Federal Watchdog Takes Aim at Crypto Gaming

By Jason Nelson

The U.S. Consumer Financial Protection Bureau (CFPB) is keeping an eye on online gaming, and specifically financial transactions taking place on game platforms, the government watchdog revealed in a new report on Thursday. The agency said its oversight is part of its broad mandate to protect consumers in financial markets wherever those markets exist.

“In some of the most popular video games today, players generally earn or buy in-game currency, essentially converting fiat currency to in-game currency,” the CFPB said. “In-game currency is then used to buy goods and services as a part of gameplay, including virtual items.”

Whether it's buying extra lives or special powers in a casual game, or earning “virtual currencies” or tokens in a play-to-earn game, the CFPB labels it all as “banking in video games and virtual worlds.” If gaming assets are a medium of exchange for goods and services or peer-to-peer transfers, they are comparable to banks and payment services.

“While these crypto-asset virtual worlds are significantly less popular than virtual gaming worlds like Roblox, Second Life, or Fortnite, they are important to note because of the prevalence of third-party crypto-asset trading platforms, users can convert a virtual world’s native crypto-asset to fiat currency, making them even more porous than typical gaming markets,” the agency said.

The increased scrutiny comes as crypto gaming has seen increased interest and activity. Last month, gaming tokens, including Gala (GALA), Immutable (IMX), Floki (FLOKI), and Ronin (RON), surged in the first quarter of 2024, surpassing $26.9 billion in market capitalization, according to CoinGecko. 

Even AI developers are looking to get into the blockchain gaming scene. Last week, AI analytics firm Helika launched a $50 million crypto gaming accelerator.

The CFPB also highlighted its study of “concerning issues” like scams, theft, and other criminal activities. The agency also said it pays attention to whether platforms offer users a recourse for lost assets.

“Gaming companies often take a ‘buyer beware’ approach, putting the burden on individual players to avoid these scams and phishing attempts,” the agency said. “They may lock or ban players’ accounts suspected of scamming and phishing but do little to provide remedy to the victim.”

The CFPB noted that some third-party websites allow in-game items and currencies to be traded for Bitcoin, calling out Second Life’s “Linden Dollars,” which gamers can purchase through Second Life’s official Linden Exchange (LindeX) using fiat currency and transfer to third-parties using PayPal and Skrill.

“Between 2011 and 2013, third-party websites allowed trading between Linden dollars and Bitcoin,” the agency said. “In 2021, Second Life reported the average number of daily users to be 200,000 users across 200 countries and a GDP equivalent of over $600 million, more than some small countries.”

In addition to Bitcoin, the CFPB’s report also highlighted blockchain-based games and platforms, including the Ethereum-based Axie Infinity, Decentraland, Sandbox’s MANA and SAND tokens, and NFTs that can be traded and sold for USD.

Also in its crosshairs are DeFi-lending platforms like MetaLend, a cryptocurrency financial services company that made it possible for Axie Infinity players to take out loans against their in-game NFTs while still using them to play.

“At the height of its success, Axie Infinity had over 2.7 million daily active users, but as the number of users grew, the NFTs required to play became very expensive, leading to hierarchies of users: investors, managers, and workers,” the CFPB said. “While the crypto-asset industry and its investors lauded the game as a viable way to earn income, reports documented the ways the gaming system exploited workers.”

The CFPB noted the March 2022 hack of Axie Infinity’s Ethereum sidechain Ronin that used stolen private keys to drain over 173,600 ETH and 25.5 million USDC, totaling $622 million at the time.

The report did not prescribe a decisive course of action, but the CFPB said it would continue to work with other agencies to monitor the space. It added that going forward, it would focus on companies that assemble and sell sensitive consumer data—such as a consumer's payment history—especially when this data is harvested and monetized without the user’s awareness.

The CFPB did not immediately respond to Decrypt’s request for comment.

Edited by Ryan Ozawa.

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