Skin gambling and interactive entertainment: the trouble with skin in the game

Written on 19 Oct 2018

The ability to purchase and trade skins is a feature of many popular games. The “skin” of a weapon, costume, or other item, generally refers to its aesthetic appearance (with some skins also conferring a limited playing advantage). Certain games allow gamers to buy or trade stylised or multi-coloured skins, some of which are considered rare, or are otherwise sought-after. Gamers are able to buy, swap or trade skins using tokens or virtual currency, including via third party skin trading platforms. Developers and digital distribution platforms also sometimes have open Application Programming Interfaces (APIs), which enable third party skin trading sites to link to the developer’s or digital distributor’s system to enable trading. Juniper Research has estimated that consumer spending on loot boxes and skin gambling will reach $50 billion by 2022.

The problems with skin gambling

Over time, third party skin trading sites have become increasingly sophisticated, meaning that gamers visiting them are able to participate in what are potentially gambling activities, with the aim of winning more, or better, skins. For example, some third party sites enable several players to participate in a game where each player offers up a number of skins. A game of chance is then run to see who wins them all.

Unlicensed gambling of skins is an issue that has concerned gambling regulatory authorities for some time, including the Gambling Commission in the UK. A particular concern is that children are participating in skin gambling. In August 2016, the Gambling Commission published a discussion paper on the subject, followed last year by the publication of a position paper.

In 2016, Valve, the operators of the “Steam” digital distribution platform, sent cease and desist letters to third party skin gambling websites stating that they were breaching the terms of use their Steam accounts, and requiring the sites to stop using those accounts.

Last month, a number of European gambling regulatory authorities, as well as the regulatory authority for Washington State in the US, released a joint declaration sharing their concerns about gambling and video games, mentioning specifically, skin gambling, loot boxes, social casino gaming and use of gambling-themed content within video games available to children. The joint declaration states that the regulatory authorities will: “…work together to thoroughly analyse the characteristics of video game and social gaming… [to] enable an informed dialogue with the video games industry and ensure appropriate and efficient implementation of our national laws and regulations”.

What are the legal issues?

Provision of facilities for gambling without a licence is a criminal offence in the UK. In addition, there is considerable reputational damage at stake for interactive entertainment companies who become associated with third party sites which enable unlicensed online gambling, particularly where children are involved. However, it is not always clear whether the nature of the activities carried out by some skin trading sites constitutes gambling within the meaning of the Gambling Act.

The Gambling Commission has acknowledged that in some cases the lines are blurred. One important factor is the extent to which skins can be readily converted into money and money’s worth, and whether there is a secondary market for the skins. Where trading of skins is restricted so that it is within the “closed loop” of a game and the skins cannot easily be converted into cash, this is less likely to be caught. That said, where it is clear, the Gambling Commission has already proven it is willing to take action, and in 2017 prosecuted a site which was enabling illegal virtual currency gambling. It is important to note that the regulatory framework which applies to gambling differs in different jurisdictions, so an international approach will be needed when considering this from a legal perspective: the issues and solutions in one jurisdiction may not necessarily be the same in another.

What next for skin trading sites and skin gambling?

The Gambling Commission has made it clear that tackling skin gambling is one of its priorities, and that it expects the interactive entertainment industry to play a part in addressing the problem. Its initial focus is likely to be on third party skin gambling sites which enable activities that “feel” like traditional online gambling (for example, casino-style games) and which are being used by, or targeted towards, children.

The interactive entertainment industry will need to respond effectively to address the issue. However, any action needs to be carefully considered. For example, the sender of a cease and desist letter will need to fully understand the legal basis on which they are asking the recipient to stop. Valve’s approach may not work, or necessarily be the best, for all companies. It is also necessary to think about other business issues, such as what will happen when if the skin gambling site complies and shuts down, resulting in users potentially losing high-value skin inventory which they have accumulated over time. This could result in negative publicity amongst the gaming community.

The Gambling Commission has recently stated that it expects to have a constructive dialogue with other regulatory authorities and the interactive entertainment industry. Developers, publishers and digital distribution platforms will need to take this opportunity to work with the Gambling Commission to tackle the problem in a considered, appropriate and effective way.