China: A Middle-Ground Approach: How China Regulates Loot Boxes And Gambling Features In Online Games

Last Updated: 16 May 2018
Article by Tracey Tang

Online gaming and online gambling can overlap significantly, and it is difficult to draw a line between the two. However, in countries such as mainland China where gambling is statutorily banned, online games are highly regulated from an anti‐gambling perspective to make sure no digital gambling, or similar mechanism, is provided via online games.

This article focuses on how gambling‐related game features such as loot boxes, and online chess and card games, are currently regulated in mainland China.

Gambling Under China’s Laws

In mainland China, gambling is strictly prohibited, although Chinese laws and regulations do not specifically define what constitutes gambling. Instead, law enforcement authority’s discretion plays an important role in determining whether certain activities are gambling.

In China, gambling is commonly taken to consist of a person paying to take part in an activity or event with an uncertain outcome for the primary goal of winning money or gaining monetary value. Therefore, it requires 3 elements: payment, chance and prize. These elements may appear in different forms, and so the determination of what is gambling will depend largely on governmental policies and be subject to case‐by‐case analysis.

Loot Boxes

Recently, the “loot box” has been one of the hottest regulatory topics in the video game industry. In November 2017, the Belgium Gaming Commission launched an investigation into whether the use of loot boxes in video games constitutes a form of digital gambling. In the context of the investigation, the Belgian Minister of Justice commented that the “[t]he mixing of money and addiction is gambling.” It may not be a coincidence that Apple’s latest app store review guidelines (dated December 2017) explicitly require, for the first time, that the odds of winning must be disclosed in Apps offering loot boxes.

The international scrutiny of loot boxes caused no panic in China because loot boxes were already heavily regulated by both the SAPPRFT (State Administration of Publication, Press, Radio, Film and Television) and the MOC (Ministry of Culture), the two major online gaming regulatory bodies in China.

The MOC’s latest regulation, which took effect on May 1, 2017, requires that loot boxes meet the following requirements:

  1. loot boxes cannot be acquired with real money or virtual currency;
  2. virtual items and other services offered in loot boxes must be obtainable by other means, e.g., purchased with real money or virtual currency;
  3. game publishers must in a timely manner, and truthfully, publicize information such as names, functions and quantity of virtual items or other services offered in loot boxes, as well as the probability of winning; and
  4. loot box results must be publicly disclosed and their records must be kept by game publishers/operators for no less than 90 days.

The SAPPRFT’s attitude toward loot boxes is similar. As the authority tasked with game content examination and approval, SAPPRFT forbids any game content that induces users to directly or indirectly spend real money to acquire virtual items or services in a randomized way without detailed rules explicitly being provided to users.

China’s regulatory authorities acknowledge the important and irreplaceable role that loot boxes play in increasing fun, engagement and monetization of online games. However, they also realize that loot boxes can easily become gambling if game developers are not subject to any restrictions. Therefore, Chinese authorities have taken a middle‐ground approach by mitigating or disabling gambling mechanisms in loot boxes rather than categorically banning loot boxes. More specifically:

  • Elements of “chance” and “prize” in a loot box are allowed but the forms of “consideration” paid by a user to get a loot box are limited. For example, a loot box can be used to reward the time spent by a user or for completing a game without quitting, but cannot be purchased for or exchanged with real money or virtual currency.
  • Loot boxes cannot be intentionally designed as a “compulsion loop”, which contributes greatly to gaming addictions. For example, loot boxes cannot be the only way to get any particular virtual item, regardless of its rarity level.
  • Probability and other important information must be transparent to users so they can make informed decision as to whether to try their luck with a loot box.

If all these rules are followed, loot boxes will not be deemed as in‐game slot machines. Game developers or publishers that fail to obey these rules, however, may be punished by the SAPPRFT and/or the MOC. They may also face claims by users for violations of consumer protection regulations.

Online Chess and Card Games

Online chess and card games (including Mahjong) tend by nature to be regarded as virtual casinos unless special measures are put in place to eliminate the gambling features. In China, an operator of legitimate online chess and card games must take steps to ensure that:

  • real money rewards or trading is absolutely prohibited;
  • only virtual currency/items (such as points earned by users) that cannot be redeemed for real money can be used as “chips” or “tokens” for the games;
  • redemption of virtual currency into real money or merchandise is forbidden;
  • no one can take commission in relation to game results, regardless of whether the commission would be real money or virtual currency/items;
  • there is a pre‐set cap on the consumption of virtual currency/items by each user per day and per game for betting on game results; and
  • no trading of, or no providing a transfer system for, virtual currency or items among users is offered.

The implementation of these measures largely removes the “prize” and “payment” aspects of gambling from the games. Therefore, online chess and card games can be operated as recreation on the Internet without wagering of money.

If a developer does not implement these measures, then the developer or publisher of such online chess and card game risks being deemed as having engaged in organizing gambling. Special care must be taken to ensure compliance as online chess and card games remain high risk areas which continue to draw more attention in Chinese legislation (both administrative and criminal) and from law enforcement. Both developers and publishers must remain attentive to any changes of law or law enforcement.

Given the high profitability of gambling, there are always people that attempt to circumvent the anti‐gambling restrictions and provide online casino‐like services. For example, a “room card” model became popular in recent years, where a game publisher only provides a password‐protected virtual game room to users but will not offer any virtual currency system. Users would pay game publisher for hours that they “occupy” a virtual game room. Under such model, payment of gambling money (if any) is made via online payment solutions independent of the game.

Some have argued that the “room card” model is substantially different from an “online casino”, and that it is fully legitimate. However, others consider this model highly risky, if not intrinsically illegal, since in most cases game publishers or their sales agents knowingly allow gambling in the virtual rooms though payments taking place outside of the virtual game rooms.

In late November 2017, clarity began to emerge when Zhejiang police reportedly arrested more than 50 people for their active participation in the operation of a Mahjong APP based on the “room card” model. “The gameplay determines it is by nature gambling and a violation of law” noted the Zhejiang Police. Though the development and result of this case remains to be seen, the “room card” model’s vulnerability to criminal liability should be taken seriously by companies that engage in online chess and card games in China.

Conclusion

In summary, online game developers and publishers that design or operate gamblingrelated features are exposed to higher regulatory and criminal liability in China. Western online gaming companies that produce or publish online games that may trigger gambling concerns are advised to seek legal advice on their game content and gameplay before localizing their games for the China market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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