State Securities Regulators Target Metaverse Casino

November 1, 2022Articles

State Securities Regulators Target Metaverse Casino

State securities regulators from Kentucky, New Jersey, Texas, and Alabama have issued cease and desist orders against Slotie, a Metaverse casino developer located in the country of Georgia. Regulators allege that the non-fungible tokens (NFTs) Slotie offers to investors are securities and that the ongoing sale of these NFTs constitute an ongoing unregistered issuance of securities.

Slotie opened its virtual doors in 2021 and has since sold NFTs, ostensibly to fund the buildout and maintenance of its casino infrastructure and experience. To date, there are 10,000 outstanding Slotie NFTs, each of which permit holders to share in the profits of the enterprise—a hallmark of investment contracts under the Howey test.

Of the 10,000 NFTs issued, 5,000 are public. The remaining 5,000 are eligible for a complicated upgrading process called “breeding.” Here’s how the breeding scheme works:

Holders of Slotie NFTs receive 10 WATT tokens a day (WATT are the digital asset tokens that can be used to generate new NFTs).

  1. Once a holder obtains 2 Slotie NFTs and 1,800 WATT, the tokens can be used to generate a distinct class of NFT—Slotie Junior. This generation process is referred to as “breeding” NFTs.

Slotie Junior holders receive double the profits of Slotie holders, as well as an airdrop of a plot of digital land in the virtual “metaverse” controlled by Slotie holders — the SlotieVerse District (the “District”). The District’s revenue is allocated to Slotie Junior holders, providing an additional passive revenue stream for NFT holders.

Slotie also encouraged a liquid secondary market for Slotie and Slotie Junior NFTs. Originally, the tokens were traded on OpenSea, a popular NFT marketplace, but in April 2022, OpenSea delisted the Slotie NFT collection (Slotie, Slotie Junior, and WATT are now located on other markets, including Rarible and LooksRare). 

This action against Slotie highlights the fact that that the securities laws extend beyond ERC20 and other token protocols and into the realm of NFTs. Accordingly, NFT and metaverse developers must remain vigilant and structure digital assets and reward infrastructure in order to account for evolving regulatory and interpretive guidance. In particular, digital assets, including NFTs, that provide purchasers with ownership rights, passive income, or any expectation of profit other than through the efforts of the holder, are coupled with high risk and should be sold only once registered or pursuant to an exemption from registration (as is the case with any traditional security).

*Tanner Dowdy is a Law Clerk and not licensed to practice law.