The following article is the last 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.
Although each U.S. federal gambling statute prohibits illegal “bets or wagers”, most of these statutes do not define what activities constitute a “bet or wager”. Rather, federal gambling statutes defer to state laws to do so. Both the Illegal Gambling Business Act (IGBA) and Unlawful Internet Gambling Enforcement Act (UIGEA) also require federal prosecutors to first show that the impugned operation violates a state gambling law.
Under each state anti-gambling statute, plaintiffs must prove that the activity amounts to gambling. Almost every state adopts a three-part test to characterize an activity as gambling: (1) the participant pays a consideration (2) for a game of chance that (3) has a payout or prize.
Courts have not yet addressed whether in-game currency wagering falls under a statutory definition of gambling. However, numerous courts have examined analogous activities, such as online social casinos, through state loss recovery statutes. The precedent established by these cases will likely discourage subsequent courts from describing activities involving virtual currencies as gambling. Since federal prosecutors likely cannot characterize activities such as skin betting as gambling under state laws, these activities are presumably unaffected by federal gambling statutes such as the IGBA and UIGEA.
Virtual Currency is Insufficient Consideration and Payout
“Consideration” is an idea from contract law. It is a thing of value – a price or a bargain that a party exchanges for a contractual promise. Without consideration, a contract becomes a bare, unenforceable promise.
U.S. courts have analyzed whether virtual currencies are something of value, and hence consideration, under state loss recovery statutes. These statutes empower plaintiffs to launch a civil suit and recover damages from defendants involved in unlawful activities. To bring a loss recovery suit, plaintiffs must suffer some form of economic injury. Some loss recovery statutes also require a plaintiff to prove that the defendant was a “winner”. For example, the Illinois Loss Recovery Act states that “any person who by gambling shall lose to any other person, any sum of money or thing of value… may sue for and recover the money or other thing of value… in a civil action against the winner”.
Barring one extraordinary ruling, District Courts have consistently held that players who use non-redeemable virtual currencies for video game gambling do not lose anything of value. As a result, players do not qualify as “losers” while gambling operators do not qualify as “winners” under loss recovery statutes. Courts have reached this conclusion based on two main grounds:
- Players cannot cash out in-game currencies. Therefore, neither players nor gambling operators have any stake in the outcome of these activities; and
- Although players can liquidate in-game currencies on third-party markets, these transactions violate the game’s end-user license agreement (EULA).
Virtual Items Lack Value if Players Cannot Cash Out
In Mason v. Mach Zone, the Maryland District Court examined whether a player could recover damages from a mobile game under the state’s loss recovery statute. Mason purchased and lost $100 in virtual “gold” on Game of War’s in-game casino. Players can spend gold to acquire in-game resources or virtual “chips”. Players can spend chips on an in-game lottery system for a chance to acquire rare virtual items.
The District Court held that Mason did not suffer any economic injury from playing with virtual gold. Even though Mason was engaging in casino-like activities within the game, her “loss” did not occur at the point of gambling. The court explained that Mason’s “loss”, if any, occurred when she exchanged “something of value (real money) for something of whimsy (pretend “gold”)”. Since Mason could not redeem her virtual gold for cash outside of the game, the court analogized Game of War’s lottery system to a cinema or amusement park ticket. According to the court, players are paying for a “nontransferable, revocable license to use virtual currency for entertainment”, rather than for economic gain.
The Fourth Circuit struck down Mason’s appeal. The Court of Appeal further explained that game operators keep the cash a user pays to buy virtual casino chips whether that user wins or loses the in-game lottery. As such, game operators would not “win” any money if Mason received less value in virtual casino “resources” than virtual gold. Game operators also would not “lose” money if Mason won a rare item. Therefore, neither party had any money at stake when Mason wagered virtual currency in the game.
EULAs Negate the Value of Virtual Items
In Kater v. Churchill Downs, the plaintiff lost over $1000 worth of virtual casino chips on a mobile casino game. Players could not directly exchange virtual chips for cash or merchandise through the game, and the game’s EULA explained that chips do not have any cash value. The EULA also prohibited players from exchanging chips with other players for cash.
Despite the EULA, Kater argued that the chips have value because players can sell them to others for cash on third-party markets. Kater further asserted that the game developers facilitated and profited from sales on third-party markets. Similar to platforms such as Steam, the virtual casino featured an in-game exchange system where players could transfer virtual chips to other players. Kater contended that the game developers indirectly profited from third-party markets because the developer received a fee each time players exchanged in-game items.
The Washington District Court in Kater relied on the game’s EULA to find that the virtual chips were valueless. The court stated that “it would be contrary to basic principles of law and equity” to allow Kater to sue based on their own breach of contract. On appeal, the Ninth Circuit upheld this line of reasoning.
In a shocking turn, the Ninth Circuit ultimately reversed the District Court’s ruling. Contrary to the precedent followed by cases like Mason, the Court of Appeal in Kater held that Kater’s virtual casino chips were a thing of value. However, this extraordinary ruling was predicated by how Washington gambling statutes broadly define a “thing of value” to encompass “any form of credit… involving extension of… entertainment or a privilege of playing at a game or scheme without charge.” In Kater, the in-game chips were necessary for users to continue playing virtual casino games.