Metaverse Casino Violating Securities Law Through NFT Sale, State Regulators Say

Posted on: April 14, 2022, 01:58h. 

Last updated on: April 14, 2022, 07:22h.

Two Cyprus-based online gaming operators have been told they can’t fund the development of their planned ‘Metaverse’ casino through the sale of NFTs. That’s because they are violating securities laws.

Sands Vegas Casino Club
One of 11,111 “Gambler” NFTs offered for sale by the Sands Vegas Casino Club, above, to help fund development. Texas and Alabama regulators claim the promotion is a “high-tech scam.” (Image: Sands Vegas Casino Club)

This week, financial regulators in Texas and Alabama sent cease and desist orders to Martin Schwarzberger and Finn Ruben Warnke, cofounders of Sands Vegas Casino Club.

The pair offered 11,111 NFTs for sale, promising that buyers would share in future casino profits. On its website, Sands Vegas Casino Club says it will distribute 50 percent of profits to NFT holders as “creator earnings,” estimating these could be as high as $81,000 per year.

The Texas State Securities Board (TSSB) described the offering as “an illegal and fraudulent securities scheme.”

What Are NFTs?

NFTs, or non-fungible tokens, are digital tokens that can represent ownership of an underlying virtual item, such as sports trading cards and other digital content, or even a tangible asset like a painting or sculpture.

Each NFT is unique. Once minted, it exists as a permanent and unique proof of title that cannot be edited, deleted, or duplicated. Ownership is tracked on the blockchain, the digital ledger of transactions that underpins cryptocurrencies like bitcoin. The market for NFTs is soaring, particularly in the sports and digital arts sectors, often making millions for their creators.

The Sand Vegas Casino Club’s “Gamblers” and “Golden Gamblers” NFTs are linked to cartoon gamblers’ digital drawings.

Despite this, most jurisdictions do not have legislation or regulations specifically related to NFTs, and there is uncertainty as to whether existing regulations governing crypto-assets are applicable.

The US Securities and Exchange Commission (SEC) is looking into NFTs but has offered no formal guidance on whether they can be considered securities.

‘High-Tech Scam’

But Texas and Alabama state regulators are saying that is exactly what they are when used in this context. The TSSB said in its order that “The Gambler NFTs and Golden Gambler NFTs are ‘securities’ as the term is defined in Section 4001.068 of the [Texas] Securities Act.”

The board added that Schwarzberger and Warnke were “representing they comply with laws regulating the sale of securities because securities laws do not currently regulate NFTs as an asset class.”

The advice regarding regulation is simply not true and the offering of NFTs is a high-tech scam,” said the TSSB. “The parties are concealing their locations, hiding the identities of managers, misleading potential purchasers about their experience, and obscuring the significant risks associated with investing in their NFTs.”

The board also noted the similarity between the Sands Vegas Casino’s name and brand and global casino operator Las Vegas Sands Corp, despite Schwarzberger and Warnke having no affiliation with the latter.