This article is the first of three parts. Part one introduces readers to the various forms of video game gambling. Part two covers the legislative landscape for video game gambling in the United States. Part three discusses the unique properties of virtual currencies in video game gambling, as well as their tensions with state gambling laws.
The History of Video Game Gambling (2000s to 2013)
The origins of video game gambling are rooted in the century-old practice of including decorative baseball cards in cigarette packages. In 2006, a Chinese company called Giant Interactive pioneered one of the earliest instances of video game gambling in their free-to-play multiplayer online game. By purchasing virtual keys to unlock “treasure boxes” within the game, players could obtain rare equipment and competitive advantages over their peers. Today, players commonly refer to treasure box systems in video games as loot boxes. Loot boxes are a form of “microtransactions” – an in-game exchange of real currency for virtual items.
In 2010, Japan helped popularize the use of loot boxes in video games through “gacha” mobile games. The gacha game model imitates a common type of vending machine in Japan which dispenses concealed toys in opaque plastic capsules. In gacha games, players can spend real money to purchase virtual currency, which they then use to acquire playable virtual characters or items within the game. Genshin Impact, currently the most popular gacha game in the world, has already earned $874 million in revenue in the five months since its release.
Driven by the success of microtransactions in mobile games and the fixed pricing of the video game market, Western developers such as Valve adopted the gacha model to AAA blockbuster games. Valve introduced loot boxes to Western markets through Team Fortress 2 in 2010 and Counter Strike: Global Offensive (“CS:GO”) in 2013. The introduction of loot boxes in CS:GO breathed life into the game’s player base. Within two years, the number of players in CS:GO increased by 1,500%, and today, CS:GO boasts roughly 740,000 concurrent players.
The Modern Video Game Gambling Landscape (2013 to present)
Unlike their Asian mobile game counterparts, Western blockbuster games spawned a lucrative gambling market through the world of online competitive video gaming – esports. Esports are professional, organized video game competitions with a live audience. For instance, the 2019 League of Legends World Championship drew over 100 million unique viewers, with 44 million peak concurrent viewers. The online viewership for this event exceeded the audience of the Super Bowl 2019 finals that year (roughly 98 million viewers). Prior to COVID-19, analysts projected that the esports industry will generate over $1.6 billion U.S. in revenue in 2021.
In addition to loot boxes, the esports industry gave rise to three main forms of online gambling: fantasy esports, esportsbook wagering, and betting using in-game virtual items. One major video game title, CS:GO, has spawned all of these gambling activities due to the game’s strong connection to esports and third-party marketplaces.
What are Fantasy esports?
One of the largest pay-to-play fantasy esports websites, Vulcun, sported a prize pool of $10 million before its shutdown in 2016. Similar to fantasy leagues for traditional sports, websites such as Vulcun allowed players to draft and manage a team with a fictional budget cap. Players used their budget to select real-life esports athletes from various professional teams within an eSport title. Vulcun set esport athlete salaries according to their popularity and previous in-game records. Fantasy league players also earned team points each week based on their selected athletes’ in-game performances. After each professional league season, Vulcun offered cash to players with the highest scoring fantasy teams.
What are esportsbooks?
Esportsbooks involve betting on the outcome of professional esports matches on various third-party websites. Sportsbook-style wagering in esports typically involves betting against the house, as opposed to betting against peers.
What is Skin Betting?
The most popular type of video game gambling, wagering in-game currency, departs from traditional forms of sports gambling. CS:GO propagated and continues to control a dominant market share for in-game currency gambling through “skin betting”.
Valve owns Steam, a digital distribution platform that manages thousands of games, including CS:GO. CS:GO is a first-person shooting game where two teams clash in a counter-terrorism operation. Outside of matches, players can collect “skins” to customize the appearance of their in-game weapons. Skins are created by both Valve and casual players. Players can acquire skins through loot boxes or buy and trade skins through Steam’s official player-to-player marketplace. For instance, one player recently purchased a rare rifle skin, which bore a sticker for a 2014 tournament and glowed blue, for a whopping $150,000 USD. However, players can only purchase skins on Steam through “Steam Wallet funds” – a virtual currency which players use to purchase other games on Steam. Valve retains a 15% cut for every skin transaction on the official marketplace.
Third parties eventually used Steam’s open Application Program Interface (API) to develop websites where players can acquire and sell skins outside of Steam. These websites are unaffiliated with Valve or any game developers. The third-party sites embed automated programs, also known as “bots”, onto Steam. Users can trade skins from their Steam accounts to bot accounts on Steam, effectively giving third-party sites control over players’ skins.
Some third-party sites are designed as online casinos which solely facilitate transactions with skins. Players can directly wager their skins, similar to a casino chip, or trade their skins onto the website for a virtual website credit. Players can then use these credits to play casino games like roulettes, jackpots, and slots to win additional skins on the website. Players can “cash out” their earnings by requesting the site to send the player’s won skins back to their Steam account.
Alternatively, players can wager their skins on the outcome of esports events. For example, the site “CS:GO Lounge”, shortly before it ceased offering skin betting in 2016, helped players bet over 100 million skins, valued at $1 billion USD, over six months.
Players can also use third-party sites to sell their skins to other players for real money. For example, sites such as “Skinwallet” use online payment systems to facilitate transactions between players. A player can connect their Steam ID to these sites and auction their skins to other users. Sellers can then connect their Paypal account to the site to collect their money.
Reporters theorize that CS:GO’s third-party gambling market may have helped the game grow as an eSport. Three years since skins appeared in CS:GO, tournaments became twice as frequent, the prize pool for professional tournaments tripled to over $60 million USD, and the average salary for professional players increased by nearly $1000 per month.
Financial Scope of the Video Game Gambling Industry
One research firm projects that, by 2024, the esportsbook wagering industry will generate $862 million USD in revenue, with players placing close to $14 billion USD in esports bets in 2020.
In-game currency betting likely comprises the largest portion of the video game gambling market. Throughout 2015, another research firm estimated that players wagered nearly $5 billion USD in virtual items. Before Valve sent cease and desist letters to over forty skin gambling websites in 2016, analysts estimated that the market size for skin gambling was about $7.4 billion USD. These analysts also projected that the skin gambling market will grow to approximately $20 billion USD by 2020, generating nearly $3.3 billion in revenue. Valve’s attempts to curb the skin gambling industry were likely unsuccessful. As noted by a 2018 article, roughly half the sites targeted by Valve continued operating, while new skin gambling sites emerged each day. Some reporters also speculate that the shutdown of large and reputable skin gambling sites led to the emergence of less scrupulous sites. Valve explained that further efforts to curb skin gambling operations, such as restricting third-parties from accessing their open API, would disrupt its service to hundreds of millions of Steam users.
In part two of this article, we will explore various U.S. federal gambling statutes that prosecutors may use to regulate the video game gambling industry. We will also examine the shortcomings of each statute when applied to the various forms of video game gambling.