Upcoming regulation on loot boxes in Spain

Background

As the world of video games has evolved, there has been an emergence of new business models and new products. The traditional model, whereby a player purchases a game upfront, has been substituted wholly or in part by in-play purchases which may see their spending increase dramatically. These developments require urgent regulation, not only in Spain, but also in other jurisdictions.
In September 2018, 15 EU gaming regulators as well as the Washington State regulator signed a declaration stating increased concern in relation to “the risks being posed by the blurring of lines between gambling and other forms of digital entertainment such as video gaming.” They also expressed concerns over “controversies relating to skin betting, loot boxes, social casino gaming and the use of gambling themed content within video games available to children”.

Recognizing the need for regulation, and after a period of analysis and study, the Spanish Ministry of Consumption (the Ministry) has initiated a legislative process concerning the regulation of the random reward mechanisms associated with interactive entertainment software products, commonly known as “loot boxes”.

The law-making process was started in February 2022, when the Ministry opened a public consultation period to obtain views from all interested stakeholders on the regulatory alternatives it might consider for governing loot boxes. The Ministry’s objective is to create an optimal and well-balanced model for the new legal framework for these kinds of products. The General Directorate for Gambling Regulation (the “DGOJ”), under the auspices of the Ministry, asked some specific questions to be evaluated and responded to within the framework of the public consultation. The most important of these was whether the future regulation of loot boxes should be achieved within the framework of the Spanish Gaming Act 13/2011 and its secondary regulations, or alternatively, whether a new regulatory model should be designed for these digital products, that is, a specific regulation separate from those that currently exist.

On the 1st of July 2022, after a pause of more than a year, the DGOJ opened a new public consultation. This second consultation concerned a preliminary and specific Bill regulating random reward mechanisms (loot boxes) associated with interactive entertainment software products. From this we can establishe that the decision has been taken to make a specific regulation because, despite the clear similarities between random reward mechanisms and those regulated under the Gaming Act, there are several key differences.

Almost all the questions raised by the DGOJ in the first consultation period have been resolved within this second version of the draft Bill. This is an important step forward, as it creates more legal certainty for loot box products, which have, until now, been deployed through a regulatory loophole in the country.

 

Analysis of the main aspects

At the outset, the essential definition should be highlighted in this regulatory text as to what should be understood by “random reward mechanisms”, as defined in art. 3.c). As with the definition of gambling in Spain, random reward mechanisms require the existence of consideration or payment for participation and the element of chance. What makes the difference is how the prize component is defined. In this sense the prize obtained from the loot box should have an element of interchangeability. This is specified in points 1 and 2 of art. 3.c) which establishes that the prizes must be given or exchanged between the participants, for money, or for other virtual objects which may be used within the same product. This is a fundamental point which should be analysed and refined as much as possible. The fact that the prize can be exchanged between players or for other virtual objects is quite straight-forward. However, the fact that it can be exchanged for money or other objects related to the same product will give rise to some interesting debates in the future over its interpretation.

For instance, it could be interpreted that the item obtained can be exchanged for real money with the same software – or gaming – company that is offering the product. If this is possible, how many times could the player resell items/prizes to the same company that is offering the product?

Clearly, the definition of “random reward mechanisms” – in other words, the loot box – is at the heart of this regulatory text and the clearer such a concept is defined the less room there will be for potential misinterpretation.

The Bill goes on to list some prohibitions such as the use of loot boxes by minors, as well as a number of rights for the user such as the right to obtain clear and truthful information on the probability of obtaining different items. These are two basic but fundamental aspects, which bring responsible gaming characteristics to the product, making it safer to the user.

To evaluate the effectiveness of the regulation, it is necessary to consider how this product will evolve in the coming years, and whether the regulation covers all the scenarios that may arise in the future. In our view it is essential to transfer knowledge obtained in the online gaming sector to the regulation of random reward mechanisms in order to anticipate any problems that may arise. In this sense, it could have been prudent to establish not a full licensing regime but some sort of authorization or registry for companies offering loot boxes in Spain. The single additional provision establishes that natural or legal persons that are authorised to carry out gambling activities included in Act 13/2011 cannot exploit or commercialise random reward mechanisms. Furthermore, art. 7.3 of the Bill establishes that random reward mechanisms may only be disseminated on websites or channels whose main activity consists of offering information or content on games regulated by the Spanish Gaming Act 13/2011.

Considering the emphasis on responsible gaming in the new gambling regulations, besides the rights of users set out in the Bill, it would also have been appropriate to establish certain obligations on the company. These could include verification of the source of players’ funds, or the right to prohibit the use of the loot box product if there are concerns related to responsible gambling.

Some of the rights granted to the user under the draft Law are set out in articles 8 a), b), and (g). These articles contain the right of users (i) to obtain clear and truthful information on the conditions for participation arising from random reward mechanisms, (ii) to obtain clear information on the probability of obtaining the different virtual objects, and (iii) the prohibition of mechanisms which alter the probabilities of obtaining any given virtual item. In our view, these aspects are essential, but one aspect has not been included which would have ensured accuracy and certainty of information and probabilities. The gold standard would have been to place an obligation on the company to have its software certified, and, as happens with gambling products, to file such a certificate before the DGOJ, which should also give formal approval to the product. Such certification would act as a guarantee for users as well as ensuring their rights were fulfilled.

 

Conclusion

Loot boxes have become a headache for EU regulators given the implications involved. With this Bill, Spain has become the first jurisdiction to take a step forward in relation to their regulation. The Bill includes several provisions related to responsible gaming policies (self-exclusion, time session, etc.). However, the text seems to avoid other key aspects, like the verification of the origin of the player’s funds or the certification of the random reward mechanism, which we consider could notably improve the current Bill.

Finally, we need to take into account that whenever this regulation is approved by the Congress, it will be under the legislative form of an Act. This is the right approach as several elements contained within it will require a sanction regime. However, there are other aspects or details within the regulation that could have been left to a secondary text developing the Act (decree, ministerial order, etc.). As it is, any amendment or addition to the final Bill will also require the approval of the Spanish Parliament.