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Insights: Square Enix has committed to investing in Web3, but the Japanese gaming company faces an uphill struggle given the country's strict regulations about anything that resembles gambling.

Favorable Economic Conditions Make for a Flat Market

By Sam Reynolds

By all accounts, the Fed’s moves to curb inflation are working, and that’s been good for crypto.

Bitcoin began the day in Asia fairly flat, up 1.2%, trading at $16,851 according to CoinDesk pricing data. Ethereum was up 3.46%, coming in at $1,254.

But the question is, has inflation peaked? Will the Fed ease off on raising interest rates?

Recently released minutes from the Federal Open Market Committee aren’t painting a clear picture of what’s next. The Fed says that price increases are stubborn, saying it “proves to be more persistent than anticipated”, while raising interest rates another half a percentage point.

A smaller increase than the three-quarter of a percentage point increases of before — indicative of inflation that has peaked — but still another rate hike.

“Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time,” the minutes say. “In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy.”

The minutes also say that despite the need for a continued restrictive policy stance, flexibility is also on the agenda.

"Most participants emphasized the need to retain flexibility and optionality when moving policy to a more restrictive stance," suggesting that the next interest rate increase might be a quarter of a percentage point, or 25 basis points.

Before the tumultuous year that was 2022 for crypto, digital asset traders were eying interest rate hikes as a problem; its pricing pressure for bitcoin and ether, which are considered to be risk assets like tech.

But now that the Fed is easing off interest rates, and the market has shaken out the trifecta of toxin that is Terra, Three Arrows, and FTX, pricing recovery should be in the cards. If there’s not another black swan event.

Square Enix's Uphill Commitment to Invest in Web3

By Sam Reynolds

Japan’s gaming industry has produced some of the world’s most recognizable intellectual property with its best-selling franchises.

But corporate Japan is known for its caution and conservatism; the likes of Nintendo and Sega have shown no interest in Web3 gaming or NFTs. Nintendo has aggressively defended its IP against those that have tried to appropriate it for crypto gaming.

Square Enix is a rarity for the country, as the company's President Yosuke Matsuda recently committed the gaming company to investing in Web3.

"In terms of new business domains, we named three focus investment fields under our medium-term business plan," Matsuda wrote in a blog post. "Among those, we are most focused on blockchain entertainment, to which we have devoted aggressive investment and business development efforts.”

Although Square Enix isn’t as large as Nintendo or Sega, among gamers that are fans of Japanese RPGs the company holds plenty of clout. Officially licensed non-fungible tokens (NFTs) of some of Square Enix’s best-known characters, like Final Fantasy VII’s Sephiroth or Cloud Strife would definitely be a hot commodity with fans.

A Likely Face-Off With Regulators

But Square Enix will be up against regulations in Japan that many legal experts believe would be hostile to Web3 gaming, classifying it under the country’s gambling framework.

“In the case of blockchain games, it is also necessary to consider gambling laws,” wrote Tokyo-based law firm So & Sato in a 2021 review of how Web3 gaming and the laws of Japan intersect. “Blockchain games that include incentives for users, such as the free issuance of NFTs, must further comply with the Premiums and Representations Act.”

The Premiums and Representations Act, So & Sato wrote in a paper, regulates the free provision of goods and services by a business which aims to induce potential customers to buy the business’s products or services.

As CoinDesk previously reported, Axie Infinity’s gameplay structure would constitute gambling according to So & Sato’s analysis. “Since a user must pay a certain amount of smooth love potion [or SLP, an in-game token] to breed new randomly generated Axies, there is a possibility that the breeding of new Axies is considered illegal gambling,” the firm wrote. The game’s tournaments, which require an entry fee, would also fall under this category.”

To be sure, play-to-earn is only one kind of Web3 gaming, and a dying one at that. Ubisoft’s (unsucsessful) foray into Web3 gaming involved selling collectible skins to be used in one of its Ghost Recon games. But the market didn’t seem all that interested in the prospect – though that might change when it comes to recognizable characters from Square Enix.

NFTs and the Unknown

If blockchain gaming for Square Enix just means that collectible NFTs for character skins are bolted on to an otherwise regular game, that’s probably OK under Japanese law.

“It is understood that NFTs are not subject to the financial or business regulations under the Financial Instruments and Exchange Act, the Payment Services Act or other Japanese laws,” wrote Japanese law firm TMI Associates in a recent paper.

TMI Associates warns that there’s a lot unknown about how NFTs would be viewed by the courts in the event of a dispute as their legal status has yet to be tested.

“While NFTs hold hidden possibilities as a new means of content distribution, their structure and legal positioning are not necessarily fully known at this time,” the firm said.

This great unknown is probably why cautious Japanese corporations, like gaming giants Nintendo and Sega, have yet to dip their toes in the space.

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