July 12, 2022

Watch Out for Illicit Actors Gaming Crypto Games

By Yaya J. Fanusie

Play-to-earn (P2E) crypto games are emerging as a popular blockchain application that is likely to bring a high risk for scams and money laundering, especially once the crypto winter thaws.

Although P2E crypto tokens, like a lot of the crypto ecosystem, have lost much of their value in recent months, they deserve attention from financial regulators because P2E crypto (also sometimes referred to as Game Finance, or GameFi) offers a glimpse into the types of financial crime complexities that will arise as tech companies work to usher in an even more nascent development on the horizon: the metaverse.

Blockchain analytics firm Elliptic recently published a great report explaining types of financial crime likely to accompany the growth of metaverse ecosystems. (Disclosure: A few years ago, I collaborated with Elliptic in both my think tank research work and my private consulting practice. Facebook/Meta has been a client as well.) If the metaverse is to become the virtual interactive world that its proponents aspire for it to be, a combination of gaming and crypto will expand the outlets for good and bad actors seeking riches alike.

Virtual money in online games is not new. But P2E crypto gaming adds a real-world financial dimension by offering tokens that can be easily sold outside of gaming environments. In many cases, gamers can sell their crypto funds earned in obscure P2E crypto games for more liquid ERC-20 tokens that run on top of Ethereum, especially stablecoins, on centralized or decentralized exchanges. Gamers then can convert their more popular tokens into the fiat currency of their choice.

If the metaverse is to become the virtual interactive world that its proponents aspire for it to be, a combination of gaming and crypto will expand the outlets for good and bad actors seeking riches alike.

Even before the advent of P2E crypto, anti-money laundering experts have flagged the illicit finance risks around online gaming. In 2019, researchers at the Royal United Services Institute, a U.K. think tank focused on international security issues, pointed out that if users can find ways to exchange in-game items (like virtual money, artifacts, tools or clothing) for real-world currency, those items will become attractive for criminals looking to launder illicit funds. But selling game virtual-assets for fiat money used to be difficult. In traditional online games, users had to access unauthorized secondary markets to trade gaming items outside the games’ platforms. These markets are often on the darknet, which requires a special browser like Tor to access. With crypto gaming, the virtual money earnings and the collected items are all created on blockchains and traded relatively freely, often wherever blockchain assets are sold.

P2E platforms vary widely in their gaming models and in how players earn and spend crypto. Many games offer digital collectibles via non-fungible tokens (NFTs). Some pair mobile app activity with geolocation and augmented reality, where gamers must physically go to locations to play the game, similar to Pokémon Go. Some P2E games literally give crypto funds away. For example, Coin Hunt World, which is available as a downloadable mobile app and was co-founded by the CEO of the Bittrex crypto exchange, lets players earn bitcoin and ether by completing various tasks without investing any crypto up front. Apparently, the game’s business model is to lure users into the game and show them paid advertisements in the game environment.

Read the full article from CoinDesk.

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