GameFi - Legal Setup for Web3 Gaming Platforms

Issuance of a native token for crypto gaming

Starting your own GameFi project requires the issuance of a native cryptocurrency token or an in-game NFT. These will be used as currency for players to earn and trade. With the game’s native token, gamers in the ecosystem will be able to purchase land, character skins, costumes, weapons, and other in-game items depending on the nature of the project.

In order to offer your crypto token or an NFT to players, you must first launch one in such a way that would keep it within the regulatory framework. Based on the nature of a token, it is crucial to ensure that it won’t classify as a security and thus invoke the need for additional licensing. It is also worth verifying whether the income generated from the token is subject to any form of tax, as well as looking into ways of preventing possible money laundering on the side of token users.

AML-CFT compliance with crypto gaming regulations

The need for a license for a GameFi project is a double-edged sword. If, through a detailed analysis of all the included business models, the lawyers have indicated that a GameFi startup requires a cryptocurrency gaming license, complying with the AML-CFT rules will be one of the primary assignments.

Web3 gaming projects that involve fiat currencies in any way or another (on-/off-ramping and the connection of fiat wallets to a gaming account) will require a crypto license, which comes with an obligatory AML-CFT requirement. In order to fulfill it, the lawyers must draw up and submit a compliance program designed according to the criteria of a particular regulator.

KYC identification for GameFi clients

If a GameFi project must deal with a regulator, the regulator will most likely require the passing of a due diligence process. The main goal of it is to ensure that the crypto assets gained by participants in-game will not be used for money laundering and other unauthorized procedures. 

The due diligence procedure will involve a mandatory KYC check for all customers involved in on-ramp or off-ramp transactions. That is to say, regulators will only require a due diligence check from those web3 game platforms that use fiat currencies.

IT infrastructure and technical audit of a crypto gaming platform

Every user experience with a GameFi platform starts with connecting a cryptocurrency wallet. With the use of a wallet, players will be able to purchase the game’s native tokens that will give them a pass to the virtual world. Later, they will use the same wallet for transferring their in-game rewards earned through the P2E system. 

Ensuring the safe connection of clients’ wallets, as well as the inner security of your gaming program, is part of the IT infrastructure, which must be dealt with diligently regardless of the need for a license. It also accounts for the safety of crypto assets which participants gain through playing and later keep in their gaming accounts. It might be useful to access GameFi development services from a professional technician before launching your platform, and LegalBison can assist you with finding one.

Banking and the financial structure of a GameFi project

While there are crypto-only P2E games, some of them also involve trading for fiat currencies. For instance, players can connect their bank accounts to the game in order to exchange fiat for crypto, which would allow them to purchase in-game items. In the same way, NFTs purchased in-game can be eventually traded for fiat currencies. These processes are known as on-ramping and off-ramping.

GameFi startups that involve fiat come with certain risks from the regulatory point of view. For starters, any P2E project using fiat will be subject to licensing before being taken to the market. Being granted access to banking services will be an extra challenge since most fiat banks are biased toward any crypto-related projects.

Taking all these factors into account, it is important to define the business models involved in your web3 gaming startup or, better, have them evaluated by a professional legal expert.

Adding DeFi elements to your GameFi DApp

It is possible to expand your GameFi project by adding extra DeFi services to it. These might include staking, liquidity mining, and yield farming. Staking, which is essentially the locking of crypto assets to ensure the operation of a blockchain, can serve as an additional source of income for players.

Liquidity mining, in turn, is the most surefire way of providing high liquidity for the platform by lending assets to the platform for special rewards. Similar to it is yield farming, in which participants use smart contracts to lend their crypto assets to other members of the DeFi ecosystem in order to gain interest and generate passive income.

Another DeFi element of huge importance is the platform’s native DAO (decentralized autonomous organization). Since one of the main ideas of GameFi is creating a strong and stable community, voting for various in-game updates or new projects through DAO can give a huge team-building boost. Players can participate in voting by locking their governance tokens within the DAO and thus enhancing their voting power.

Fusing GameFi and DeFi elements can be a challenging task, especially without enough technical know-how. The best approach would be to consult an IT specialist with enough experience in both GameFi and DeFi projects.

Licensing requirement

The preparation of any GameFi project starts with analyzing the need for a license, which usually depends on the crypto gaming regulations of the country you are opening a business in. As a rule, a crypto license is needed if a platform offers any kind of crypto-to-fiat or fiat-to-crypto transactions. A gambling license, on the other hand, is required if the presented games have an element of pure randomness in them.

The best way to define whether your startup will require a license is to trust a partner like LegalBison: by analyzing all the involved business models, our lawyers will evaluate the best regulatory scenario for each.

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Company incorporation for a GameFi project

Incorporation and company structuring are other crucial preparatory steps for a web3 gaming startup. Whether a company requires a license or not, forming a company comes with multiple legal implications and administrative subtleties. At this stage, LegalBison either purchases a ready-made company with a crypto or gambling license (if the project requires one) or builds an entirely new company from the ground up. The decision depends solely on the client’s expectations, budget, and requests.

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Anti-Money Laundering procedures

If a GameFi startup requires a license, the AML-CFT compliance will be the first preparatory step. In tandem with drafting the company’s AML compliance policy, LegalBison has the experience to provide key stakeholders with mandatory AML training materials. Preventing money laundering is one of the primary goals of a legal permit, hence the strict compliance requirements set forth by every regulator.

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Know Your Customer (KYC) policies

The due diligence procedure involves passing a test from the authority that would define the ability of a platform to properly identify its customers and ensure that their in-game earnings will not be used for any fraudulent activities. Once again, this process only concerns those GameFi startups that need a crypto license for fiat-to-crypto transactions. Lawyers at LegalBison have a full comprehension of the due diligence process, hence the administrative side is always taken care of flawlessly.

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