Slotie, an online casino registered in the East European nation of Georgia, has found itself in hot water with US securities regulators.
States issue cease-and-desist orders
State securities agencies in Texas, New Jersey, Kentucky and Alabama are accusing the metaverse casino of selling unlicensed securities. Agencies from the four jurisdictions issued simultaneous cease-and-desist orders against the company on Oct. 20.
The filings allege that Slotie sold 10,000 Slotie NFTs, assets which are comparable to stocks and other equities. Slotie NFTs supposedly provide investors with ownership interests in the casinos as well as the right to passively share in the profits of the casinos.
In effect, regulators accuse Slotie of:
- Violating state registration laws by failing to register their securitized NFTs with the appropriate securities boards.
- Failing to provide all the required disclosures for operating a gambling platform.
- Providing misleading promotional information and concealing key financial data.
Faced with a $10,000 fine and up to 10 years imprisonment, Slotie officials immediately stopped selling the NFTs.
What are non-fungible tokens (NFTs)?
NFTs are becoming increasingly ubiquitous as the metaverse grows.
Essentially, NFTs are a type of digital asset that represents actual digital items in the real world such as art, music, videos and more. People buy and sell these online, usually with different cryptocurrencies.
NFT creators typically encode them with the same underlying software as many cryptos, namely blockchain technology.
Non-fungible tokens aren’t a recent innovation. In fact, they’ve been around since 2014 when the first known NFT called “Quantum” was released. However, it wasn’t until 2017 with the launch of CryptoKitties – a blockchain-based game that utilizes the Ethereum network – that the NFT trend really took off.
CryptoKitties is a game in which players breed, adopt and trade virtual cats. Although the game’s craze abated for a while, its obsession picked up again in January 2021.
NFTs are gaining notoriety lately because they are becoming an increasingly popular means of buying and selling digital artwork. It’s hard to fathom, but in 2021, the global NFT market was worth a dizzying $41 billion.
NFTs are stand-alone digital items that cannot be duplicated and used in multiple transactions simultaneously. Their value is determined at sale, and price appreciation results solely from external market forces such as inflation and consumer taste.
What makes NFTs so popular is their inherent ability to facilitate the purchaser to own the original piece of digital content. More so, non-fungible tokens include ingrained authentication which effectively proves ownership. Collectors of special or rare items place a lot of value on these features.
Slotie’s unlicensed NFTs
Slotie NFT is a virtual gambling entity created by Elia Software and based in Tbilisi, Georgia. The company, which allegedly runs gambling games in more than 150 different online casinos, is, according to its website, “the largest and fastest growing online casino network in the blockchain.”
“Sloties” are the company’s NFTs. They grant holders an “Exclusive Holder Reward” which, depending on the rarity of the NFT, bestows holders with the power to vote “and decide how the rewards should be managed.” Slotie holders can also be upgraded to VIP status at each of the 150 partner casinos, with a guaranteed 20% rakeback as well as other perks.
In most cases, utility NFTs offer holders novel use-cases like providing access to particular services, events and other benefits. Quite often, however, NFT sales resemble investment contracts. Companies must register these according to state and federal law.
The reason for this is that NFTs give their holders or buyers owning rights, such as revenue, which in turn can be used to generate capital.
In the United States, all securities must be registered and regulated by the Securities and Exchange Commission. Slotie NFT’s are not.
Slotie announcement triggered regulators
An announcement made by Slotie in November 2021 triggered US authorities to question the company’s transactions:
“Holding a Slotie NFT can be seen as a partnership deal between holders, casinos and Elia Software. Casinos pay 12% of their slot machines’ revenue as a commission to us for executing and distributing high-quality gaming solutions for them. We share 80% of our NFT-based slot machine revenue with Slotie owners on a monthly basis.”
Consequently, state authorities believe Slotie NFTs are unlicensed securities, even though federal laws on NFTs are still up in the air. And it’s usually the federal governement (via the Securities and Exchange Commission) that regulates international financial instruments. This raises the issue as to what jurisdiction states should have over NFTs based abroad.
Joe Rotunda, director of Enforcement at Texas state securities enforcement, believes Sloties’ NFTs are securities and that his office has jurisdiction. The way he sees it, where the party is operating is not relevant. His office will prosecute anyone entering Texas with the intention of recruiting constituents into an illegitimate enterprise.