GameFi investors should get ready for a big US crackdown

Are cryptocurrency games innocent fun? Or are they Ponzi schemes facing an imminent crackdown by regulators in the United States?

Tokens related to cryptocurrency games — known colloquially as “GameFi” — were worth a cumulative total of nearly $10 billion as of mid-August, give or take a few billion. (The number may vary depending on whether you want to include partially finished projects, how you count the number of tokens that projects technically have in circulation, and so on.) In that sense, whether the games are legal is a $10 billion question that few investors have considered. And that’s an oversight they may soon regret.

That’s because a bipartisan consensus appears to be forming among legislators in the U.S. that the industry needs to be shut down. They haven’t addressed the issue specifically — good luck finding a member of Congress who has uttered the word “GameFi” — but there are at least two bipartisan proposals circulating among senators that would effectively eject these gaming projects from American soil.

The Responsible Financial Innovation Act, offered in June by Senators Cynthia Lummis (Republican from Wyoming) and Kirsten Gillibrand (Democrat from New York), would, in Lummis’ words, classify a “majority” of cryptocurrencies as securities subject to regulation by the Securities and Exchange Commission (SEC). And this month, Senators John Boozman (Republican from Arkansas) and Debbie Stabenow (Democrat from Michigan) offered a second proposal — the Digital Commodities Consumer Protection Act. The effect would be similar, but with a stronger emphasis on classifying Ethereum as a commodity — putting it under the purview of the less heavy-handed Commodities Futures Trading Commission (CFTC).

Securities classification for Axie Infinity, DeFi Kingdoms and other games

According to the SEC definition that Congress is looking to affirm, any token in which users invest with “an expectation of profit” is likely to be a security. Let’s talk a bit about what that may mean for your favorite tokens.

For one, this definition is likely to include projects that incentivize liquidity pools. Examples of projects this would affect are Axie Infinity — which incentivizes liquidity pools with interest payouts provided through its native token, AXS — and DeFi Kingdoms (DFK), which incentivizes liquidity pools using its native tokens, JEWEL and CRYSTAL.

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