Filthy Lucre: Regulatory Risks of Digital Currency, Loot Crates, and Other Video Game Monetization Strategies

7 min

Over the past few years, video game developers have been at the forefront of integrating cryptocurrencies and other payment technologies into their games to create realistic, seamless, and interactive worlds. While the gaming industry has moved ahead quickly, federal and state regulators are taking a much closer look at how these technologies fit within existing legal frameworks. For game developers, this trend is creating increased regulatory attention on in-game use of digital currencies, marketplaces, loot crates, and other platform-based monetization mechanics. Developers should review their policies and processes to ensure they are in compliance with applicable regulatory regimes, including anti-money laundering and money transmission, gambling, and escheatment laws.

Anti-Money Laundering (AML) and Money Transmission

The rapid growth in cryptocurrencies and new payment technologies is forcing regulators to carefully consider definitions of currency, value, and money transmission. Federal AML and state money transmission licensing laws regulate non-bank entities that receive money or monetary value and transfer them between different persons or places. In general, such entities are referred to as "money transmitters" and are required to register at the federal level with the Financial Crimes Enforcement Network (FinCEN) and obtain a license in each state in which the entity offers services. FinCEN and several state regulators have published further guidance stating that, in certain circumstances, the movement of monetary value through digital currencies may also trigger money transmitter obligations. This guidance generally defines regulated digital currency as one that (1) has an equivalent value in fiat currency or (2) acts as a substitute for fiat currency.

The question of whether a digital currency can be "cashed out" is an important indicator of whether money transmission issues may apply. If users can both buy into the digital currency with fiat currency and "cash out" by exchanging or otherwise converting the digital currency back to fiat currency, the digital currency has value in fiat currency. For a more in-depth discussion of money transmission issues related to in-game digital currencies that can be "cashed out," please see our previous article on this topic.

But what if cash-out is prohibited? If users can never receive back fiat currency after loading funds or otherwise buying in, is that enough to avoid the application of AML and licensing requirements? Maybe not.

Consider a company that provides a software platform (the "Platform") through which users can access multiple games, as well as social interaction and marketplace functions. At registration, a user receives a designated account and can purchase digital currency for use on the Platform by spending fiat currency. Users have no ability to cash out – they cannot convert their digital currency back to fiat currency. While a good first step, the Platform could still have AML and/or licensing issues, despite limiting cash-out, for example in the following scenarios:

  • "Real" Goods: The Platform facilitates the purchase of items from third-party sellers, such as video games, clothing, figurines, or other merchandise, in exchange for digital currency. Although the user cannot cash out, the Platform has still created a digital currency that is being used as a substitute for fiat currency. Where the Platform redeems the user's digital currency and provides fiat currency to the seller as payment for the user's purchase, it may be acting as a money transmitter.
  • Purchases from the Platform: What if the Platform is the seller, as opposed to a third party? In this scenario, the platform has already received the user's fiat currency and redeems the user's digital currency in exchange for merchandise. Here, the digital currency is like a gift card program in which a consumer pays money to a seller in exchange for the ability to spend that value for goods or services from the seller at a later date. In some cases, gift card programs are carved out of the scope of money transmission, but may be subject to other laws specifically applicable to gift cards and other stored-value products.
  • Marketplace Transactions: If a digital currency has value because it can be exchanged for goods from either the Platform or a third party, then the Platform's movement of that digital currency between users, through marketplace transactions, gifting, or otherwise, could be considered money transmission.


Developers are increasingly using loot boxes, promotions, and other reward programs to entice gamers to play. Prize promotions, including sweepstakes and contests ("games of skill"), are subject to a wide range of federal, state, and local regulation in the U.S. Moreover, if not properly structured and administered, the use of these types of promotional items may constitute illegal gambling or an unfair and deceptive trade practice.

In the United States, the Entertainment Software Rating Board does not consider loot boxes to be a form of gambling. "While there's an element of chance in these mechanics, the player is always guaranteed to receive in-game content (even if the player unfortunately receives something they don't want)," an ESRB rep was quoted as saying in October 2017. "We think of it as a similar principle to collectible card games: Sometimes you'll open a pack and get a brand new holographic card you've had your eye on for a while. But other times you'll end up with a pack of cards you already have."

Similarly, in November 2017, the UK Gambling Commission issued a statement that said, among other things, a "key factor" in deciding whether a loot box has crossed the line into gambling "is whether in-game items acquired 'via a game of chance' can be considered money or money's worth. In practical terms this means that where in-game items obtained via loot boxes are confined for use within the game and cannot be cashed out it is unlikely to be caught as a licensable gambling activity. In those cases our legal powers would not allow us to step in."

A more difficult question, however, is when the game allows users to sell their digital items obtained through loot boxes to other players. Gambling concerns could arise even when players can only buy and sell digital items with digital currency. If the digital currency is entirely in-game, without any ability to convert the digital currency to fiat currency, gambling concerns are mitigated. But what if the digital currency is tied to a larger marketplace through a cross-gaming platform? And what if that gaming platform, while not explicitly allowing conversion of the digital currency for fiat currency, has gaps in its system? For example, such a platform might allow users to spend digital currency to purchase other games, and perhaps even allow users to send purchased games to other users as gifts. In situations like these, users could trade their loot box items for digital currency and then use that digital currency to purchase video games that ordinarily would have been purchased using fiat currency. It is also conceivable that clever users could create an informal system outside of the platform to cash out the digital points/currency. Such an informal system may be in violation of the platform's terms of service, but what happens if such a system nonetheless becomes robust and easy to access and utilize without repercussion?

These types of issues begin to challenge the boundaries of what may or may not be considered gambling. And because video games are often targeted at children and teenagers, these concerns are amplified, causing regulators to take a closer look at this activity. Belgium's Gaming Commission, for example, is investigating whether loot boxes are a form of gambling. Here in the United States, a Washington state senator introduced a bill into that state's legislature with the purpose of defining whether loot crates constitute gambling. And, most recently, the Hawaii state legislature is now considering two bills that would regulate games containing randomized in-game purchases, such as loot crates. As a result, these questions will continue to be raised, and different jurisdictions may come to different conclusions.


In addition to money transmission and gambling issues, in-game and platform-based economies and wallet systems can potentially trigger escheat/unclaimed property requirements. Whether a digital currency is subject to these requirements depends on the facts and circumstances of that digital currency system.

While a completely closed-off in-game digital currency that can't be bought or sold is unlikely to trigger escheat requirements, such unclaimed property laws may come into play the closer the digital currency comes to being redeemable for fiat currency, if the currency is denominated in U.S. dollars, or if it can be used to purchase real goods (including other video games). And because these laws vary – sometimes significantly – from state to state, understanding these requirements is imperative.

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Despite the various issues described above, it is entirely possible to structure an in-game or platform-based digital currency or market experience that minimizes legal risk while still being enticing for users. It will be important, however, to design such a system thoughtfully and with the advice of legal counsel to ensure risk is minimized.