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How loot boxes deal with regulations and limitations, and how the gaming industry is reacting?

The mechanic of loot boxes is often misinterpreted by regulators that are cooperating with the industry to find a common position

What are the main regulations imposing restrictions on loot boxes? And why are they so much under the radar of authorities?

Loot box regulations are a hot topic in a variety of regions.  The attention over loot boxes began when several video games started to incorporate micro-transactions for chance-based items.

Previously, video games were sold as a stand-alone product.  The interaction between players and the game developers existed only and to the extent players would have bought a sequel or an expansion pack of the video game.

With the rise of online gaming, players are no more interested in time-consuming games containing just one milestone, a mission, or a storyline. As a result, developers:

  • created formats of video games aimed at constantly engaging players, also through a real-time competition between players; and
  • enabled players to purchase randomly assigned items (the so-called “loot boxes“) in video games through an in-game currency that can often be purchased with real money or earned through game-play.

What are loot boxes?

Loot boxes are not a homogeneous category, and there are several different iterations of the mechanic. A range of stakeholders, including regulatory agencies and academics, noticed that loot boxes should be assessed on a case-by-case analysis.

Regulators often refer to loot boxes as

in-game items that can be purchased by users with the purpose of randomly obtaining particular gaming contents or other utilities,

but there is no clear definition of loot boxes in the regulations.

The main feature of loot boxes is that players do not exactly know the item that they are buying.  Still, the purchased item is determined by a random number generator, according to criteria that publishers often make available before the purchase, through the publication of statistical data.

Loot boxes may be categorized based on the method of acquisition as follows:

  • Game-play where items are randomly awarded to players as a result of game-play for achievements, milestones, and challenges completed;
  • Game-play with purchasable items where items are randomly assigned to players during game-play, but players must purchase/obtain an item to open the loot box;
  • Purchasable for which players have to buy a loot box and open it to obtain a randomly assigned item.

Can loot boxes be deemed gambling under applicable regulations?

A special focus on loot boxes has arisen after some regulators around Europe (such as the Belgian and the Dutch gaming authorities) began to investigate whether loot boxes may be qualified as gambling since they evoke the so-called “near miss” feeling and because they encourage players to keep trying, similar to what players feel when they play slots machines.

A slightly different position on this subject has been taken by the French regulator that qualified loot boxes as gambling only to the extent that the winning has real-world monetary value.  This led to the conclusion that when the awarded items cannot be cashed out or the winning is not in cash, loot boxes cannot be qualified as gambling.

In a recent declaration by gambling authorities, they highlighted the risks posed by the “blurring” of lines between gambling and other forms of digital entertainment, such as loot boxes.  However, they then took a common stance to deny the current qualification of loot boxes as gambling.  Still, lately, the UK House of Lords took a diametrically different view, urging the broadening of gambling rules to cover loot boxes.

Much of the legal battle surrounding loot boxes involves the concepts of (i) performance of purchase with real money and (ii) the transferability of awarded items. Indeed,

1. Regulations in some territories prohibit any lottery in which money can be spent to increase the chances of winning prizes with real-world monetary value.  But, video game developers argue that loot boxes’ items do not have real-world value, as they exist only as “strings” of computer code. In support of this, virtual items contained within loot boxes cannot be – nearly always – exchanged with real money outside of the game, and items are valuable only within the video game

and

2. Transferability refers to whether or not the awarded items can be transferred from one person to another, allowing them to become a commodity in real money transactions. This draws a line between loot boxes in which it is not permitted to trade items outside of the video game and loot boxes in which items trading is a huge part of the video game ecosystem.

A common argument against the categorization of loot boxes as gambling is that empty loot boxes are not available within a video game.  Therefore, while a slot machine or even a lottery can take the money, giving no return if a player loses, loot boxes always give a return that does not have any value since it is not tradable.  The idea of “losing” for a loot box does not lay down in the sense of walking away completely empty-handed.  But also winnings don’t have a real-world value.

Are loot boxes misleading?

Another issue raised by regulators is the need to provide transparent information about the mechanic of loot boxes according to applicable regulations.

Advertising authorities are investigating whether the offering of loot boxes might be deemed to be misleading and, as such, amount to an unfair commercial practice under EU Directive 2005/29.

Unusually, the transparency of the mechanic of loot boxes is questioned by regulators only concerning the video gaming sector.  The same practice has been common in other areas for decades, and we are not aware of similar challenges.  It will be interesting to understand why authorities believe that stricter regulations are required for the video game, while other surprise reward products can be exempted.

The video gaming industry has already made considerable improvements, but the standard of transparency required by regulators is still unclear.  Self-regulations adopted by game publishers and console providers already considerably increased transparency, with descriptors clearly identifying games with in-game purchases and parental control functionalities constantly improved. In most cases, children’s accounts cannot make any in-game purchase, and youth accounts dedicated to players between 16 and 18 are subject to self-limitation restrictions.

It is more a question of educating parents to properly use the parental control functionalities, which are often overlooked.  The industry can contribute to the matter, but such an educational role belongs to governmental authorities.

The outcome of loot boxes’ peculiarities is that regulators have not yet taken a clear position on them. Precedents are being set and operate as valid guidelines for operators to minimize the risk of potential challenges.  Considerable improvements still have to be made, though.  And as often happened in the video gaming industry, self-regulation will likely indicate the path towards compliance.

You can find interesting on the topic the article “eSports tournaments limited by Italian prize promotion and gambling rules?” and “Loot boxes are NOT gambling for regulators, but the UK House of Lord dissents“.

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Vincenzo Giuffré

Trainee Lawyer at DLA Piper IPT Italy, Milan| Graduated Student at Bocconi University: Major Business Law School | Exchange Program at University of Minnesota - W. Mondale Law School | Visiting Student at National University of Singapore (NUS)

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