Navigating the Regulatory Landscape of GameFi, NFT IPs and DAOs
The information in this article is extracted from the CryptopiaCast podcast hosted by Cryptopia's CEO Sangho Grolleman, with the guest Nicolle Lafosse—a once traditional, but now Web3 lawyer. In this episode, she delves into the intricacies of using crypto tokens and NFTs in the gaming world, discussing topics such as security classification, intellectual property rights, and DAO governance.
With the advance of blockchain technology, new avenues to use it are constantly emerging. While some people find positive innovative ways to utilize this disruptive technology, there are always malicious actors who seek to misuse it. When these negative applications come to the attention of the authorities, they often result in the creation of new regulations aimed at mitigating the risks and protecting consumers. In this article, we will explore the current regulatory environment on the technology surrounding GameFi, IP (intellectual property), and DAOs (decentralized autonomous organization).
Traditionally, financial laws are enforced through a bureaucratic process, but the decentralized nature of blockchain technology makes it difficult for governments and other regulatory bodies to impose them. Although the efficiency and transparency of blockchain technology make regulatory processes more streamlined, compliance with legal regulation is still necessary for individuals and businesses operating within the crypto and blockchain industry. Determining the appropriate level of regulation requires a careful analysis of the nature of the token.
What it Means to Be a Security
Crypto investments are not governed by the usual bureaucratic procedures. However, the Howey Test is still used to establish if these tokens are classified as securities, and therefore fall under the jurisdiction of the SEC's (Security and Exchange Commission) regulations. The test has four factors:
- An investment of money
- In a common enterprise
- With the expectation of profits
- To be derived from the efforts of others
If a cryptocurrency is determined to be a security, it will fall under the jurisdiction of the SEC and must comply with disclosure requirements, registration and reporting obligations, investor protections, and possible restrictions on transferability (Securities Act of 1933, Securities Exchange Act of 1934). This brings the question, would in-game tokens be classified as securities too, and if not, what are the regulatory protocols?
Understanding GameFi, NFT IPs, and DAOs
In the world of GameFi, there has been a rapid expansion of the use of cryptocurrencies and NFTs. It is important to understand the intricacies involved in using these digital assets to support the game's economy.
The use of tokens as an investment with the expectation of profit through other people's efforts can classify it as a security and would require proper registration. One of the distinctions on whether or not tokens are a security is based on the level of effort players put into influencing the token's value appreciation—"how much effort is enough for it to be not considered a security" (Lafosse, CryptopiaCast)—which is still an unexplored factor, as it can be subjective.
NFTs fall under this as well, and they often have IP rights attached to them; it is important to understand these rights as they are in the hands of the creator. The extent of intellectual property rights attached to NFTs can range from having no rights to the investor to having full rights being transferred from creator to investor. If it exists in a purely decentralized system, the players are responsible for governing what these rights might be, and can potentially change them over time; this happens with a DAO.
In a DAO, the rules for the governance of tokens are determined by consensus. Typically, individuals with larger token holdings have greater voting power. In the case of an unexpected malicious act, the liability falls on these individuals as they hold the majority voting power, and they are the ones the regulatory bodies will contact. "Sometimes if you have a DAO, and something goes south, they're going to go after the person who has the higher number of tokens, who has more stake." (Lafosse, CryptopiaCast).
Navigating the world of blockchain gaming with crypto tokens and NFTs requires a deep understanding of its complexities. From security classification and intellectual property rights, to decentralized governance, these challenges must be considered and comprehended by both players and investors alike to ensure a seamless and successful experience in the GameFi universe. Ignoring these critical elements could result in costly mistakes.
The upcoming article will dig into the complications surrounding the usage of in-game tokens. We will examine the challenges related to the tokenization of in-game assets and the regulation of these tokens in the blockchain industry.
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