intended to give the acquirers access to services or products in the later game (e.g. certain skins). They are neither to be classified as financial instruments within the meaning of the German Banking Act (KWG), nor as securities within the meaning of the German Securities Prospectus Act (WpPG), nor as investments within the meaning of the German Investment Act (VermAnlG).

The distinction can be difficult to make in individual cases, especially if the publisher envisages that the tokens will not only be used ingame, but will also fulfill value preservation and payment functions outside the publisher’s ecosystem. This is referred to as hybrid tokens, where possible regulatory obligations are determined based on a delineation of the focus of the tokens.

The later intended use and later acquisition options of the tokens can also lead to unwelcome permission requirements. The use of tokens as a payment method in pure exchange transactions in the delimited gaming world as well as the trade of tokens between private users may be permission-free. However, this may change for the publisher if he wants to provide a platform in his ecosystem in which he wants to act as a third party between the payments of the gamers and thus possibly provides payment services within the meaning of the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, ZAG).

NFTs can also trigger permit obligations

Finally, NFTs cannot be excluded from the consideration of regulatory obligations. Although disputed in detail, NFTs are likely to fall under the definition of crypto assets within the meaning of Section 1 (11) sentence 1 no. 10 KWG. According to the legal definition from Section 1 (11) sentence 4 KWG, crypto securities are digital representations of a value that has not been issued or guaranteed by any central bank or public body and does not have the legal status of currency or money, but is accepted by natural persons or legal entities as a means of exchange or payment on the basis of an agreement or actual practice or serves investment purposes and can be transmitted, stored and traded electronically. In the legislative statement to the law, the legislator expressly stated that it intended this definition to cover all tradable assets that are intended to serve investment purposes. In view of the current interest and strong performance of NFTs, the investment purpose is at any rate obvious. Thus, an NFT could also represent an asset investment.

The classification as a financial instrument means that many services that are conceivable for publishers around NFTs in the gaming world require permission from the responsible regulatory authority BaFin. An approved prospectus (or optionally a permitted asset information sheet) would also be required for the issuance of NFTs representing investments.

However, the effort should be worth it: In Germany alone, revenue in the gaming sector for 2020 was EUR 8.5 billion. Worldwide sales are expected to exceed the 200 billion US dollar mark by 2025 at the latest.


Cover picture: Copyright © Adobe Stock / Tom Eversley

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