Is it illegal to exchange game points for physical gifts?

Is it against the law to trade game points for tangible prizes?

Author: Lawyer Shao Shiwei (Senior Lawyer at Shanghai Manking Law Firm)

Introduction

In order to increase user engagement in games, many game companies have set up a points mall where users can exchange their in-game points for physical items or gift cards, such as shopping cards or smartphones. But is this legal?

On July 15, 2023, the Guiyang Procuratorate WeChat public account published a case titled “Online Casino Operation, Prosecution! Sentencing! Effective!” In the game “Crazy Fishing,” the game operator included features such as “exchanging in-game items for physical goods.” As a result, Ye and 11 others were convicted of running a casino and sentenced to varying prison terms by the Guiyang County People’s Court.

So, does exchanging game points for physical items or gift cards always constitute a crime? Today, let’s discuss this issue.

• Analyzing the potential attack vulnerabilities of wallets based on the design principles of BRC-20.
• Europe releases the world’s first AI regulation. What intersection does it have with the crypto asset industry?
• Step into the Future with eTukTuk AI, EV, and Blockchain Investment Opportunity You Can’t Afford to Miss Out on before 2024!

When does exchanging points for physical items constitute running a casino?

In a legitimate game, only the “buy-in” feature is allowed (players use real currency to purchase in-game virtual currency). The “cash-out” feature (converting in-game virtual currency or virtual items into real money) is not allowed, as it poses a gambling risk. I have previously discussed the legal analysis related to this in my article titled “How to Avoid Gambling in Blockchain Games That Let You Earn Money While Playing?”

Game companies cannot provide a platform for cashing out game virtual currency/items directly into legal tender. This is common knowledge. However, besides enhancing the gaming experience itself, cashing out game coins can indeed attract more users to participate in the game and generate more revenue for the game company.

Therefore, some game companies have adopted alternative methods, such as using points to exchange for items as a marketing tactic, to incentivize more users to make deposits and play the game. However, whether providing exchange services in the form of cash or physical goods, it is essentially the same and will be recognized by judicial authorities as a form of “cashing out,” just like the case of the fishing game being deemed as running a casino.

So, is the points exchange feature necessarily prohibited by law?

Can games have a points-to-physical-items exchange feature?

As a recent catchphrase I often use goes, “This is a very complex issue,” and it applies to this question as well. Let’s first take a look at a legal provision:

“Notice on Regulating the Mid-to-Final Supervision of Network Game Operation and Strengthening Work” (referred to as “the Notice”) (issued by the Ministry of Culture [2016] No. 32) (IX) Network game operators shall not provide users with services to exchange virtual in-game currency for legal tender or physical items; (X) Network game operators shall not provide users with services to exchange virtual items for legal tender. If they provide users with services to exchange virtual items for small-value physical items, the content and value of the physical items should comply with relevant national laws and regulations.”

Although the “Notice” has expired, there is currently no new regulation to replace it, so it still has some degree of reference value. Let’s start with this regulation and provide an interpretation.

These two articles are about the prohibition of game developers converting virtual currency/items “backwards”. Article 9 prohibits the conversion of virtual currency into legal tender or physical goods; Article 10 prohibits the conversion of virtual items into legal tender, but it leaves a loophole regarding whether they can be exchanged for physical goods.

So here are three questions that arise:

1. Since there are regulations allowing the exchange of virtual items for physical goods, does this mean the exchange function has legal basis? Why do platforms still face legal risks related to criminal activities?

2. Only virtual items are allowed to be exchanged for physical goods, not virtual currency. What is the difference between items and virtual currency? How can we avoid items being classified as virtual currency and consequently facing the legal risk of running a gambling site?

3. What kind of exchange services provided by platforms can be considered as “small-value physical goods”?

Regarding the first question, we cannot deny that not all platforms with the function to exchange points for physical goods will be classified as running gambling sites. In practice, for example, the “Tencent Happy Landlord” game points can be exchanged for third-party products like JD.com cards or phone cards. Although the “Notice” has expired, it still holds some degree of reference value. But why do we say it has “some degree” of value?

Because it is indeed an expired regulation, strictly speaking, the idea that items can be exchanged for physical goods can no longer be relied upon.

Regarding the second question, the difference between items and virtual currency, according to the current effective “Regulations and Enforcement Guidelines for Virtual Currency in Online Games” published on November 16, 2010, “For virtual items (in-game currency) directly purchased by users with legal tender and capable of being exchanged for other game items, in-game currency, or value-added services provided by the game operating company, they should be managed following the requirements for virtual currency in online games.”

Therefore, it is not sufficient for game developers to argue, “We provide users with the function to exchange items, not virtual currency!”, to be recognized by judicial authorities.

As for the third question, Article 9 of the “Notice” stipulates that if items are exchanged for small-value physical goods, it can be allowed. However, this provision is still somewhat ambiguous. The content and value of the physical goods “should comply with relevant laws and regulations of the country,” but what rules are being referred to here is not clear. There is also no clear restriction on what value is considered “small”. Should it be less than one hundred yuan or less than five hundred yuan? Different people may have different perceptions. In practice, there are platforms that consider “phone cards” as exchange vouchers, and one would think that the value of phone cards in the public’s perception should be consistent. However, there are still cases where platforms are convicted of running gambling sites, such as case (2021) Xiang 0923 Criminal Case No. 189, where the court considered the exchange mall set up in the game as having the ability to directly convert virtual items into virtual cards for monetization, thus giving the platform a gambling nature, making it a gambling website.

Legal Advice from Mr. Mankun

The platform provides users with a points redemption service, whether it has this feature itself or cooperates with third-party payment processors, there is always a risk of gambling involvement. Therefore, we do not encourage platforms to engage in such practices. For game developers who still want to use this feature to increase their user base, here are a few suggestions:

1. Try to avoid the legal risks of considering game items as virtual currencies. For example, game items cannot be directly purchased with fiat currency, and they do not have the function of being exchanged for game virtual currencies, and so on.

2. Do not cooperate with third-party entities such as payment processors to provide users with final cash redemption services. How should we understand this sentence? Let’s take an example: the platform offers a service where game virtual items can be redeemed for a $200 shopping card. The third-party entity that the platform cooperates with then repurchases the shopping card from users for $150. In the end, the platform indirectly facilitates the cash redemption process for users. In this case, the platform is likely involved in gambling activities.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!