Abstract
Changes to the UK’s Gambling Act 2005 have been set in motion amidst concerns over increased spending on loot boxes prompted by the COVID-19 pandemic and recent studies demonstrating the positive correlation between loot box spending and problem gambling. In anticipation of the upcoming legislative update, this article seeks to examine the loot box phenomenon and the regulatory developments surrounding it. It will provide a comparative overview of different jurisdictional approaches taken to address this issue and will conclude with a brief discussion of their implications in devising the UK regulatory framework.
I. Introduction
Loot boxes are special features included in many video games that may be purchased during gameplay with real or virtual currency, wherein each loot box offers a probability of obtaining randomised virtual items.1 Because a player does not know what the loot box contains until it is opened, it may be considered as a game of chance. Changes to the UK’s Gambling Act are on the horizon with the White Paper on the Review of the 2005 Gambling Act expected to be published in the fourth quarter of this year.2 Most notably, the scope of the amended Act will be expanded to specifically cover regulations on loot boxes. Such measures for reform reflect concerns voiced by the Gaming Commission tracing back to 2017 regarding “the growth in examples where the line between video gaming and gambling is becoming increasingly blurred”.3 Since then, there have been calls for immediate action to bring loot boxes within the scope of the Act, as evidenced by the House of Lords Committee report that stressed the overall adverse impacts of loot boxes on children and adolescents.4 The report cited research demonstrating that young people who spent money on loot boxes were more than ten times as likely to be problem gamblers than those who did not.5 Against this backdrop, this piece will examine the different responses of other jurisdictions in this regard and subsequently discuss their implications on the UK in designing a regulatory framework for loot boxes.
II. The Loot Box Phenomenon and a Comparative Review of Regulations in Other Jurisdictions
Despite the growing chorus of concerns over their exploitative and addictive nature, loot boxes continue to remain popular. According to a survey commissioned by the gaming publisher WePC, one in three UK gamers purchases a loot box at least once a week, with 47% of the players having increased their gaming expenditure since the outbreak of the COVID-19 pandemic.6 While formal regulations specific to loot boxes are pending in the UK, other jurisdictions have taken the lead, finding loot boxes to fall within local gambling legislations or to be linked to gambling, notably in Japan and Germany. The following paragraphs will discuss the approaches taken by each of these jurisdictions in turn.
A. Japan
Japan, the country where loot boxes originated, was the first country to respond to the global regulatory agenda on loot boxes.7 In 2012, Japan imposed a blanket ban on a special type of loot box called “Kompu Gacha”, a mechanism through which players may obtain a rare item by collecting a complete set of items from randomised loot boxes.8 “Kompu Gacha” was declared illegal under the “Law for Preventing Unjustifiable Extra or Unexpected Benefit and Misleading Representation”.9 It is interesting to note that, unlike most Western countries that determine the illegality of loot boxes pursuant to their gambling laws, the illegality of loot boxes in Japan is based on its consumer protection law. The law provides the basis for its Consumer Affairs Agency to take action to protect consumers from deceptive practices.10 Many Western loot box regulatory models are premised on the basis that loot boxes are accessed via real-world money and that they offer prizes of real-world monetary value that are transferable to other players.11 In contrast, the Japanese model is premised upon a consumer welfare perspective that seeks to regulate “Kompu Gacha” because of its exploitative nature in inducing consumers to make more in-game purchases to obtain another item and ultimately, to gain the full set of items.12 Although the acquisition of a rare item is conditioned on the purchase of multiple items and the actual chances of obtaining such a rare item are low, the actual probabilities of winning the items are not fully disclosed to consumers.13 As such, consumers are injured because the cost of participating in transactions to obtain loot boxes significantly exceeds the value of the grand prize with considerably lower payouts than those expected by the gamers that participate in the draw.14 Meanwhile, “Gacha” mechanisms similar to ordinary randomised loot boxes are not prohibited and the legality of Japanese loot boxes is determined on a case-by-case basis.15
Unlike Western regulators, Japanese counterparts are less concerned with the game of chance element in “Kompu Gatcha” than they are with the issue of the unknown probability in obtaining rare items that has led to consumer complaints.16 That is, without regard to whether “Kompu Gatcha” contains gambling elements, the Japanese regulation seeks to safeguard consumer rights by enhancing the transparency of information on game features to better equip consumers to make informed decisions before purchasing a video game.17 This is in stark contrast to most Western countries that choose to regulate loot boxes under gambling laws, wherein their competent regulatory bodies can only exercise authority when loot boxes fall within the definition of gambling. Hence, Japanese regulators may exercise a broader scope of authority in regulating the gaming industry on the basis of consumer protection laws.
Considering the foregoing, the Japanese model aptly addresses concerns regarding the effect of in-game transactions on consumers, particularly as it takes into consideration young game players vulnerable to problematic game designs due to the lack of guidance. On the other hand, it may still leave some uncertainty in ascertaining the legality of loot boxes because it is unclear whether from a consumer welfare perspective, a “Gacha” would be found illegal; this can only be determined by assessing the facts specific to each mechanism. Moreover, the Japanese model fails to adequately take into account global concerns about the gambling aspect of loot boxes, so long as labelling and information disclosure requirements are met. In comparison, the Western model is not without its strengths and weaknesses. Since most Western countries’ regulations of loot boxes are based on their gambling laws, they are well-positioned to directly regulate gambling behaviours of game players. However, their regulations are heavily tilted towards the issue of loot boxes in relation to their gambling aspects, leaving room for improvement in providing broader consumer protection in instances where certain types of loot boxes may not fall under the definition of gambling.
B. Germany
While other European countries such as Belgium18 and the Netherlands19 regulate loot boxes under their Gaming and Betting Acts, Germany takes a unique approach with a view to protect minor game players. On March 5 2021, the German Federal Parliament (Bundestag) adopted the amended Youth Protection Act, which would establish a new Federal Agency for the Protection of Minors in the Media while calling for reform to improve technical settings for youth protection.20 The amended Act seeks to enhance the visibility of the risks of monetisation practices like loot boxes by mandating both age ratings for games and the inclusion of warnings against the harmful effects of purchase functions in games.21 Moreover, following the implementation of the amended Act, the immediate content of games will not be the sole determinant in gauging their age ratings. Instead, the appropriate age ratings will be determined by taking into account multiple factors through an examination of the interplay of interactive elements that games contain.22 The Act provides a non-comprehensive list of elements that are deemed “risky functions”, such as: (1) communication and contact functionalities; (2) purchase functionalities; (3) gambling-like mechanics; (4) mechanics encouraging excessive media use; (5) sharing user data without consent; and (6) purchase exhortations that are not age-appropriate.23
With the amended Act, Germany became the first country in the world to expressly tackle the rights of minors in the digital environment by means of legislative reforms. However, unlike its European counterparts, Germany has not issued an outright ban on loot boxes nor does it directly regulate games featuring gambling mechanics. Without further substantive measures to protect young game players from interacting with games featuring gambling mechanics, mandating the inclusion of warnings for loot boxes would only have provisional short-term effects.
III. Implications on the UK Regulatory Framework
In light of the above-mentioned jurisdictional approaches to loot box regulation, one can ask what their implications on the UK regulatory framework are. Currently, loot boxes do not meet the definition of “gaming” under the Gambling Act of 2005. Gaming is defined under Section 6 of the Act as “playing a game of chance for a prize”, where a prize in relation to gaming: (a) means money or money’s worth, and (b) includes both a prize provided by a person organising gaming and winnings of money staked.24 This definition does not apply to loot boxes because the prizes that game players receive via loot boxes are not money. Neither are all loot boxes money’s worth as there are certain types of loot boxes that fall outside this definition because they provide prizes that cannot be cashed out in real-world money. As such, they do not constitute a “game of chance” under the incumbent Act and the Gambling Commission lacks authority to regulate loot boxes.
Under the current Act, the Gambling Commission’s role is limited to that of applying the definition outlined in the Act to different activities and determining whether they fall within the Act, while any changes to its definitions are made by the UK Parliament.25 Accordingly, the amendments to the current Act should explicitly state that loot boxes are a game of chance. Specifically, the Act could expand the definition of “money or money’s worth” to include both in-game items that can be converted into cash as well as those that cannot be cashed out but may be traded for other items of value.26 This would allow for the universal application of the Act to all types of loot boxes.
Further, as the Japanese model suggests, loot box regulation should be viewed under the broader lens of consumer protection, especially with regard to underage game players that are highly susceptible to the adverse impacts of loot boxes. While regulating loot boxes under gambling laws will allow the UK to implement substantive reforms by making explicit connections between gambling and loot boxes, designing the amended Act to balance both consumer protection and gambling regulation would be optimal. As examined, while the German model sought to attain such an outcome by protecting children’s rights in abusive games and media, it could be further improved by implementing concrete measures beyond a mere warning of their potential risks.
Based on the insight gained from other jurisdictions, the UK could devise a well-rounded law that addresses the dual challenges of tackling gambling concerns while fortifying measures for consumer protection. It has been suggested that to address gambling issues, the UK could revamp existing gambling laws by drafting precise definitions to encompass ‘all game related transactions with chance-based outcomes’, allowing for the consistent application of legislations to a wide variety of problematic game designs.27 While such amendments would be helpful, regulators should tread carefully so as not to craft definitions in a manner that would unduly restrict the gaming industry. Meanwhile, consumer protection issues could be addressed by implementing measures mandating the disclosure of game features.28 Furthermore, ethical frameworks could be introduced to re-design loot boxes, for instance, by introducing voluntary features that would allow players to choose a spending limit to impose upon themselves.29
It has been demonstrated throughout the piece that policy debates surrounding the regulation of loot boxes should not go by unheeded. However, the design of loot box regulation must also consider its impacts on the competitiveness of the British gaming sector on an international plane, especially considering the vital role the UK has played in the development of the global video games sector, with British game developers having designed iconic games such as Tomb Raider and Grand Theft Auto, to name a few.30 Specifically, with the implementation of the new regulations, gaming companies may incur additional compliance costs, placing a heavy economic and administrative burden on game developers.31 This could, in turn, lead to unintended consequences by raising the barriers to entry for potential new entrants to the gaming market and stifle the competitive edge of the UK video games industry.32
Moreover, another long-term challenge is that of tackling problematic game design overall, instead of limiting the regulatory agenda to loot box mechanisms.33 Indeed, the video game industry has seen rapid development where one product is quickly replaceable with another. As such, it should be kept in mind that a ban on loot boxes may not be the panacea to all ills and that other novel problematic game designs may simply replace loot boxes in the future. Changes in Blizzard’s approach to selling its popular video game in the Chinese market is illustrative of this point. In response to amended Chinese laws in 2017 that banned loot boxes that could be purchased with real money, Blizzard ceased to sell loot boxes directly to consumers.34 Instead, it provided free loot boxes to game players in exchange for their purchase of in-game currency.35 Hence, loot boxes were replaced with in-game currency, effectively circumventing the amended legislations.
Considering the potential shortcomings of a mere ban on loot boxes, issuing best practice guidelines to recommend self-regulation initiatives as preemptive measures may be a feasible way to complement legal frameworks. Some suggestions for self-regulatory mechanisms would be: placing a payment cap for underage players, including ‘breaks’ on purchasing by requiring game players to re-input their usernames and login to the game, and requiring the full disclosure of odds in obtaining items of value in an easily interpretable manner.36 While legislations or self-regulatory mechanisms alone may be insufficient to achieve the desired effect of curbing problematic game designs, a harmonised approach under which legislations are complemented with self-regulations would preclude regulatory overreach while incentivising the gaming industry.37
IV. Conclusion
The UK could set an exemplary global precedent by taking the lead in shifting the debate on loot boxes away from most European jurisdictions’ narrow focus on gambling aspects and towards a wider consumer protection angle, such as that in Japan. In doing so, regulations should be implemented in a way that would adequately balance the interests of all pertinent parties to reach an optimal outcome with inclusive and transparent dialogue that actively involves industry professionals, game developers, and game players. Further, as a complementary measure to the pending regulations, the UK could provide concrete guidance to private actors in the gaming industry by means of self-regulations in the form of best practice guidelines.
[1] Kevin Bailey, ‘Loot Boxes in Games: Do They Need A Gambling-Like Regulation?’ (TechShout, 5 July 2021) <https://www.techshout.com/loot-boxes-do-they-need-a-gambling-like-regulation/> accessed 15 July 2021.
[2] United Kingdom Department for Digital, Culture, Media & Sport, ‘Digital regulation: overview of government activity’ (6 July 2021) <https://www.gov.uk/guidance/digital-regulation-overview-of-government-activity> accessed 15 July 2021.
[3] Gambling Commission, ‘Loot boxes within video games’ (Gambling Commission, 24 November 2017) <https://www.gamblingcommission.gov.uk/news/article/loot-boxes-within-video-games> accessed 15 July 2021.
[4] Select Committee on the Social and Economic Impact of the Gambling Industry, Gambling Harm – Time for Action (HL 2019–21, 79) para 434.
[5] Select Committee on the Social and Economic Impact of the Gambling Industry, ‘Corrected oral evidence: Social and Economic Impact of the Gambling Industry’ (3 March 2020), Q 199 <https://committees.parliament.uk/oralevidence/129/pdf/> accessed 15 July 2021.
[6] ‘The Rise of Microtransactions’ (WePC, 9 June 2021) <https://www.wepc.com/statistics/microtransactions-survey-uk/> accessed 16 July 2021.
[7] Marco Josef Koeder and Ema Tanaka, ‘Game of chance elements in free-to-play mobile games. A freemium business model monetization tool in need of self-regulation?’ (28th European Regional Conference of the International Telecommunications Society (ITS): “Competition and Regulation in the Information Age”, Passau, Germany, 30 July – 2 August 2017) <https://www.econstor.eu/bitstream/10419/169473/1/Koeder-Tanaka.pdf > accessed 16 July 2021.
[8] ibid.
[9] ibid.
[10] ibid.
[11] Stephanie Derrington, Shaun Star, and Sarah J Kelly, ‘The Case for Uniform Loot Box Regulation: A New Classification Typology and Reform Agenda’ (2021) 46 Journal of Gambling Issues <https://jgi.camh.net/index.php/jgi/article/view/4103> accessed 17 July 2021.
[12] ibid.
[13] ibid.
[14] ibid.
[15] ibid.
[16] Koeder and Tanaka (n 7).
[17] ibid.
[18] Article 2 para 1 of the Act of 7 May 1999 on games of chance, gaming establishments and the protection of players, M.B 30.12.1999.
[19] Betting and Gaming Act 1964 art 1 para 1(a).
[20] Martin Puppe, ‘German Bundestag passes new Youth Protection Act’ (The German Games Industry Association, 10 March 2021) < https://www.game.de/en/german-bundestag-passes-new-youth-protection-act/> accessed 12 August 2021.
[21] ibid.
[22] Felix Hilgert, ‘Legislation incoming: Germany’s new Youth Protection Act’ (2021) <https://gameslaw.org/legislation-incoming-germanys-new-youth-protection-act/> accessed 12 August 2021.
[23] ibid.
[24] John Woodhouse, ‘Loot boxes in video games’ (House of Commons Library, 2021) <https://researchbriefings.files.parliament.uk/documents/CBP-8498/CBP-8498.pdf> accessed 12 August 2021.
[25] ibid.
[26] James Close and Joanne Lloyd, ‘Lifting the Lid on Loot-Boxes’ (2021) <https://www.begambleaware.org/sites/default/files/2021-03/Gaming_and_Gambling_Report_Final.pdf> accessed 3 Sep 2021.
[27] ibid.
[28] Leon Y. Xiao and Laura L. Henderson, ‘Towards an Ethical Game Design Solution to Loot Boxes: a Commentary on King and Delfabbro’ (2019) 19 (1) International Journal of Mental Health and Addiction <https://link.springer.com/content/pdf/10.1007/s11469-019-00164-4.pdf> accessed 3 Sep 2021.
[29] ibid.
[30] Department for Digital, Culture Media & Sport, ‘Loot Boxes in Games Call for Evidence’ (2020) <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/920393/Loot_Box_Call_for_Evidence_Document_.pdf > accessed 19 July 2021.
[31] Emily Daniels and Hunter Thomson, ‘What happens if loot box regulation passes into UK law?’ (Games Industry Biz, 26 November 2019) <https://www.gamesindustry.biz/articles/2019-11-26-a-tougher-stance-on-online-video-games-opinion> accessed 19 July 2021.
[32] ibid.
[33] Annette Cerulli-Harms and others, ‘Loot boxes in online games and their effect on consumers, in particular young consumers’ (2020) <https://www.europarl.europa.eu/RegData/etudes/STUD/2020/652727/IPOL_STU(2020)652727_EN.pdf> accessed 19 July 2021.
[34] Nicole Carpenter, ‘Overwatch players in China can now buy in-game currency directly — but it doesn’t work exactly how you’d expect’ (Dot Esports, 5 June 2017) <https://dotesports.com/overwatch/news/china-loot-box-overwatch-laws-15034> accessed 3 Sep 2021.
[35] ibid.
[36] Close and Lloyd (n 26).
[37] Xiao and Henderson (n 28).
Bo Hyun Kim
BA (Korea University) ’17, JD (Handong International Law School) ’22