France opens a market for games based on monetizable digital assets

In recent years, many countries have seen a significant increase in the offer of games based on Web3 technologies and the development of play-to-earn business models.

According to a report from the French Senate, “the French National Gaming Authority (ANJ) estimates that between 1,200 and 2,500 Play to Earn games are in the development phase, with twelve billion dollars invested in these technologies in 2022. In the French sector, the ANJ lists fifteen games of this type developed or under development in 2022”.[1]

Based on these observations, France is about to launch a three-year experiment modifying the current gaming regulatory framework to specifically authorize games based on monetizable digital objects known in French as JONUM.[2] It will be a derogatory regime to the gambling and online gambling regimes, aimed at incentivizing investments in NFT-based games and business models, with the objective that France remains a leading country in this type of entertainment. On July 5, 2023, the French Senate adopted the draft law to secure and regulate the digital space, including its article 15, dedicated to ensuring the development of the monetizable digital game object economy in France.[3]

The French National Assembly made several amendments to the text and then adopted this draft law at first reading on October 17, 2023.[4]  A Joint Committee will be set up shortly to reconcile the draft law to secure and regulate the digital space proposed by the Senate on July 5, 2023, with the draft regulation of the National Assembly of October 17, 2023, which are not quite the same. The Joint Committee will advance discussions, probably from January 2024, and the draft law may thus still evolve accordingly. However, it remains quite unlikely that the Joint Committee will significantly modify the provisions dedicated to the games based on monetizable digital objects.

In the absence of a European framework for these new types of games, France in early 2024 may well become the first country in the world to regulate this ecosystem.

1. Background

This draft law was initially led by the French government. It intends to fill a legal vacuum but also to support thriving French start-ups such as Sorare – which raised US$680 million in 2021 and is valued at US$4.3 billion. The draft law has even been informally called the “Sorare law”.

In play-to-earn games, players can purchase digital objects to participate and progress in the game. A core feature of these games is the possibility for the player to resell these objects to third parties, either on the game publisher’s platform or on a secondary marketplace.

JONUM fall within the definition of video games under the meaning of French law. Video games are defined as “any leisure software made available to the public on a physical medium or online, incorporating elements of artistic and technological creation, offering one or more users a series of interactions based on a storyline or simulated situations, in the form of animated images, with or without sound”.[5]

The motivations of JONUM players may generally differ from what motivates gamblers. The JONUM operators’ business model is also perhaps distinct from that of gambling operators. Yet, the current legal regime does not take these circumstances into account, and the legal characterization of JONUM poses a regulatory challenge under French law from a gambling perspective.

Article L. 320-1 of the French Homeland Security Code prohibits gambling as long as the following four conditions are met (i) an offer is made to the public, (ii) a financial sacrifice is made by the player; (iii) a gain of any kind is hoped for by the player; and (iv) a dynamic of chance is involved, however slight. Gambling as defined above is prohibited unless it is included in the list of exceptions to the prohibition set out in article L. 320-6 of the French Homeland Security Code.

It should be noted that the intervention of chance is not a decisive criterion under French law anymore. The hope of a gain does not have a specific legal definition. Therefore, it could be considered that a digital token, which is tradeable and which has a monetary value, is a gain.

JONUM are thus at the edge of the French online gambling regulation.

Under French law, violation of the gambling prohibition is an imprisonable offence and subject to heavy fines.[6]

The online gambling market is open to competition in France. However, the games allowed under the online gambling regulatory framework are limited to poker, sports betting and horse racing bets. Therefore, it is insufficient to cover all digital token-based games.

Consequently, the French government considered that the creation of a dedicated regulatory framework was necessary. Such a dedicated framework would offer legal certainty to operators and the legal barrier for investors will thus be removed.

According to a Senate report, these games presented the same kind of risks as those associated with gambling and, to a lesser extent, video games.[7] Therefore, following the French government initiative, the parliament acknowledged that JONUM should be authorized by law and supervised by the ANJ.

1. The authorization of games based on monetizable digital objects

As of October 17, 2023, article 15 of the draft law authorizes JONUM:

On an experimental basis and for a period of three years from the enactment of this law, games offered via an online public communication service that enable, based on a mechanism that relies on chance, adult players who have made a financial sacrifice to obtain monetizable digital objects, to the exclusion of any gain in a tradeable currency, shall be authorized provided that these objects cannot be transferred whether directly or indirectly through the intermediary of any natural or legal person for financial reward either to the gaming company that issued them, or to a natural or legal person acting in concert with it.

This article further provides that:

Monetizable digital objects within the meaning of the first sentence of this II are game elements that confer on players alone one or more rights associated with the game, and which may be transferred, directly or indirectly, to third parties for financial reward.

The games allowed will be determined by governmental decree after a non-binding opinion of the ANJ.[8]

According to the initial project prepared by the French government in June 2023, the games allowed could be:

… games falling into one or more of the following categories, in which monetizable digital objects constitute game elements [such as game characters, advantages for participating or progressing in the game, or any other element usable in the game]:

• fighting games based on simulated combat situations, which offer one or more users interactions with other players or game characters;
• breeding games, which allow users to develop animals or imaginary creatures;
• sports and horse-riding fantasy games, which offer users interactions based on real competitions, sports events or horse-riding trials;
• adventure and quest games, which offer users a series of interactions based on a storyline or simulated situations.

This list is now out of date and still under discussion. It is thus likely to change.

It is noteworthy to point out that by focusing on the themes of the games rather than on their mechanics, the regulation is creating an opportunity for many operators offering games of chance, casino related or other, that are ready to make some adaptations to match these themes.

As this draft law is a three-year experiment, the government, with the contribution of ANJ, is committed to providing a mid-term review, that is to say 18 months after the enactment of this law.[9]

• The ad hoc legal framework

One of the major derogations created by this draft regulation, compared to the existing online gambling regulatory framework, is that JONUM operators will not need to obtain a license or an agreement prior to launching their activities. They will need only to notify the ANJ of their existence and the launch of their activities.[10]

Article 15 bis of this draft regulation sets out a comprehensive regulatory framework for the three-year experimentation period. This article specifies the obligations of JONUM operators and the supervisory and sanctioning powers of the ANJ over JONUM operators. The regulatory framework provides in particular for:

• specific obligations to prevent minors from playing games for financial reward.[11] In this respect, JONUM operators shall implement an identity and majority verification process before a player can withdraw its winnings;[12]
• obligations to prevent the risk of gaming addiction, notably by implementing self-exclusion and self-limitation mechanisms for spending and playing time.[13] Furthermore, JONUM operators shall inform players of the health risks associated with gaming via a warning message;[14]
• obligations to combat money laundering and the financing of terrorism, with a compliance period for JONUM operators since these obligations will only apply 18 months after the enactment of the law;[15]
• specific provisions regarding advertising practices. JONUM operators will have to refrain from sending any commercial communication to minors and account holders benefiting from a self-exclusion measure applicable to the games operated.[16] In addition, the restrictive provisions of the French Homeland Security Code in this area will apply to their commercial communications, in a comparable manner as to the applicable rules for online gambling;[17]
• specific provisions regarding sports[18] and horse-riding[19] fantasy games. For instance, operating a sport fantasy game may require an agreement from the organizer of the sporting competition or event;
• enhanced supervisory powers for the ANJ over JONUM operators. The ANJ will be able to monitor JONUM operators’ compliance with their obligations, particularly in relation to the fight against illegal gambling,[20] and to impose any appropriate sanctions in the event of a breach of these obligations. These sanctions may range from a mere warning to a ban, for a maximum of three years, on an operator conducting JONUM activities.[21] A number of sanctions applicable to gambling operators are also applicable to JONUM operators.[22]

Once adopted by the French Parliament, the regulatory framework of the Web 3.0 gaming sector will still need to be supplemented, which will take some time. Subject to the discussions at the Joint Committee, governmental decrees should be enacted to:

• specify the information that games with monetizable digital objects operators must notify to the authorities prior to launch;[23]
• specify the list of authorised game themes;[24]
• specify the characteristics of the rewards that can be offered including a potential rewards cap;[25]
• specify the procedures for opening, managing and closing player accounts by the gaming company, notably to warrant that minors cannot access the games;[26]
• specify the list of data used to search for and identify any act committed by a player likely to constitute fraud, money laundering or terrorist financing, as well as the procedures for checks carried out by the National Gaming Authority;[27] and
• frame the prevention of excessive or pathological gambling behaviour, in particular through the introduction of self-exclusion mechanisms and self-limitation mechanisms for spending and playing time.[28]

No decision has been announced yet on the sensitive point of taxation for this new legal regime. The government’s initial message was one of fair taxation that would foster innovation. One can reasonably expect that taxation for JONUM would therefore not be as important as taxation for gambling and games of chance, which are considered by the public institutions as highly profitable activities overall.[29]

The legal framework detailed here is already much more complex and burdensome than what was initially designed by the French government. However, it remains theoretically lighter than the legal regime for online and land-based gambling. Obviously, the way ANJ will choose to regulate these new activities will be key in ensuring this sector thrives in France and does foster further developments of unicorns. Lastly, let’s not forget it is, at this point, an experiment and that the situation will need to be reassessed first 18 months after its launch, and then before the end of the three-year period.

Nevertheless, we should rejoice at the first significant loosening of French gambling regulation since 2010 and hope it is a step in the direction of other regulatory changes such as the opening of online casinos. We look forward to exploring the opportunities created by this new development.

[1] Report No 777 (2022-2023) of the French Senate on the draft law to secure and regulate the digital space of June 2, 2023, filed on June 27, 2023, Projet de loi visant à sécuriser et réguler l’espace numérique – Sénat (senat.fr).

[2] In French, JONUM stands for Jeux à Objets Numeriques Monetisables.

[3] Text No 156 (2022-2023) adopted by French Senate on July 5, 2023, Sécuriser et réguler l’espace numérique (senat.fr).

[4] Draft law No 175, as modified, by French National Assembly, October 17, 2023, Projet de loi n°175 – 16e législature – Assemblée nationale (assemblee-nationale.fr).

[5] Article 220 terdecies, II, of the French General Tax Code.

[6] Article L324-1 of the French Homeland Security Code.

[7] Report No 777 (2022-2023) of the French Senate on the draft law to secure and regulate the digital space of June 2, 2023, filed on June 27, 2023, Projet de loi visant à sécuriser et réguler l’espace numérique – Sénat (senat.fr).

[8] Article 15, III, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[9] Article 15, III bis, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[10] Article 15 bis, I, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[11] Article 15 bis, II, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[12] Article 15 bis, III, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[13] Article 15 bis, X, XI and XII, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[14] Article 15 bis, XII, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[15] Article 15 bis, XIII, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[16] Article 15 bis, XI, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[17] Article 15 bis, VIII, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[18] Article 15 bis, V bis, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[19] Article 15 bis, VII, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[20] Article 15 bis, XIV, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[21] Article 15 bis, XXII, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[22] Article 15 bis, XXII, XXIII and XXIV of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[23] Article 15 bis, I, B, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[24] Article 15, III, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[25] Article 15, II, second paragraph, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[26] Article 15 bis, III, second paragraph, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[27] Article 15 bis, V, third paragraph, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[28] Article 15 bis, X, of the draft law No 175, as modified, by French National Assembly, October 17, 2023.

[29] See French Cour des Comptes Report on gaming and gambling, September 21, 2023, Les jeux d’argent et de hasard : un secteur en mutation, des enjeux de régulation | Cour des comptes (ccomptes.fr).

 

Does this mean that it represents a weakening or relaxation of the existing regime?

 

Does this mean age?