https://ift.tt/3fYzp3U NFT Gaming at Risk from the SEC? Identity Could be the Answer for Regulatory Conundrum

Despite the broader sell-off in the crypto markets characterizing the first month of 2022, NFTs continue their meteoric trajectory. Along with the unfathomable success of the Bored Ape Yacht Club, NFTs are proving irresistible as a way for people to generate income and marketing hype. From Julian Lennon to IreneDAO to YouTube, everyone wants in on the act. 

But it’s not just celebrities, influencers, and the uber-rich who are cashing in on the NFT trend. Along with putting a rocket up the rear end of the creator economy, NFTs are transforming the way we think about gaming thanks to the surge in play-to-earn over the last year or so. During the pandemic, games such as Axie Infinity provided a source of income to people in the Philippines, demonstrating that this trend is already going mainstream. 

Now, others are jumping in for a slice of market share. CryptoTanks is one example, an NFT play-to-earn game based on the Polygon network. It plays on the nostalgia factor for all things 8-bit, improving the gameplay of the classic Tanks game where NFT tanks are the star characters. Players battle their tanks to earn $TANK tokens as rewards, which they can also use to upgrade their armor, weapons, speed, and more. CryptoTanks operates its own gaming studio called Seven Winds and has received strategic funding from Magnus Capital, Gains Associates, and others. 

Like many other NFT games, CryptoTanks NFTs take on their own value within the game, meaning that users can sell them for a profit. Furthermore, like Axie Infinity and other rivals, CryptoTanks also makes its $TANK token available via decentralized exchanges, where users can stake to earn yield. 

Risking the Wrath of the SEC? 

While all this presents a wealth of earning opportunities for users, it does create a conundrum for game developers and operators. Blurring the boundaries between decentralized finance, NFTs, and gaming means a small humble game studio could find itself on the wrong end of a securities fraud lawsuit. 

How? Well, there’s no legal precedent as yet, but some experts believe that some NFTs could be classed as securities under US regulations. The US Securities and Exchange Commission (SEC) is well-known for taking enforcement action against crypto firms, and now it seems that NFT issuers could also face its wrath. In May last year, Dapper Labs, the firm that develops NBA Top Shot, faced a lawsuit after being accused of selling its NFTs as unregistered securities. 

While experts have argued against taking a broad-brush approach to such a flexible asset type, NFT issuers have every reason to be cautious when engaging with US users. But a challenge for developers in the decentralized blockchain space, where users are generally pseudonymous, is how to discern users in the US from any other country, where regulators take a more permissive approach to NFT activity? 

Identifying User Credentials

Geoblocking is one approach, but it’s not particularly effective since most people are wise to the idea of using a VPN to navigate geoblockers. Besides, it’s hardly a sophisticated solution. Even within the draconian US securities laws, accredited investors don’t need to be blocked, so using geoblockers risks locking legitimate users out. 

A more sophisticated solution, and one that’s fit for purpose in financial transactions, would be based on identity. Established financial firms use know-your-customer processes, which many in the cryptocurrency space find intrusive. However, there’s a blockchain-based solution for managing identity that doesn’t compromise on privacy, allows effective gatekeeping of blockchain-based apps and services, and even leverages NFT technology to achieve all this. 

Selfkey has been in development since 2018 but has recently launched its intriguing “Living Avatar” NFT feature. Twitter has already begun rolling out the feature to allow users to upload their NFTs as their profile picture, and Reddit is now also following suit. Cue a slew of celebrity Bored Ape NFT profile images. 

However, Selfkey reinvents this feature to include elements of an individual’s real-world identity. The image looks like a picture surrounded by a QR-type code allowing someone to read particular credentials. It could be their country of residence, or their age, allowing them to access services that may be geo- or age-restricted. 

The Living Avatar could also include other identity credentials, such as attesting to ownership of other NFTs, their affiliations to particular groups, or even their likes and dislikes. Ultimately, the Living Avatar represents however we want to show ourselves online. 

Broad Spectrum of Use Cases

Such a feature is likely to prove attractive to game studios and other NFT developers who may be concerned about the potential reach of the SEC or their overall compliance obligations. As well as enabling games like CryptoTanks, solutions like Selfkey’s and other identity-focused projects are likely to empower other enterprises and industry use cases that rely on verifying particular credentials. 

One obvious example is in DeFi, which relies heavily on over-collateralization to obtain credit. But if someone could attest to their ownership of collateral without having to stake it, DeFi liquidity could increase exponentially as a result. 

The NFT sector is only in its very early infancy, but we’re already beginning to realize that we’ve only seen the tip of the iceberg. As blockchain projects across different disciplines convene, they become greater than the sum of their parts, demonstrating new ways to generate value and engage users.

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