Loot Box Systems - Is it Gambling?

Whenever you think about gambling you usually imagine yourself hitting the jackpot at a slot machine in the casino. However, what if gambling covered more than just a chance at winning a tangible prize? Does South African law recognise the possibility of gambling for virtual-items?

In recent years the video game industry has come under severe criticism for the use of the so-called "loot box system". The loot box system (LB system) entices a consumer to purchase a virtual container in a video game, using either virtual currency or real-world currency.  A consumer is then rewarded with a randomised virtual item selected from a pre-determined range that will either enhance the gaming experience or merely modifies the look of the video game. The more valuable the item - the lower the probability of being rewarded with that item.

Many people, especially in the European Union, believe that the LB system should be classified as gambling, and therefore be regulated, due to the fact that you pay for a chance to win a randomised reward. Should it constitute gambling, this would be worrying as the gaming industry targets children. Should this classification exist in South Africa?

The Lotteries Act

There are two pieces of legislation that regulate gambling in South Africa: the Lotteries Act and the National Gambling Act.

Section 1 of the Lotteries Act defines a lottery as:

    "any game, scheme, arrangement, system, plan, promotional competition or device for distributing prizes by lot or chance and any game, scheme, arrangement, system, plan, competition or device, which the Minister may by notice in the Gazette declare to be a lottery"

Based on this definition, it seems that the LB system may be classified as a lottery. Some argue though, that the video game and the system form one indivisible product, with the latter being dependent on the former. The argument continues that as the video game was developed for the purpose of entertaining gamers rather than allowing gamers to gamble, the system is part and parcel of the entertainment purpose.

Although the system and the video game form part of the same package, it can also be argued that the system is actually separate from the video game. Following this line of argument, the system was designed for a different purpose and it can operate on a platform that is entirely separate from the video game.  The video game can also function as intended without the system, which we saw when the video game developer Activision Blizzard was able to remove the system from some of its games in Belgium. Therefore, as it is the system that rewards customers through the element of chance, and not the video game, it is possible to classify the system as a lottery.

The actions of Activision Blizzard were in response to the Belgian government declaring the system to be a form of gambling.  Belgium is not the only country to have done this as similar steps have been taken in The Netherlands.  The regulators of the European Union have also begun to consider regulating the system and they have warned video game developers to consult the gambling laws of each market.

The National Gambling Act

Section 3 of the National Gambling Act defines a gambling activity as one involving bets, wagers, totalisator bets, bingo or any other gambling game. It is clear that that the loot box system does not involve any betting, or wager placements or bingo and it is therefore necessary to determine if it could be classified as a gambling game.

Section 5 of the National Gambling Act defines a "gambling game" as one where a player, upon payment of an amount, will become entitled to or receive a pay-out, and the result is determined by skill, chance or both. Section 6 of the National Gambling Act defines a pay-out as:

    any money, merchandise, property, a cheque, credit, electronic credit, a debit, a token, a ticket or anything else of value won by a player -
    (a) whether as a result of the skill of the player or operator, the application of the element of chance, or both, and
    (b) regardless how the pay-out is made.

The system thus meets the criteria of section 5 (and in turn section 3). When purchasing a loot box using real world money you will generally become entitled to or receive some form of virtual item, the value of which is determined by the element of chance.

Some argue that the virtual item received has no value (and so does not constitute a pay-out) as the value that would be attached to that item only exists within the game itself. This cannot be true because the value of the virtual item would be the amount paid by the consumer on the loot box.  Also, section 6 does not require the pay-out to have value for all people, but rather that it has some form of value. Some video games also provide the consumer with the ability to convert their rewards into real-world currency.  For example, some virtual items obtained from the video game, Counter Strike (or Counter Strike Go), can be sold on Steam (a platform that runs the video game) for currency that can be used to purchase other products on this platform. These virtual items from Counter Strike can also be sold on other third-party sales platforms that allow peer-to-peer transactions for real-world currency (which has also occurred with virtual items obtained from the renowned World of Warcraft video game).

If the loot box system is not classified as a lottery or gambling, the question remains whether it should be regulated in some way.

The Entertainment Software Rating Board and the Pan European Game Information, which are the organisations responsible for regulating the industry internationally, have recommended adding labelling for loot boxes and other in-game purchases as a method of informing consumers that the video game will contain a loot box (or similar) system. This would be compliant with section 41 of the Consumer Protection Act which requires suppliers to inform consumers of any risks of which they may not reasonably be aware. This may not necessarily regulate the system, but it may help to ensure that consumers are aware of its existence and thus allows them to make informed decisions.

It seems as if the possibility of classifying the loot box system as gambling exists but nothing is certain until either the courts or the legislator provide some guidance. Until such time, suppliers should consider labelling their gaming packages in order to keep consumers informed.