What are the legal risks of NFT digital collectibles playing lottery?

Legal risks of NFT lottery for digital collectibles.

Recently, the author has received many legal consultations about domestic NFT art platforms. The majority of these platforms have prize-enabled gameplay, and some legal cases have been triggered by prizes. Either the promised prizes were not redeemed, or the quality of the redeemed products was compromised. Therefore, the author believes it is necessary to write an article to clarify these issues. In fact, the Manning team has already written many legal articles about prize-enabled gameplay on art platforms. However, considering the current wave of legal disputes, the author believes it is necessary to analyze the topic again to help art platforms “reduce risks” and create a clean entrepreneurial environment in the art market.

01 Lottery is the Favorite of Art Platforms

Prize-enabled gameplay itself is a popular method in the internet e-commerce industry, and it is an effective way to achieve “viral growth”. Blockchain is inseparable from internet thinking and can incorporate traditional e-commerce methods without contradiction. Domestic art platforms rely more on various innovative gameplay, which may involve the underlying value logic of art.

When we handle criminal defense cases involving art platforms, we always explain to relevant authorities what it is, what its technology is, and most importantly, where its value lies (how its price is determined). As I mentioned during last week’s Manning afternoon tea live stream, just like many virtual items, the value/price of domestic digital art is based on a consensus among people. When people believe it is worth the price, it is; conversely, the large-scale fake transactions on art platforms are considered deceptive behavior from a legal perspective. Some platforms manipulate the technology to create a thriving scene, leading people to mistakenly believe that there are a large number of players participating and recognizing its value, thereby increasing the potential for future appreciation, trading, and direct liquidity. When people realize these scenes are fake, can they not be angry?

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Based on this, some art platforms adopt prize-enabled gameplay to attract users. They link the issued digital art with physical or tradable items (prizes) to determine its value and tell a compelling “story”. Therefore, the author believes that if prize-enabled gameplay is the core (main selling point), the specific gameplay of the prizes and whether they can be realized will determine users’ perception and further influence the legal risk level of the platform.

02 Risks of Prize-Enabled Gameplay

Based on the author’s superficial industry observations, the current prize-enabled gameplay on domestic art platforms includes lottery (blind box) activities, point (synthesis) redemption, and referral rewards. Let’s analyze each category separately.

1. Lottery (Blind Box) Activity

The act of participating in a lottery is considered a form of gambling under civil law, which is essentially a game of chance. In order to differentiate it from gambling, China has enacted the “Anti-Unfair Competition Law” and the “Interim Provisions on the Regulation of Promotional Activities”. Among them, Article 10 of the “Anti-Unfair Competition Law” stipulates that “operators engaged in prize sales shall not have the following situations:… (3) lottery-style prize sales, with the highest prize amount exceeding 50,000 yuan.” Article 17 of the “Interim Provisions on the Regulation of Promotional Activities” states that “the highest prize amount for lottery-style prize sales shall not exceed 50,000 yuan.” In other words, violating the regulations on the value of prizes in lotteries/blind boxes may carry administrative legal risks and may result in administrative penalties.

In addition, if a platform sets the prize rewards too high, does not establish/publish clear winning probabilities, and the platform itself has the function of repurchasing, repurchasing prizes at a discounted price, or converting them into cash or cash equivalents, the essence of this behavior may be regarded by relevant authorities as “betting little to win big” or “betting less to win more” or using uncertain chance events to determine the ownership of property, which may constitute gambling-related crimes (gambling or operating a gambling establishment).

For those who manipulate blind box prizes through backend operations or deliberately lower the winning probabilities to prevent users from winning, this behavior may constitute fraud.

2. Points (Synthesis) Redemption

Taking low-level items and combining them with a certain “fuel” to create higher-level items and realize an increase in value is a common practice in online games and was often seen in the plot of collecting all the 108 heroes of the Water Margin to exchange for a big toy in childhood. Now, this has also become a trendy gameplay in the world of digital collectibles.

In terms of gameplay itself, I think it’s not bad. It is an effective method to revitalize the circulation of digital collectibles, provide players with a sense of novelty, and attract new players. However, the problem arises when synthesis requires a large number of digital collectibles, which can be dozens, hundreds, or even thousands, and obtaining them through transactions takes a long time. By the time the synthesis is actually achieved, the value may plummet and no one is interested, or the platform simply refuses to redeem. The reason why players are so enthusiastic is usually because the platform made too many overly optimistic promises in the early stages. These promises belonged to a foreseeable future during peaceful times (which may also be false advertising), but when they are unable to fulfill their promises and a crisis arises, it may constitute fraud.

3. Invitation Rewards

The fastest way to acquire new users is through invitation rewards (giving out prizes), and the most important thing to pay attention to in this area is pyramid schemes. Regarding the determination of pyramid schemes, I have previously written an article titled “NFT Digital Collectibles New Gameplay: Beware of Pyramid Schemes in Mentor-Apprentice Invitation Rewards!” analyzing the popular mentor-apprentice invitation ranking gameplay and differentiating between commercial pyramid schemes and fraudulent pyramid schemes (organizing and leading pyramid scheme activities). Readers can refer to that article for more information.

The domestic digital asset platform is enthusiastic about using a pyramid scheme-like model to attract new users. The reason is that the platform is more focused on building a community ecosystem, and the pyramid scheme model is a convenient way for user acquisition. Therefore, the platform always enjoys using this method. However, at present, when frontline law enforcement officers in China generally have misunderstandings about new things, when the hierarchy and number of participants are “sufficient,” this method is prone to be mistakenly judged as pyramid scheme crime, thereby increasing criminal legal risks, which the platform should be aware of.

03 Summary by Lawyer Mankun

Humans are naturally accompanied by risks, and as a new phenomenon like digital assets, it is inevitable to completely eliminate risks. However, while using rewards to empower the digital asset platform, it is important to remember not to engage in “fraud,” which can isolate a large part of the risks. The remaining risks can be resolved by lawyers with their expertise.

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