NFT digital collectibles playing lottery, what are the legal risks?

Original author: Gao Mengyang, Senior Lawyer at Shanghai Manqun Law Firm

Recently, the author has received many legal inquiries about domestic NFT storage platforms. The majority of these platforms have prize-enabled gameplay. There have been cases of litigation arising from these prizes, either due to unfulfilled promises of prizes or reduced quality of delivered products. Therefore, it is deemed necessary to write an article to clarify these issues. In fact, Manqun's team has already written many legal articles regarding the prize-enabled gameplay of storage platforms. However, considering the current wave of litigation, the author believes it is necessary to further analyze and assist various platform operators in minimizing risks and creating a clear entrepreneurial environment for storage.

01 Lottery is favored by storage platforms

Prize-enabled gameplay is an effective way to achieve "viral growth" in the internet e-commerce industry. Blockchain, being inseparable from internet thinking, is not out of place applying traditional e-commerce gameplay. Domestic storage platforms heavily rely on various innovative gameplay mechanics, which may involve the underlying value logic of storage.

When we handle criminal defense cases involving storage platforms, we always take the time to explain to the relevant authorities what it is, its technology, and most importantly, its value (how its price is reflected). As I mentioned during last week's Manqun afternoon tea live stream, much like many virtual items, the value/price of domestic digital collectibles relies on a consensus among people. When people believe it is worth the money, then it is worth it. Conversely, the reason why large-scale brushing on storage platforms is considered consumer fraud from a legal perspective is because some platforms have manipulated techniques to create a thriving illusion, making people believe that there are a large number of players participating and endorsing its value, thereby increasing the potential for future appreciation, trading circulation, and direct liquidation. Can players not be angry when they realize it's all fake?

Based on this, in order to attract users, some storage platforms will adopt prize-enabled gameplay, linking the issued storage tokens with physical objects or tradeable items (i.e., prizes) to determine their value appreciation and tell a compelling "story". Therefore, if prize-enabled gameplay is considered the core (main selling point), the specific gameplay and its feasibility will determine users' perception and further influence the legal risks of the platform.

02 Risks of prize-enabled gameplay

According to my shallow industry observation, there are several prize empowerment methods for domestic digital asset platforms, including lottery activities (blind boxes), points (synthesis) redemption, and referral rewards. Let's analyze each category separately.

1. Lottery Activities (Blind Boxes)

In terms of civil law, lottery is considered a form of gambling that relies on luck. To differentiate it from gambling, China has enacted the Anti-Unfair Competition Law and the Interim Provisions on Regulating Promotional Activities. The Anti-Unfair Competition Law Article 10 states that "operators engaged in prize sales shall not have the following situations:... (3) lottery-style prize sales with a maximum prize amount exceeding 50,000 yuan." The Interim Provisions on Regulating Promotional Activities Article 17 states that "the maximum prize amount for lottery-style prize sales shall not exceed 50,000 yuan." In other words, violating the regulations on lottery/blind box prize values carries the risk of administrative violations and may result in administrative penalties.

In addition, if a platform sets prizes with excessively high values, fails to specify/publish the winning probabilities, and provides functions such as repurchase, discounted repurchase, or realization of prizes, it may be deemed as "betting small to win big" or "betting little to win more" and may potentially constitute gambling-related crimes (gambling or operating a gambling establishment).

Manipulating blind box prizes through back-end operations or intentionally lowering the winning probabilities to prevent users from winning may constitute fraud.

2. Points (Synthesis) Redemption

Transforming low-level items into high-level ones by using certain "fuel" is a common feature in online games and was frequently seen in the plot of collecting water margin characters to exchange for big toys in our childhood. Now, it has also become a trending gameplay in the digital asset community.

In terms of gameplay itself, I think it's quite good as a method to activate the circulation of digital assets, provide players with a sense of novelty, and attract new players. However, the problem lies in the fact that synthesis requires a large number of digital assets, which could be tens, hundreds, or even thousands, and obtaining them through transactions takes a long time. By the time the synthesis is completed, the value may have plummeted or the platform may simply refuse to redeem them. The reason why players are so enthusiastic is usually because the platform made too many overly optimistic promises in the early stages. These promises were within the realm of foreseeable future (or could be false advertising), but when they cannot be fulfilled and a crisis occurs, it may potentially constitute fraud.

3. Referral Rewards

The fastest way to expand your user base is through invitation rewards (giving prizes), and the most important thing to pay attention to in this regard is pyramid schemes. I have previously written an article on the identification of pyramid schemes, titled "NFT New Gameplay, Beware of Pyramid Schemes in Mentor-Student Invitation Rewards!". In that article, I analyzed the popular mentor-student invitation ranking system and distinguished between operational pyramid schemes and fraudulent pyramid schemes (the crime of organizing and leading pyramid schemes). Readers can refer to it for further reading.

Domestic digital collection platforms are fond of using pyramid-like models to attract new users. The reason behind this is that these platforms are primarily building a community ecosystem, and the pyramid-like model is a convenient way to cold-start the user base. As a result, digital collection platforms are always enthusiastic about this approach. However, in the current situation where frontline law enforcement officials generally have misunderstandings about new things, when the hierarchy and number of participants are "enough," this approach is easily misjudged as a criminal pyramid scheme, which increases the criminal legal risks that the platform should be aware of.

03 Summary by Lawyer Mankun

Risk is inherent in human nature, and as a new phenomenon like digital collections, it is difficult to completely avoid risks. However, while empowering digital collections through rewards, always remember not to engage in "deception", which can eliminate a large portion of the risks. As for the remaining risks, they can be resolved professionally by lawyers.

Special Disclaimer:

This article is an original piece by Mankun Law Firm in Shanghai and only represents the personal opinions of the author. It does not constitute legal advice or opinions on specific matters. If you need to republish this article, please contact the staff at Mankun Law Firm: MankunLawFirm