Tag: Casinos

Metaverse Casinos: A Regulatory Wild West

A New World of Gaming

The metaverse is an immersive online universe on the blockchain where users interact with a multitude of digital worlds and with each other. As in the real world, the metaverse offers a wide variety of activities and entertainment options. The metaverse has become a haven for gaming. Users can explore casino “districts,” offering slots, poker, roulette, blackjack and more, go to shows and nightclubs, and even purchase real estate, including an entire casino. Some platforms within the metaverse are more developed than others, with their own parcels of land, decentralized governmental structures and native tokens. As this space continues to expand into various aspects of daily life, participants in the metaverse ecosystem, and in particular, gaming operators, should proceed with caution as the line between fantasy and reality continues to blur.

The metaverse provides an alternative virtual reality for those who visit, seemingly outside of the legal and regulatory structure of the real world. Now, due to the development of digital assets1 including cryptocurrencies and non-fungible tokens (“NFTs”), visitors can add real-world economic value to some in-game activities. Players can buy, sell, or gamble items in the metaverse for digital assets that can convert to fiat currency, further blurring the lines between a virtual game experience and reality. What seems to some like a game will increasingly have real-world economic consequences for users, and the businesses with which they engage in the metaverse, resulting in more regulatory scrutiny and legal disputes.

Metaverse Gaming vs. Traditional Online Gaming

It is helpful to distinguish metaverse gaming from traditional online gaming. Gaming in the metaverse and online gaming both allow users to play casino games with their friends and social network virtually without the burdens and restrictions of physical travel. Unlike traditional online casinos, the metaverse attempts to replicate the full casino experience, allowing users to explore a digital representation of a casino using a unique avatar and virtual reality technology. Through advancements in technology, users can control their avatar’s behavior in a similar manner to controlling their own conduct in the real world. Essentially, avatars are digital representation of users – they physically walk around and engage with other avatars, including making observations of other avatars’ tells and contributing to an authentic casino experience, all from the comfort of home.

Metaverse casinos generally do not accept traditional fiat currency. A metaverse casino requires a participant to convert their fiat into one of the crypto currencies accepted in the metaverse and deposit funds using a crypto wallet. Users exchange the NFTs and cryptocurrency that they win in the metaverse for fiat currency in the real world, however.

The use of crypto in metaverse gaming has some clear benefits. In addition to providing an immersive interaction compared to fiat-based online gambling platforms, metaverse casinos offer higher levels of security, transparency, and privacy for users. For example, the history of the entire transaction history is accessible on a blockchain. Although the transaction is visible on a blockchain, users may remain anonymous without having to disclose certain personal information, thereby protecting privacy. Deposits and withdrawals are processed virtually instantaneously because there is no third party verifying the transaction.

Regulatory Considerations for Metaverse Gaming

Casino and sports gaming is one of the most heavily regulated industries in the United States. The regulation is primarily at the state level. Some mistakenly believe the metaverse is insulated from real life legal restrictions. To the contrary, any gaming and wagering activity, which constitutes a game of chance involving the risk of something of value and a prize,2 that is being offered to U.S. citizens in the metaverse (on an unregulated basis) is likely to draw the attention of regulators.

Despite the popularity of metaverse gaming, the top U.S. operators have largely stayed on the sidelines while offshore and smaller companies dominate the space. This is unsurprising for three reasons:

  1. The fact that metaverse gaming lacks a dedicated regulatory framework and online gaming is legal in only a handful of states;

  2. As we wrote previously, the reluctance of regulated gaming companies operating in the U.S. to pursue the legal use of cryptocurrency given its volatility, lack of acceptance, and regulatory and/or legislative hurdles; and

  3. General legal uncertainty.

An operator that wishes to offer a gaming platform to U.S. citizens in the metaverse would need to do so with the express permission and under the oversight of each state’s gaming commission whose residents they serve. This may also require new legislation and regulatory schemes. For example, Wyoming, an early adopter of cryptocurrency, passed legislation in 2021 that allows sportsbooks to accept “digital, crypto and virtual currencies.”3 Generally, however, regulators and legislators are not known for their speed in adopting new and emerging technologies and the industry as a whole is still working toward more immediate and attainable goals, such as expanding legal online gaming. Currently, fewer than 10 states offer online casinos and/or poker.

There is significant regulatory and legal uncertainty surrounding metaverse casinos. For example, which oversight bodies have authority to regulate metaverse casinos? Can users face consequences in the real world for the actions of their avatar in metaverse casinos? How are players protected from unlawful conduct in metaverse casinos? Can operators be held responsible for that misconduct? State gaming regulators would have jurisdiction over gaming activity being offered to their residents in the metaverse alongside other regulators including the SEC, the U.S. Commodity Futures Trading Commission, and the Financial Crimes Enforcement Network, given the use of cryptocurrency and NFTs.4 At this early stage, there are more questions than answers. The history of the real-world gaming industry suggests it is highly probable that metaverse casinos will be subject to direct regulation.

New Legal Parameters Around Metaverse Gaming Are Expected

The competitive nature of the U.S. gaming market, the vast lobbying power of licensed gaming operators, and the substantial fees for licensure indicate that it is not a matter of if, but when regulators will intervene in metaverse gaming. While the concept of metaverse casinos is exciting and creates the opportunity for significant growth in the gaming industry, like many innovations, it brings additional challenges and risks for operators.

In fact, earlier this year securities regulators in Texas and Arizona demanded that a metaverse casino developer cease its funding for the development of its metaverse casino (and expansion of its metaverse casinos to all other relevant metaverses) through NFTs for failing to register the NFTs as securities and on the grounds that it was conducting an illegal fraudulent securities scheme.5

About a month later, securities regulators in Texas, Wisconsin, Kentucky, New Jersey, and Alabama filed an action against another metaverse casino due to its alleged ties to Russia and a fraudulent investment scheme it was running in violation of securities laws.6 The Texas State Securities Board stated its concerns about scammers being able to hide their identities (also referred to as “going dark”), as they alleged occurred here, in metaverse casinos.

In addition, just a few months ago, 28 members of Congress urged the Department of Justice to work with the industry, and other stakeholders to prosecute offshore sports betting companies operating illegally in the U.S.7 Similarly, absent a known regulatory scheme, even “successful” operation of a metaverse casino at present does not foreclose adverse action or shutdowns in the future due to increasing regulatory scrutiny.

While it is unclear how, if, and to what extent, existing regulations apply to metaverse gaming, the actions referenced above demonstrate that some state regulators are taking the position that the same rules that apply to investments in the real world also apply to investments in the metaverse. The risk is not limited to the virtual world, but also exposes investors to the potential loss of real money. The above matters also highlight the broad range of risks government authorities could be motivated to address, from international policy implications to financial fraud scams.

Pioneering the Metaverse

Although there are significant barriers to operating gaming platforms in the metaverse, forward-thinking gaming companies have wisely been preparing to enter this new world when it is safe to do so. If the metaverse becomes as integrated into daily life as it is expected to be, those pioneers will reap the rewards. We recommend gaming operators in the metaverse proceed with caution and retain highly qualified counsel to help them navigate the developing regulatory landscape.

For more internet and cybersecurity legal news, click here to visit the National Law Review

Copyright ©2022 Nelson Mullins Riley & Scarborough LLP

FOOTNOTES

  1. Regulators in the United States including the Securities and Exchange Commission (“SEC”) use the term “digital asset” to refer to “an asset that is issued and transferred using distributed ledger or blockchain technology.” Statement on Digital Asset Securities Issuance and Trading, Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets, SEC (Nov. 16, 2018), available here. As the SEC has noted, digital assets include, but are not limited to, virtual currencies, coins, and tokens. Id. A digital asset may in certain instances be deemed a security under the federal securities laws. While not defined in the securities laws, the SEC often refers to digital assets that are securities as a “digital asset securities.” Id.

  2. The issue of what is a “thing of value” within the meaning of state anti-gambling law has been the subject of recent litigation. See, e.g., Kater v. Churchill Downs, Inc., 886 F.3d 784 (9th Cir. 2018) (virtual chips in online game held to be a “thing of value” for purposes of Washington’s illegal gambling law); Coffee v. Google, LLC, No. 20-CV-03901-BLF, 2022 WL 94986, at *13 (N.D. Cal. Jan. 10, 2022) (“loot box” prizes limited to use in in-app game not “things of value” under California illegal gambling law).

  3. Pat Evans, Cryptocurrency In Legal Sports Betting: What’s Next?, (June 9, 2022), available here.

  4. We will discuss the potential role of these Federal regulators in future articles.

  5. Dorothy N. Giobbe, et. al, Texas and Alabama Securities Regulators File Enforcement Actions Against Online Casino Developer Selling NFTs to Operate Casinos in a Metaverse, (April 29, 2022), available here.

  6. Five States File Enforcement Actions to Stop Russian Scammers Perpetrating Metaverse Investment Fraud, (May 11, 2022), available here.

  7. Chris Altruda, Congressional Group Calls on DOJ to Help Fight Illegal Offshore Sportsbooks, (Jun. 30, 2022), available here.

 

The Texas Legislature Takes a “Texas Two Step” Approach to Indian Gaming

With new legislation introduced in Texas, it is an appropriate time to examine whether the Texas State Legislature is trying to do something for Indian Gaming or to Indian Gaming. The only certainty is that something is likely to happen! And, like the Texas Two Step, the legislative casino dance changes at the whim of the “leader” – which in this case is the Texas Legislature.

The overriding question is: What is happening here, and why?

For starters, it is important to understand two things: (1) the state’s three federally recognized Indian tribes do not share equal legal status and (2) the Legislature ostensibly has proposed to level the playing field so that all three enjoy an equal gaming opportunity. The three tribes are (1) the Texas Band of Kickapoo Indians in Eagle Pass, which is 143 miles southwest of San Antonio on the Rio Grande River and far from the Gulf Coast, (2) the Ysleta del Sur Pueblo Tribe – also known as the Texas Tigua Tribe, located near El Paso and far from the Gulf Coast, and (3) the Alabama-Coushatta Tribe of Livingston, 74 miles north of Houston and 76 miles northwest of Beaumont, and clearly much closer to the Gulf Coast and the hundreds of thousands of tourists annually traveling to the Gulf. Each of these tribes was recognized by a special Act of Congress.

Kickapoo was recognized by Congress through the Act of January 8, 1983, a federal law which imposed no restrictions on the Tribe’s right to conduct gaming. The Alabama-Coushatta and Texas Tigua Tribes were recognized through the Act of August 18, 1987, which restricted any tribal gaming to gaming activities that are lawful under Texas state law. The distinction between Kickapoo gaming opportunity and that available to the Alabama-Coushatta and Tigua becomes important under both the Texas state laws and, in turn, the federal Indian Gaming Regulatory Act of 1988.

It should be noted that the Alabama-Coushatta opened a casino in 2001 on its Livingston reservation that produced monthly revenues of an estimated $1 million for nine months. A federal court shut it down, and the facility has never reopened. Similarly, the Tigua Tribe operated a casino for a while, but it too was closed by court order. Since then, the Tigua gaming operation has been limited to a “sweepstakes” that the Tribe claims is legal under state law. In the meantime, the Kickapoo Tribe has been operating a Class II gaming facility on its reservation, but the State has refused to negotiate a Class III gaming compact.

The two “have not” tribes are the subject of state legislation that would remedy the situation. This would be accomplished by a bill introduced on March 12 by state representatives for districts in Houston and El Paso purporting to put all three Texas tribes on an equal footing. Indeed, the legislation has been touted in the press as “recognizing the gaming rights of all tribes in Texas.” It would do this by removing the restrictions of the 1987 federal law by extending the same rights to the two tribes recognized by that legislation to the level of rights enjoyed by the Kickapoo under the 1983 federal law. The bill sponsors’ stated intent is to amend the Texas Constitution to allow the Alabama-Coushatta and Tigua to engage in gaming on their tribal lands, and thus putting them on the same footing as the Kickapoo.

Within 24 hours of the introduction of the March 12 legislation, State Representative Joe Deshotel of Beaumont proposed to severely mitigate the pro-tribal benefits from the day-old legislation. The Beaumont politician introduced legislation proposing to authorize nine non-tribal “Las Vegas style” casinos to be located in counties on the Texas Gulf Coast. (As the reader will recognize, the sponsor’s hometown just happens to be in one of the counties that just happens to be on the Gulf Coast.)

The ostensible purpose of the new bill is far from the costs incurred by property owners in those designated counties during violent storms, such as hurricanes. However, its actual effect would be devastating to an Alabama-Coushatta gaming facility located far from the tourism mecca of the Gulf Coast. It is true that the Tigua and Kickapoo would benefit, but they almost certainly would lose destination casino traffic in light of the competing opportunity on the Gulf Coast.

The March 12 legislation looks great on paper. However, it looks much less so in light of the March 13 legislation. Moreover, current activity in the Legislature is even more troubling for tribal gaming. What initially seemed to be a fairly simple resolution is more complicated by recent statements by Texas legislators from Laredo, Houston, and Eagle Pass, as well as statements from anti-gaming lobbyists claiming a “clear majority” of lawmakers opposed to any expansion of gaming “even when times are hard.”

By Dennis J. Whittlesey of Dickinson Wright PLLC

© Copyright 2015 Dickinson Wright PLLC