What KamaGames learned from its failed cryptocurrency experiment

Last August, KamaGames, a big European operator of social casino games, said it is moving into blockchain and cryptocurrency with the launch of its own KamaGames Token. The idea was to make it easy for the company’s 100 million social casino game players to buy in-game currency for the game Pokerist, using any kind of currency they wanted for the purchase.

But the experiment was a big hassle, and it turned out to be disappointing, said Andrey Kuznetsov, CEO of KamaGames, in an interview with GamesBeat. That was a letdown after predictions that games and other apps would drive cryptocurrency and blockchain to become a $60 billion industry, according to an October report by DMR Business Statistics.

For Kuznetsov, the jury is still out on whether it’s going to be a valuable and long-lasting addition to the sector as a whole. In games, crypto was hailed as a way to make in-game transactions easier and safer. By getting people to buy tokens, Dublin-based KamaGames hope to bolster engagement, brand loyalty, and drawn new users. It was following the lead of companies like PayPal, Red Bull, Swarovski, and Kik.

For KamaGames, the move into crypto and blockchain had little to do with raising money. The company made it clear from the onset that the objective of the token sale was not to attract the interest of investors or their financial backing. Nor did KamaGames look for speculator interest related to the token. It did not plan to list it on any of the crypto exchanges.

Based on blockchain technology and the Ethereum platform, KamaGames Tokens were primarily designed to give players the best possible return on in-game currency purchases as well as guaranteed bonus chips every day. KamaGames Tokens were to be available as a collection of in-game chips sold in a bulk block at the best price possible. These chips will then grow in value every day. Players would be rewarded for leaving their tokens untouched, with an expected 11-fold growth if they do so.

Last fall, the company tested the waters for interest in blockchain. Players said they wanted to use cryptocurrency to buy the tokens for KamaGames’ Pokerist app. But actual demand for the KamaGames token sale was less than its most pessimistic projections. That was measured in terms of the number of actual crypto payments made, the volume of new users attracted, additional revenue generated, and improvements in player retention and engagement.

Part of the reason may have been the broad decline in cryptocurrency prices. But Kuznetsov decided developing a social casino product on the blockchain makes little sense considering the priority for most social casino players is simplicity and speed. Blockchain doesn’t make that happen. In fact, KamaGames found Ethereum took too long to do transactions. KamaGames needs about 1.5 million transactions per minute.

While the conversation around blockchain and cryptocurrencies won’t dissipate anytime soon, it is clear that they may not be widely adopted by the gaming industry in the near future, Kuznetsov said.

Here’s an edited transcript of our interview.

GamesBeat: I was reading about your experience. It’s a good description of what happened with your tokens. Could you describe where we left off and how things went in your own words?

Andrey Kuznetsov: I’ll start from the reasons we decided to do this market experiment. First of all, being an innovative company, we constantly do a lot of R&D. We test many different things, even some things that aren’t related to games. We did some experiments in the past with messaging platforms, with social networks. The token sale was a part of another experiment in the blockchain and crypto spaces.

In 2016 and 2017, and even a bit earlier, we were observing what was going on with blockchain and cryptocurrencies. We looked at the technology and we thought that if there was a benefit for us to come up with blockchain games — poker or any other social casino games — we’d decide to introduce it eventually. There were some technical limitations. We have more than 1.5 million transactions per minute, and at that time there was no blockchain that could guarantee that. There are probably some now, but not at that time. The other concern was how to do a proper RNG on blockchain. There are, again, some solutions available at the moment, but we haven’t come up to testing them yet, because there was no reason to do so. The third thing was, what is the actual demand for these games? What would be the benefits to players and us as a company? Unfortunately we found neither demand nor direct benefit, to players or to us.

Now we come to the crypto part. We received a number of requests from our players to accept cryptocurrencies as a payment for our in-game virtual currencies. We never did that, and we don’t do it now, but we decided to do a short-term marketing campaign to see what the actual demand would be. If the demand was high, then we could probably implement some solution on a permanent basis. From time to time we get outreach from providers who could offer such services. We decided to do that short campaign, and that was part of the token sale.

GamesBeat: What next?

Kuznetsov: The second thing was just to see how the industry works, how complicated it is, and what the audience is like. Who are the users? What are their values and requirements? What do they need and what do they want? That’s why we decided to do a hands-on experiment there. Another thing was, we wanted to see if we could attract a new audience, more new players, outside our conventional user acquisition channels. We believe the demographic of our players is quite similar to the demographic of crypto users.

We also wanted to reward our existing players with something new, offer them this kind of proxy to chips. That would increase retention, because the token was designed such that holders could get additional bonuses every day for just holding tokens. Meanwhile, the exchange rate between tokens and virtual chips is growing over time, so they could eventually get more chips. At the same time, we tried to return our lost players, especially players, who might have played with us in the game for some time and left. We tried to bring them back with our usual instruments — push notifications, emails, sales and promotions — but the ones that never came back, we tried to offer them some free tokens. It’s a new marketing approach. Maybe we could bring them back and then sell them more.

As we mentioned a number of times, a decent part of our revenue growth over the last three years has been personalized sales and promotions. Now we do that four or more days a week. The key is to target people properly, to personalize as much as possible, to deliver the right message and the right proposal to every player. Here we created another promotional campaign where players could buy our chips through the token as a proxy for the best possible price. They could hold it and receive even more chips. It was a very good offer.

GamesBeat: And what happened?

Kuznetsov: We know that there’s still a depression in the crypto market. The value of tokens is declining, and even plunging significantly. But we have different types of participants. Overall we have roughly 33,000 participants. Among them, there were our lost players, our whales, our new players — just people who decided who participate in this experiment. We didn’t sell many tokens for very much money. It’s a relatively small amount. We’re still finalizing the results because it’s a part of our revenue, but it was a tiny number. At the same time, though, we distributed millions of tokens to these 33,000 participants.

For our players, the biggest problem was the complexity of the whole process. Of the existing players we brought in, the lost players, the whales, the new players, all of them had no experience with crypto. So first of all, they were shocked by the requirements disclose their identity, to provide documents. They were asking, “Why should we do this? We’re not buying a financial instrument. We’re buying virtual chips, the same as we would through Apple and Google. We can do it very simply there.”

GamesBeat: Tell us more.

Kuznetsov: Then the second point was it was too complicated. Our support team still sometimes spends up to three hours with a single person trying to explain how to create a crypto wallet, how to get tokens, how to send them to us for exchange, and how to link them to the account. Only a small number of token holders get to the end of that process. Most of them eventually quit in the middle. “It’s too complicated, guys. If you want to give me some free chips, that’s fine, but if you don’t, we don’t want to bother.”

Participants who came from the crypto community and had crypto experience — since the beginning, since day one, we talked about it, spoke about it in interviews, wrote about it our Telegram channel and Bitcoin forums, and in every other social media. “We’re providing you a way to acquire our internal virtual currency to play in our games. We’re not raising funds. We don’t want to support speculation. We won’t list our token on any exchange.” We believe that we did a good job of explaining that properly, but now every other day we get requests from people: “Where can we sell the tokens? Which exchange are you listed on?”

We can’t go to an exchange. There are a number of legal restrictions and links. We can’t just give people money. Our legal team has always said that we need a special license to do that. We can’t do it. We feel a bit disappointed because of that. But my point is, most of the players who came from the crypto community, they were buying the tokens, but their goal was to buy an investment instrument. Or not an investment even. They were buying something after no research at all. Their only goal was to sell it as quickly as possible for a quick buck.

When we were doing the analysis of the landing page for our token sale — we had a colored map explaining what users were doing and what they were reading relative to different geographies and different languages. 99 percent of them were not reading anything. Maybe one percent clicked on something, read one or two of the interviews. That’s it. Almost nobody read the white paper. We spent months writing it, making it legally compliant and looking nice and all that. I feel bad about doing all that work, because nobody read it.

Now I understand why even the SEC is making the statements that they’re making, that there are no utility tokens and almost all of them are speculating. It’s really true. Even when we explained to people loud and clear that we’re only providing a payment solution for the service we provide in our game, they don’t listen. I was surprised myself. They were buying 500 euro worth of tokens without even knowing what they were buying. Then they come back in two months and say, “Which exchange do I go to?” Sorry, there is no exchange.

GamesBeat: What about your timing?

Kuznetsov: If we had done this token sale a year ago, I can give you a 196 percent guarantee that we would have collected as much money as we wanted. Tens of millions of dollars, easily. But after that, we could be in real trouble explaining to all these thousands of people who spent, or “invested” as they call it, all that money because they were only looking to sell in two months and make more money.

Coming back to the process itself, when we were dealing with different consultants and marketing people and advisors, it was a very unpleasant experience, very unpleasant. I’ve never seen in my life, in any industry, so many unprofessional people who were trying to make huge money. Some people were asking for, whatever, two percent of our company. When we asked, “What can you do?” they’d give us stories that ranged from unbelievable to impossible. Imaginative anarchy. Some people were giving fantastic introductions to I don’t even know who.

We have experience in marketing in the digital space. Because of that, we were able to make this experiment quite cost-efficient, if I may say. We didn’t lose much money. We didn’t overspend. If you go to influencers, they’re asking for hundreds of thousands of dollars. The same with bloggers or with crypto media. If you ask for numbers, they’ll refuse to provide you with any statistics. Some of them just give you a picture with one line, users going up, but that’s it. If you ask simple questions — Can we check this? Can you just show these three numbers? — they refuse.

What scares me is that most other companies I’ve spoken to, they all agree. When they were trying to speak to local advisors in places like Asian markets — Indonesia, China, Korea — they had the same problems. When they went to look for representatives in regions where they weren’t able to travel — we had someone who participated in a conference in Russia to give a talk about our project and what we’re doing as a gaming company, what we provide. I participated myself in some conferences in America and Europe. We came to an agreement with somebody in, I think, Indonesia, and the speaker just disappeared after we paid him. When we were dealing with conference organizers, the company they’d ask us to pay to didn’t exist. They were just pointing to some Paypal account or whatever. “Send them $20,000.” I’m telling you, it was shady and suspicious from the beginning, wherever we went.

I do understand that it’s a new market, a booming market. Maybe this is normal to a certain extent. You certainly saw this kind of thing in the dot-com bubble in the early 2000s. But I was still surprised. That was my experience.

GamesBeat: It sounds like most people could not get past the idea that you were not doing an ICO. That they couldn’t resell what they bought.

Kuznetsov: Right. Officially, we’ll do our best to prevent any exchange from listing us without our approval, and we won’t give that approval. At the same time, it’s an Ethereum-based token. If I want to transfer you 10 tokens, KamaGames can’t do much about it. But we don’t support it. As far as we see now, there are some decentralized exchanges. People might exchange their 10 tokens there. But the amounts are almost invisible. I hope they won’t be higher than that. We’ve never had anyone who bought even a thousand dollars worth of our tokens. It’s only been small amounts. I’m not that worried about somebody coming back at us claiming they invested something.

Still, I was shocked that — when I read about massive fraud now in crypto, hundreds of millions of dollars, I don’t have any doubt that it was possible. We made what we were doing clear, everywhere, and nobody listened. If people say what other people want to hear — “Buy our token, give us your money, and you’ll get 10 percent every other week!” — that’s it. It’s greed that drives people.

When I look at the tokens that are traded now, and when I talk to people I know in the industry — the people who are doing real solutions tell me that the market is in depression. “Nobody needs our projects at the moment, so we’re putting it on hold.” As a company, we were researching all kinds of spaces. We even participated in a couple of ICOs ourselves. Small money, just to see how it works, just to feel out the atmosphere and be part of the process. Most of these companies will never survive. The idea hasn’t been validated from the first moment. The teams are unprepared. There is not enough demand. Demand is growing, but very slowly. You’ve obviously heard the statistics around Pornhub. They disclosed that less than one percent of their daily active users use crypto, and they have 100 million daily active users.

GamesBeat: At what point in time did you run the experiment? Do you think one of the problems is that you were doing it during this crypto bust? If you’d done it earlier, do you think you would have done better?

Kuznetsov: We started our closed presale in September 2018. We finished everything on November 12. It was two months, more or less. Of course this was at the end of the game in the crypto space, for ICOs and even for Bitcoin and Ethereum. Those were the bad days. I’m scared to say this, but yes, I’d guarantee that if we had done it a year ago, we would have collected whatever we wanted. I don’t know about $100 million, but $25 million? With our project, with our company, with our approach, we would have collected that, easily. But what would we have done after that, when all these people start asking about exchanges? I don’t know. I don’t even want to think about it. At that scale, our reputation probably would have been ruined, even if we didn’t do anything wrong.

Who knows? We have enough money to grow. We’re growing, and we’ll be happy to share more results soon. We’re growing for our fourth year in a row, pretty decently. So why would we jeopardize our company’s reputation and our personal reputations and bear all the legal risks? It wouldn’t be worth it, even for $20-30 million.

GamesBeat: Was it any problem that people paid you with a cryptocurrency that subsequently declined in value? Did what you ended up selling in chips become very inexpensive chips?

Kuznetsov: In our case, there were not many transactions, and not of a very high value. Of course it declined. But we were prepared for that. Compared to our monthly revenues, it was less than one percent. It wasn’t that sensitive. It wasn’t any kind of disaster. People are mostly just disappointed that their expectations didn’t come true. If you set proper expectations, it’s easier to do things. That’s what we did from the beginning. We estimated all the risk and we estimated all the potential outcomes.

GamesBeat: The majority of people paid in some kind of fiat currency, then?

Kuznetsov: Right. We still do not consider this campaign as a negative experience. We learned so much. It was a really good marketing campaign. All the big players in the market, in the social casino space and the gaming space, they’ve all asked me, “How did you do that? What do you think about it? What were the results?” Especially when I was saying, “Guys, we didn’t do anything illegal. We did everything properly, in accordance with the law.” That made them even more interested. Many people want to learn about this. I met with one American company that I’d known for a while. They were going to do something similar themselves, and at the last moment they decided not to. I know some other gaming companies decided to postpone token sales or ICOs to this year, the third quarter, whatever.

We definitely understood that we were not in a good time for a token sale, but we weren’t looking for speculators. We decided to do it anyway because we had different goals. The companies that have moved their token sales and done a lot of work to try and make it happen this year, I don’t know that they’ll ever do it in the future.

GamesBeat: I know that Kik was able to do theirs early, but they’re now saying that they’re having problems with the SEC. The SEC wants to take some kind of action.

Kuznetsov: I can imagine.

GamesBeat: It sounds like, legally, you guys may have made the better move.

Kuznetsov: They raised funding, $100-120 million as far as I can remember. But right after we finished our token sale, we read about Paypal’s experiment. Paypal’s CEO said that they did an internal campaign with a token. I read his statement. He said something like, “We don’t know about using tokens in other capacities, but we definitely believe in using it within the company internally, for rewards and loyalty programs.” Of course. That’s what our vision was, more or less. When we heard about what they did at a bigger scale — and they’re a public company — we were pleased to be thinking in that same direction. They did it purely for their employees. We did it mostly for our community.

GamesBeat: As far as the way you did it, was it much different or any different than just another virtual currency? People talk about cryptocurrency and all the things it can do differently, but was this effectively just like one more virtual currency in your game?

Kuznetsov: We never issued a cryptocurrency. We kind of used Ethereum, but was it a separate cryptocurrency on a separate blockchain? No. We never thought about that. It was just a token based on the existing Ethereum ecosystem. We had only one goal for the token, which was for it to be exchanged for our in-game virtual chips.

GamesBeat: You mentioned the transaction frequency. It sounded like that could have been a problem if it was a higher volume.

Kuznetsov: Where a project uses a token, uses a smart contract as a part of the ecosystem, that’s critical. But in our case, our game engine works independently. So we don’t even need close frequency in our case. The token is exchanged on our platform, our website, in the player’s account. They can link their wallet address and our system automatically checks, every day, how many tokens are there and gives them the opportunity to click and get additional bonuses. If they want to exchange tokens for chips, it shows an address right there. If they send tokens to that address, we receive them, burn them, and they get their chips in their account.

GamesBeat: If you had done a cryptocurrency–you had an issue with the RNG, you mentioned?

Kuznetsov: Right. The issue is, we already have, as a company, an RNG which is certified by a special agency which checks random number generation for gaming companies. Our RNG is purely random and certified as such. It’s fair. We can’t affect it in any form. But the question is, if we put an RNG on blockchain, that means it would be much easier to make it predictable. The game wouldn’t be that interesting, because some people could quickly realize what the next card or next number would be.

If we didn’t put the RNG on blockchain, there would be plenty of people who’d tell us, “If you have poker on blockchain but the RNG is elsewhere, the game isn’t fair. It’s not fully decentralized.” We’d always be blamed for that. Some gambling companies, I know, have started to do work on designing solutions for RNG on blockchain, but again, these are all startups. The solutions still have yet to be tested. It’s not a solved problem for us. We haven’t yet decided to go design a game on blockchain entirely. We may research it further. When we come to that decision, we’ll have the resources.

GamesBeat: Jez San’s company I believe did an RNG and a game on top of Ethereum, right? Some companies are doing that.

Kuznetsov: Yes, they are. But we just haven’t tested it yet.

GamesBeat: In conclusion, then, are you putting this on hold for a while? Or do you want to revise how you’re going to do it going forward?

Kuznetsov: We sold or distributed some tokens to our players and new players. They’re in the ecosystem. Everything is working. People are getting their bonuses, getting their chips. The exchange rate for tokens to chips is growing, as we promised, and it will grow. We’ve stopped selling any new tokens since November 12, the final day of the token sale. We haven’t sold even one after that, and we don’t plan to sell any. But the tokens that have been distributed, we neither want to cancel them, nor we can if we want to. People own them. It’s how they get their chips.

Coming back to what’s next, we don’t know yet. We’re having a number of discussions. Do we do anything in 2019, any blockchain games or whatever else? No. For now we’re just observing. Our tokens are at work. They’re usable. But now we’re just observing what’s going on in the rest of the market, with other projects and cryptocurrencies.

GamesBeat: Do you still want the regulators in the U.S. to come up with real guidelines that might make it easier to decide what to do with crypto?

Kuznetsov: 100 percent. With what we’ve seen in 2018 and 2017, it’s really the wild west. We think that in order to facilitate mass adoption–I know some people will argue, but I still think that tokens or cryptocurrencies must be used by bigger companies, bigger international businesses and multinationals. This is the quickest way to mass adoption. In order for that to happen, there should be rules. They should be clear and hopefully simple. Companies and token buyers and even token or cryptocurrency investors should understand what they do, what their liabilities are, what their risks are, what the procedures are.

I’m sure it will happen, because I believe that cryptocurrencies will be with us forever. I do not know if Bitcoin will stay in the long term. I’m sure it will be there in the short and middle term. Long term, I don’t know. It may be replaced with something else that has more sophistication, a better cryptocurrency. Blockchain as a technology will be used more and more. Not everywhere, but where it’s applicable and where it makes things more efficient and reduces costs. Financial transactions, the internet of things, statistics, that will be there, I don’t doubt.

GamesBeat: Since you’ve done this, I think there have been some more interesting new platforms that have come up, things like Tron and EOS for game-related crypto projects. Do you see some better pathways for you coming soon, in terms of how to get your games to crypto players?

Kuznetsov: I have a few ideas. We’re looking forward to seeing what Telegram offers us soon with their Gram. We researched their white paper and all the other updates in detail. We believe that if the team can be able to implement even half of it, it’s so innovative. There are multi-level blockchains and other really interesting things we’re looking at. EOS is another prospective platform. We enjoy the speed. I know some people will argue about the decentralization of it, but I still believe–I’m in their favor. I think they’re doing the right thing.

Coming back to the number of gaming platforms that have either released or plan to be released soon, I think the biggest challenge for them is audience. Of course they all say that they’ll be able to attract significant amounts of players to their platforms. I know some of them are developing good loyalty instruments, rewards, the ability to sell in-game assets. But I still think that’s not the key. Audience is the key. Neither Google nor Apple nor Facebook nor Steam are eager to share a piece of their pie with these new platforms.

On the one hand I would want to support them, to believe that they’ll sustain. They’ll offering less commission, the reselling of assets, the reselling of games, or at least some of them are paying attention to that. But on the other hand I think they just won’t get enough of an audience to make it really big. I want to be wrong about that, but so far I have more doubts.

GamesBeat: Do you think that something like gambling will do much better than social casino could in this particular space? Or does social casino have as good a chance?

Kuznetsov: What blockchain gives us eventually, first of all, is transparency. Centralized can still do much higher speeds. So is there a need for more transparency in a social poker game, for example? I don’t think so. As I said, we have a certified RNG. This is the one thing our players care about. Our players are part of a social network first and a game second. If there is transparency–the idea that we might tweak the game and mislead them somehow, I don’t think that’s a big concern among our players.

At the same time, in gambling, where players are playing for money–if we’re talking about regulated companies, they all have licenses. Their systems are certified and tested. I don’t think that somebody like PokerStars or whatever, Paddy Power, will would do something unfair. They don’t need to.

But if we’re talking about smaller companies and startups in the gambling industry, which are trying to create blockchain gambling games, their goal is saying, “You don’t need to pass an identity check.” If you’re trying to become a player on PokerStars, you need to provide documents, prove your bank account, and be in a place to allows you to gamble online. These smaller companies offer a decentralized solution. They don’t care where you are. Just connect your Bitcoin, set up a smart contract, and you’ll win or lose.

The companies I’ve seen, they were all either totally illegal or in a gray area. That’s why I don’t think it’s a long-term sustainable business. Some people will make some quick money, I’m sure, in jurisdictions where that sort of thing might even be legal. But they’ll still need to comply with regulations, do reports, and all that stuff. I doubt they’ll ever get that far.

GamesBeat: As far as how much this has cost you, can you describe that in some way? How much it took to do the experiment, all the legal work, and so on?

Kuznetsov: It was a few hundred thousand dollars. Less than half a million, definitely.

GamesBeat: It sounds like you were able to avoid paying any of the scammers anything. You didn’t fall into any particular traps.

Kuznetsov: We were able to avoid any big mistakes. We might have paid someone $2,000 for participation in a conference and they never showed up, or we might have overpaid $4,000 for a test with a YouTuber. It’s not a disaster for us. I know some companies where the ICO comes out and it costs millions of dollars. That’s why I was always curious. If you guys raise $10 million, but you already spent $4 million on consultants and marketing, how are you going to do the product? You still have to develop and market that, and you’ve already spent almost half of what you raised.

With every company it’s different. But still, we were very efficient. That’s what I mean. We did okay. We don’t think we lost very much.