A discussion of NFTs as virtual assets
Play-to-Earn games have been gaining traction recently. With popular games like Axie Infinity and My Defi Pet, users are drawn to the unique selling proposition that one can earn money as they play.
In a nutshell, Play-to-Earn games involve the use of Non-Fungible Tokens (NFTs) which gamers can use to progress in the game. NFTs in essence are a type of intangible property which represent something of value. NFTs are non-fungible: it is something unique, as from its nature, it cannot be treated as an equivalent of any other unit. Obtaining NFTs will require spending real money, which will be converted into a cryptocurrency through the use of electronic instruments such as e-wallets. Players own their NFTs, and by fiat of such ownership, will have the ability to sell them for a price.
In Axie Infinity, players purchase creatures known as Axies which can be used to compete in battles to win. Conquering certain levels in the game will reward players with “Smooth Love Potions” (SLP); this can be used to breed Axies and can also be converted to real money. Axies are NFTs which can be bought and sold in the dedicated marketplace using Ethereum, a type of cryptocurrency. Since the transaction is based on cryptocurrency, the amount to be gained upon conversion will vary depending on the exchange rate at the time.
The aspect of being able to reasonably expect profits through such a system is increasingly becoming the subject of government interventions across multiple jurisdictions. In the Philippines, no government regulation has attempted to provide a categorical definition of NFTs. Nonetheless, the Securities and Exchange Commission (SEC) and Bangko Sentral ng Pilipinas (BSP) have recognized the emergence of such financial innovations and have been proposing and issuing rules to keep up with the times to ensure adequate regulation of the operations of these system/service providers.
For instance, the SEC had the occasion to define “tokens” as a “virtual currency that vests certain rights, including a digital representation of value that is intended to represent any assets or rights associated with such assets.”
This year, the BSP issued Circular No. 1108 which requires Virtual Asset Service Providers (VASPs) to secure a Certificate of Authority to operate such a service. Under the Circular, Virtual Asset (VA) refers to “any type of digital unit that can be digitally traded, or transferred, and can be used for payment or investment purposes. It is used as a medium of exchange or a form of digitally stored value created by agreement within the community of VA users.” Virtual Currency (VC) exchanges are also considered as VASP under the Circular. To clarify, VASPs are distinct from Electronic Money Issuers (EMIs) as the latter provides money transfer or remittance services using electronically stored money value system and similar digital financial services. EMIs are primarily governed by the BSP Manual of Regulation for Banks (MORB) and related issuances. Unlike in a Virtual Asset, Electronic Money is legal tender. In either case, prior approval by the Bangko Sentral is needed for an entity to operate as a VASP or EMI.
Notably, both definitions of a token and virtual asset respectively exclude “a digital representation of value issued by or on behalf of the publisher and used within an online game or game platform sold by the same publisher or offered on the same game platform” and “the payment of virtual goods and services within an online game (e.g., gaming tokens).” Whether NFTs obtained through Play-to-Earn games fall within such an exclusion remains to be seen, especially in view of the convertibility of the token into real currency and their potential use outside of gaming. In an SEC Advisory, some virtual currencies, based on the facts and circumstances surrounding their issuance, may even be considered as a security which requires the appropriate registration and/or license with the SEC.
In any event, users should be made aware of the limitations of tokens and VAs. The BSP has clarified that VAs are not issued nor guaranteed by any jurisdiction and do not have legal tender status. Because of price volatility, VC holders may incur significant losses when trading or investing in VCs. VCs (and by extension VAs) are not considered as deposits; hence, VC holders cannot claim deposit insurance from the Philippine Deposit Insurance Corporation. In contrast, real currency is fully backed by the government of a country, and is acceptable as payment for public and private debts. n
This article is for informational and educational purposes only. It is not offered and does not constitute legal advice or legal opinion.
Juan Miguel C. De La Cruz is an Associate of the Corporate and Special Projects Department (CSPD) of the Angara Abello Concepcion Regala & Cruz Law Offices or ACCRALAW.
