Popular games like Axie Infinity and My Defi Pet have recently gained traction for their unique selling proposition that one can earn money as they play. These play-to-earn games involve the gamers using non-fungible tokens (NFTs), a type of intangible property representing something of value, to progress in the game. NFTs are non-fungible; it is unique as, from its nature, it cannot be treated as equivalent to any other unit. Obtaining NFTs will require spending real money, which will be converted into a cryptocurrency through the use of electronic instruments such as e-wallets. Players own their NFTs, and by fiat of such ownership, will have the ability to sell them for a price.
In Axie Infinity, players purchase creatures known as Axies that can be used to compete in and win battles. Conquering certain levels in the game will reward players with “smooth love potions”, which can be used to breed Axies and can also be converted to real money. Axies are NFTs that can be bought and sold in the dedicated marketplace using Ethereum, a type of cryptocurrency. Since the transaction is based on cryptocurrency, the amount to be gained upon conversion will vary depending on the exchange rate.
The aspect of being able to reasonably expect profits through such a system is increasingly becoming the subject of government interventions across multiple jurisdictions. In the Philippines, no government regulation has attempted to provide a categorical definition of NFTs. Nonetheless, the Securities and Exchange Commission (SEC) and the central bank, Bangko Sentral ng Pilipinas (BSP), have recognised the emergence of such financial innovations, and have been proposing and issuing rules to ensure adequate regulation of the operations of these systems and service providers. The SEC had to define tokens as a “virtual currency that vests certain rights, including a digital representation of value that is intended to represent any assets or rights associated with such assets”.
This year, the BSP issued Circular No. 1108, which requires virtual asset service providers (VASPs) to secure a certificate of authority to operate such services. Under the circular, virtual asset (VA) refers to “any type of digital unit that can be digitally traded or transferred, and can be used for payment or investment purposes. It is used as a medium of exchange or a form of digitally stored value created by agreement within the community of VA users.” Virtual currency (VC) exchanges are also considered as VASPs under the circular. To clarify, VASPs are distinct from electronic money issuers (EMIs) as the latter provides money transfer or remittance services using electronically stored money value systems, and similar digital financial services. EMIs are primarily governed by the BSP Manual of Regulation for Banks and related issuances. Unlike a virtual asset, electronic money is legal tender. In either case, prior approval by the BSP is needed for an entity to operate as a VASP or EMI.
Notably, both definitions of a token and virtual asset respectively exclude “a digital representation of value issued by, or on behalf of, the publisher and used within an online game or game platform sold by the same publisher or offered on the same game platform”, and “the payment of virtual goods and services within an online game (e.g. gaming tokens).” Whether NFTs obtained through play-to-earn games fall within such exclusion remains to be seen, especially in view of the convertibility of the token into real currency, and their potential use outside of gaming. In an SEC advisory, some virtual currencies, based on the facts and circumstances surrounding their issuances, may even be considered security, requiring the appropriate registration and/or licence with the SEC.
In any event, users should be made aware of the limitations of tokens and VAs. The BSP has clarified that VAs are not issued nor guaranteed by any jurisdiction, and do not have legal tender status. VC holders may incur significant losses when trading or investing in VCs due to price volatility. VCs (and by extension VAs) are not considered as deposits, and VC holders cannot claim deposit insurance from the Philippine Deposit Insurance Corporation. In contrast, real currency is fully backed by the government of a country, and is acceptable as payment for public and private debts.
Additionally, providing a system to cash out or exchange tokens is actively regulated in the Philippines as an operator of payment systems (OPS). Generally, an entity may be considered as an OPS if, among others, it “maintains the platform that enables payments or fund transfers, regardless of whether the source and destination of accounts are maintained within the same or different institutions.” Entities that operate these play-to earn games and those that provide for computer application systems that enable cryptocurrency exchanges may have to look into this since an OPS is also required to register with the BSP.
Juan Miguel Calimon Dela Cruz is an associate at ACCRALAW
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