TikTok’s use of casino-like virtual currency to allegedly exploit children faces scrutiny in DC lawsuit

Of the many allegations against TikTok brought by a group of attorneys general, one stands out for its focus on the company’s abusive use of its virtual currency.

Brian Schwalb, the attorney general for the District of Columbia, alleged on Tuesday that TikTok is exploiting children financially by operating an unlicensed digital currency, similar to poker chips at a casino. 

A bipartisan group of 13 state attorneys general, as well as Schwalb, filed lawsuits against TikTok on Tuesday that claim the company misled users about the app’s detrimental effects on the mental health and well being of children and young adults.

Schwalb’s suit alleges that TikTok violated the district’s money transmission laws by failing to get the licenses necessary to facilitate financial transactions through the company’s livestreaming tool using its in-platform virtual currency. That currency “substantially harms children,” and the livestreaming feature “exploits them financially,” according to the lawsuit. 

Through TikTok’s system, children buy the virtual tokens — TikTok Coins — with real money, and the company gets 50% of the revenue from the purchases, the lawsuit says. Children are able to conduct the financial transactions, the suit adds, because they can easily bypass the company’s weak age-verification tools, which TikTok is aware of and fails to address

TikTok Coins can then be used to purchase digital “gifts” that users can send to others who are livestreaming themselves on the social media app. Those streamers can then exchange the gifts they receive for real money.

The suit says that TikTok “extracts” a commission of up to 50% from these exchanges without having obtained the necessary license. 

TikTok didn’t reply to a request for comment, but told CNBC in an earlier statement that it disagreed “with these claims, many of which we believe to be inaccurate and misleading.”

Social media companies like TikTok have been taking a cue from the video game industry in fostering big online marketplaces complete with digital currencies, said Gabriel Robins, a professor of computer science at the University of Virginia who has served as an expert witness in several tech-related patent lawsuits.

Federal and state laws are in place to protect children from financial harms, because they are “too inexperienced to know any better,” Robins said.

“If you make it look pretty and joyful and kind of innocent looking … it makes it easier to manipulate the children,” Robins said. “They don’t understand that their money is being scammed, or that the parents’ money is being scammed.”

With more big internet companies courting online creators, or social media users who produce large quantities of content in hopes of making money, the D.C. TikTok lawsuit “may compel other platform companies to reconsider how they define and regulate economic transactions,” said Brooke Erin Duffy, an associate professor at Cornell University’s department of communication, in an email.

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