ILLEGAL GAMBLING OR INNOCUOUS GAME DESIGN?
This blog piece has been authored by Mr Ranjit Mathew Jacob.
Ranjit is a third-year law student at OP Jindal Global University and a former Research Intern at the JGU Centre for Sports Law, Business and Governance. His interests include General Corporate Law, Dispute Resolution, and Sports Law.
"Locating the ‘loot-box’ mechanic in video games within the Indian legal ecosystem on gambling"
Loot-boxes are virtual items that may be redeemed by players of a video-game to obtain randomized rewards. They remain incredibly popular in modern game design, with 71% of top games on Steam, a popular online platform to purchase games, consisting of such loot-boxes. However, despite their widespread use, they have raised numerous regulatory concerns across various jurisdictions.
One of the main distresses is the similarity between loot-boxes and gambling i.e., the remittance of money towards the hope of receiving an uncertain reward has inspired substantial literature on the psychological effects of loot-boxes. Scholars believe that certain types of loot-boxes may be considered ‘psychologically akin to gambling. In response, several nations including, but not limited to, the United Kingdom[i], USA, and South Korea imposed varied regulations in this regard. However, on the contrary, deliberations on loot-boxes and online gambling, are at an extremely nascent stage in India. There is currently a dearth of detailed principles governing online gambling within the country.
As such, this paper strictly analyses paid loot-boxes that provide items of real-world value which in the author’s opinion present the most direct connection to gambling. This assertion is further substantiated by Drummond and Sauer who, along with numerous authorities have clarified that the ability to cash-out virtual items into real-world currency is an important element to the legal conception of loot-boxes as gambling.[ii] Therefore, this paper focuses on loot-boxes in the video-game ‘Counter-Strike: Global Offensive’ (CSGO), in order to extrapolate it as an example of this model.
Loot-boxes in CSGO are known as ‘containers’ and they provide players with randomized cosmetic items known as ‘skins’ of varying rarity. Containers may be purchased from other players or obtained during the game but require ‘keys’ to be opened and such ‘keys’ must be purchased. Barring certain special containers called ‘souvenir packages’ that do not require ‘keys’ to be opened, CSGO loot-boxes require the investment of real-world currency to be availed by the user.
Items in CSGO are then not tied to the player’s account and may be sold to other players. The official platform for this is the Steam Community Market which does not allow players to ‘cash-out’ their earnings. These earnings remain in the player’s online wallet as virtual currency. However, online third-party marketplaces allow players to ‘cash-out’ on skins and thus, remain incredibly popular. On these websites, sellers receive real-world currency from buyers of their skins through payment platforms like PayPal.
While it may seem trivial or unnecessary to regulate the trade of video game items, ‘Skin-Trading’ in CSGO is an incredibly serious form of collecting involving numerous high-value transactions. Some coveted cosmetic items in the game have commanded prices as high as $150,000. These items are also incredibly rare and require users to purchase hundreds or even thousands of these cases to have a realistic chance of obtaining them. For example, the odds of obtaining a skin known as the ‘souvenir dragon lore’ that sells for approximately $26,000 is 0.0004% or 1 in 250,000. However, these dismal probabilities have not deterred users from spending significant amounts of money on the chance to obtain these items. While there is no data on the amount spent on loot boxes annually, a study conducted in China saw 1.47 million loot boxes purchased for around $35 million from July to October of 2020. Rather, the high probability of receiving duplicate or lower-value items incentivizes players to continue purchasing loot boxes to obtain more valuable ones.
In short, CSGO cases are essentially games of chance that present the opportunity to earn extremely high sums of money. These cases are completely random, attract millions of dollars in spending annually, and are addictive by design. Loot boxes exploit the same psychological and financial risks associated with traditional gambling and thus, necessitate regulation.
THE PRESENT INDIAN LEGAL ECOSYSTEM
The primary statute which regulates gambling in India is the Public Gambling Act, 1867 (PGA). The PGA creates a distinction between ‘games of skill’ and ‘games of chance’ where the former is legalized while the latter is prohibited.[iii] However, it remains inadequate to regulate online gambling as it predominantly criminalizes gambling which takes place in 'any house, walled enclosure, room or place’ referred to as a ‘Common gaming-house.’[iv] Further, under the Constitution of India, states are empowered to legislate and impose taxation on gambling meaning that state gambling legislation overrides the PGA.[v] However, only two states at present specifically regulate online gambling – Sikkim, and Nagaland. Because of this vacuum in state legislation, current attempts to regulate online gambling rely on broad principles of the PGA, insufficient state gambling legislation, and existing judicial determinations. To determine whether certain online activities must be subjected to gambling regulations, courts often rely on the ‘games of skill’ and ‘games of chance’ dichotomy.
The Supreme Court of India has clarified that while a game may involve an element of chance, games, where success depends on a substantial degree of skill, will not be considered gambling.[vi] Additionally, a game that is preponderantly a game of skill will still be considered a game of ‘mere skill’ while a game of chance is one that is determined largely by luck.[vii] The court chose to clarify these principles as a majority of states excluding Assam, Odisha, and Telangana have legislations that exclude ‘games of mere skill’ from the purview of gambling regulations. Games of chance, on the other hand, are mainly prohibited throughout the country other than in states such as Goa and Sikkim. Various high courts have used this dichotomy to determine whether Indian fantasy-sports platforms would be amenable to the state’s gambling regulations. This issue has been contemplated by the Punjab and Haryana High Court,[viii] the Bombay High Court,[ix] and the High Court of Rajasthan to name a few.[x][xi] While all three courts initially ruled that fantasy-sports would be a ‘game of skill’, there is a level of uncertainty regarding this consensus as the Supreme Court of India stayed the decision of the Bombay High Court in 2020. Regardless, the crucial takeaway from these cases on fantasy-sports is that this dichotomy directly applies to alleged instances of online gambling.
LOCATING CSGO LOOT-BOXES WITHIN THIS ECOSYSTEM
For comparison, the price of a skin in CSGO is determined by several factors including changes introduced by the developer, the skin’s exterior design, and its supply and demand. Steam even provides the player with the market data of skins and containers sold which constantly fluctuate.[xii] Therefore, skin-trading certainly involves the exercise of skill and discretion by the player as understanding when to purchase or sell a skin/container could materially affect the quantum of profit that the player can earn. However, the question remains as to whether a player’s ‘success’ is dependent on a substantial degree of skill or is determined largely by chance. While a player may maximize profit through intelligent trading practices, the actual rarity and exterior design of the skin obtained is completely random. Therefore, the player’s success, in the author’s opinion, is predominantly determined by chance. Consequently, CSGO loot-boxes would likely be considered a ‘game of chance’.
Thus, CSGO containers would likely be prohibited by a majority of state gambling legislation across the country. Such a drastic step is not unprecedented considering Belgium’s 2018 ban on all paid loot-boxes. However, the possible overregulation of loot-boxes in this manner would certainly cause both game developers and players to lose out.[xiii] The author is of the opinion that it would be ideal instead, to adopt regulatory practices that enable players to make ‘informed, but not restricted, choices’ in their use of loot-boxes while simultaneously protecting the commercial interests of the video-game industry. This necessitates the implementation of ethical changes in the loot-box feature, based on approval by regulatory authorities.
THE WAY FORWARD
Loot-boxes make use of low pay-out rates to encourage players to make repeat purchases in the hope of obtaining valuable items. They enable players to justify the money spent on numerous less-desirable items through the intermittent psychological gratification of obtaining rare items occasionally. This feature called a ‘variable-ratio schedule of reinforcement’ creates several of the same psychological experiences associated with traditional gambling including but not limited to ‘near misses and the feelings of winning and losing.’
As such, the author believes that for CSGO in India, a two-pronged approach could be adopted to tackle the gambling-centric issues of loot-boxes. Firstly, players must be allowed to preview the items present in containers they receive through playing the game. Based on the player’s desire to obtain the item, they may purchase a key from the developer to open the container. Alternatively, the player would be able to dispose of the container, an option similar to one introduced to CSGO in the Netherlands and France in 2018 and 2019 respectively. This container ‘scanner’ shall be coupled with a ban on the sale of containers between players via the Steam community market. Thus, unopened containers alone would be tied to the player's account while skins could still be traded between players. This approach would enable both the legal and psychological gambling-centric issues of loot-boxes to be combatted simultaneously. However, it would enable players to continue trading guaranteed items with each other thereby, avoiding potential overregulation through a blanket ban on loot-boxes.
The widespread prevalence of third-party sites that facilitate the sale of virtual items for real-world currency presents a unique challenge when attempting to regulate loot-boxes. Several games have tied virtual items to players' accounts to prevent the sale of in-game items through third-party sites for which alternative solutions do not exist at present. However, these third-party marketplaces only enable buyers and sellers of items to agree to a sale price. The actual transfer of the item from the account of the buyer to the seller must still take place via the Steam community market. If unopened containers remain tied to the player’s account, players cannot purchase containers for real-world currency thereby eliminating the investment of money by a player for the chance to obtain an uncertain reward. Essentially, these changes would remove the element of chance from loot-boxes while ensuring that players can continue to trade guaranteed items, albeit for real-world currency as well via these third-party websites.
In the author's opinion, such changes present an effective starting point for the regulation of loot-boxes in India. These measures would likely allow loot-boxes to avoid harsh regulation under Indian gambling legislation while simultaneously combating the gambling-centric effects of loot-boxes in video gaming.
The author can be reached for comments on his email at email@example.com
Cite as: Ranjit Mathew Jacob, Illegal gambling or innocuous game design? , Extra-Cover: The Sports Law Blog of India (10th Jan. 2022), Accessed at https://www.extra-cover.org/post/illegal-gambling-or-innocuous-game-design [Date of Access].
End-Notes: [i] Xiao, Leon Y. “A Primer on the Legal Regulation of Loot-boxes” https://www.researchgate.net/publication/335485825_A_Primer_on_the_Legal_Regulation_of_Loot_Boxes. [ii] Counter Strike Wiki, Container, https://counterstrike.fandom.com/wiki/Container#:~:text=Containers%20are%20a%20type%20of,a%20smaller%20chance%20to%20appear. [iii] Section 12, The Public Gambling Act, 1867. [iv] Ibid at Section 1. [v] Entry 34 and Entry 62, List II, Article 246, Seventh Schedule, Constitution of India. [vi] Dr. K.R. Lakshmanan v. State of Tamil Nadu, (1996) 2 SCC 226. [vii] Ibid [viii] Varun Gumber v. Union Territory of Chandigarh, (2017) SCC OnLine P&H 5372 [ix] Gurdeep Singh Sachar v. Union of India, (2019) SCC OnLine Bom 13059. [x] Chandresh Sankhla v. State of Rajasthan, (2020) SCC OnLine Raj 264. [xi] Ravindra Singh Chaudhary v. Union of India, (2020) D. B. Civil Writ Petition No. 20779/2019. [xii] For example, when the Chroma case-container was first released in 2015, the price of this container started at $35 due to low market-supply. Within a week, this price dropped to $12-$15 per case with the current price remaining at around $0.55 per case. Yamamoto, Kei'Ichiro, Mcarthur, Victoria. “Digital economies and trading in counter strike global offensive: How virtual items are valued to real world currencies in an online barter-free market.” 0.1109/GEM.2015.7377220 [xiii] Xiao, Leon Y. “A Primer on the Legal Regulation of Loot-boxes” https://www.researchgate.net/publication/335485825_A_Primer_on_the_Legal_Regulation_of_Loot_Boxes.