GUEST BLOG: The Game of Coins by Aegis Frumento Esq

May 9, 2019

The Game of Coins

by Aegis J. Frumento, Partner, Stern Tannenbaum & Bell

Browsing through Game of Thrones fan theories recently I stumbled on a YouTube discussion of games that is oddly relevant to cryptosecurities. There exists in the gaming world something known as a "game as a service." I learned this from gaming guru Ross Scott. Scott recently posted a 75-minute video with the provocative click-bait title, "Games as a service is a Fraud." I don't know if Scott is a lawyer, but he's produced a very lawyerly lecture on this topic, complete with citations and quotations to legal precedents from around the world. It's worth skimming at least.

Like many kids, I grew up playing board games, starting with simple strategy games like Risk, and moving to those complex games from Avalon Hill, like Blitzkrieg and Gettysburg, that allowed you to refight historic battles over beers and pretzels -- which often turned into proto-Drunk History episodes. Those games eventually evolved into Dungeons and Dragons and the like, but by then I had moved on to more "serious" games. These days, most games I play bear such high-born names as "arbitrations" and "trials," whose rules and strategies randomly combine key elements chess, poker and three-card monte -- and not a little Russian roulette.  Any trial lawyer who dislikes playing games is in the wrong business. 

By the end of the 20th century, gaming had turned electronic. Electronic games first appeared in video arcades, then on personal computers, and eventually on specialized gaming consoles. They came home on floppy disks, CD-roms, and specialized cassettes. You "owned" them. Not in the same way you might own a Nintendo64, of course. Games were governed by software licenses, so you were technically a licensee. But the license gave you the right to play the game whenever you wanted, and if you sold the cassette or disk to someone else, your buyer could play whenever they wanted. What is "ownership" if not the right to use something when you want and to freely transfer that right to someone else? The essence of ownership is that the person who sells something relinquishes any power to control how and when it is used in the future. You wouldn't think someone could sell you a computer game and then, after pocketing the proceeds, disable it. That would be no different than selling you a car and then stealing it back.

Today electronic games, like every other digital thing, are migrating to the Cloud. Many modern games can only be played when they are connected to a server provided by the game producer. Scott argues that this amounts to a "fraud" because, despite taking your money for the game, the seller retains effective control of when you can play the game. "Eventually," Scott notes, "most companies decide they aren't making enough money on the game anymore to justify the server running. So they shut it down. Once that happens, every single person who bought the game can never play it again." In doing so, Scott notes, "They destroy your product after they sold it to you." Scott recites historical evidence from over 100 such games, showing that server shutdowns have incapacitated 96% of them. 

Scott's piece provoked several lawyers to respond that, whatever that practice might be, it can't be "fraud." See, for example,;; The end user license agreement of a game "as a service" generally disclaims any obligation by the company to maintain the gaming network. Since the risk of the server being unplugged is fully disclosed, the game buyer hasn't been duped. Those responses are basically right. But it leaves us still uneasy. Let's face it, the gamer didn't really read the EULA, and the seller fully encouraged him to expect to be able to play the game till he was bored, then stash it in his attic so he could replay it nostalgically during some mid-life crisis decades later. The gamer has a right to feel cheated, as Scott clearly does.

What attracted me to this whole discussion was how closely related it is to a latent risk in my own field. What else is there whose value depends entirely on the existence of a network maintained by shadowy "others"? Like a "game as a service," a cryptoasset has no value without a properly maintained blockchain. One might own bitcoin forever, but you own trash if the Bitcoin blockchain fails. Cryptoassets are financial analogs of games as a service. They are wealth as a service. 

The wholesale failure of a blockchain is not often discussed by securities lawyers. It hasn't happened yet, but it is probably the foundational risk of all cryptosecurities. Could a blockchain really be abandoned, leaving all its asset-holders dead orphans? It is definitely possible, and if something can happen, it eventually will. Last week we spoke about the work of miners, those who actually maintain a blockchain. See Miners won't authenticate transactions and add them to the blockchain without an incentive. The failure of mining incentives is the Achilles Heel of the whole blockchain enterprise.

As you know, a blockchain can either be under private control or it can be decentralized. A centralized blockchain exists so long as its central authority chooses to maintain it. That central authority is very much like the game company that "sells" a "game as a service." What motivates the central authority to maintain the blockchain is not likely to be the personal needs of the holders of assets recorded on that blockchain, any more than a gaming company will maintain a server so some 50-something can relive his youth.

Satoshi Nakamoto conceived the Bitcoin blockchain to be decentralized precisely to prevent any central authority from having that kind of control. The Bitcoin blockchain incentivizes miners to maintain the blockchain with the lure new bitcoins. But eventually, a blockchain has to stop creating new coins, or coin-inflation will occur and dilute the value of everyone else's holdings. Bitcoin, for example, awards coins at a diminishing rate over time. By far the most valuable bitcoins were issued to Satoshi himself when he/she/they/it "mined" the very first bitcoin block in 2009. All miners since then have been trying harder and getting less for it. Eventually, miners will no longer be able to get new bitcoins from mining. They will need to extract them as fees from users. 

You can already see where this is going. Competition will drive down fees, and inevitably miners will merge and consolidate in order to stay profitable. Eventually, the blockchain will have fewer, larger mining operations. In fact, we are already there. Kevin Werbach notes, in his The Blockchain and the New Architecture of Trust, that by 2017, fewer than 10 dominant mining pools, most located in China, were responsible for over 80% of the mining that maintains the Bitcoin blockchain. For that reason, a prominent Bitcoin developer, Mike Hearn, abandoned bitcoin. "What was meant to be a new, decentralized form of money that lacked ‘systemically important institutions' and ‘too big to fail' has become something even worse: a system completely controlled by just a handful of people." And as we know, concentration leads to dominance, which eventually leads to oligopolistic and monopolistic practices.

All this illustrates what has come to be called "Vili's Paradox," named after economic sociologist Vili Lehdonvirta. No blockchain can survive long-term without some centralized governance to ensure it is properly maintained. But a blockchain subject to centralized governance can no longer be called "decentralized." Cryptocurrencies that are subject to centralized governance are not so different from regular money, so you have to wonder why we would make such a fuss about them. Vili's Paradox suggests that long-term decentralization may be impossible, central governance may be inevitable, and our only choice may be whether that governance resides in a few mining pools in China or in some more trusted authority.

One thing is sure: holders of a blockchain-based asset are in the same boat as owners of a game that can only be played on someone else's network. They own wealth as a service, that wealth will last only so long as the service is provided, and they have no guarantee how long that will be. 


Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters.  Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.

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