Attorneys general claim the company's virtual currency system is designed to exploit children financially. A lawsuit against the popular video-sharing app TikTok, led by Brian Schwalb, Attorney General for the District of Columbia, claims that TikTok operates an illegal digital currency system akin to a casino operating poker chips.
According to the lawsuit, "TikTok Coins" encourages youth to buy and spend, and said it threatens the young with financial harm.
Unlicensed Currency Operation and Exploitation Claims
In CNBC's latest report, it was said that TikTok is being sued by the "bipartisan coalition" of 13 state attorneys general, who charge that the app has violated money transmission laws by not having gotten the licenses necessary for handling financial transactions.
This is significant in light of the fact that the app's virtual currency system and its livestreaming tool allow users, especially children, to buy tokens with real money.
According to the complaint, children dodge the loose checks that TikTok has to ensure the age so that it can use its services in making financial transactions without appropriate oversight.
TikTok Coins is the name of a company's in-app currency. The coins can be used to buy digital gifts, which the streamer can redeem for real money. The lawsuit pointed out that TikTok takes an effective share ranging from between 20% to up to 50% of those exchanges and does all this without licenses.
Financial Exploitation of Children and Litigation Outcomes
Schwalb and other attorneys general think that the virtual currency in TikTok financially exploits young children. According to them, the already weak age verification mechanism in the app makes it easy for minors to make purchases. In this regard, the suit has accused TikTok of failure to ignore this issue for such exploitation.
For Gabriel, a computer science professor at the University of Virginia, TikTok makes the scheme "kind of innocent looking" to make it easier to manipulate young users.
"They don't understand that their money is being scammed, or that the parents' money is being scammed," Robins said.
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TikTok's Response and Industry Insights
In response, the social media app TikTok dismissed the lawsuit as some of the allegations are factually incorrect and misleading.
Still, this lawsuit fits into a larger trend: More social media services are beginning to offer digital currency and in-app purchases to customers, and the practice is becoming increasingly accepted among video game companies.
Revamping Monetization Techniques
The case in D.C. may carry wider implications for other social media companies. Because many companies will continue to reward online content creators with monetized engagements, this litigation could push these platforms to revamp the way they conduct economic activity.
Brooke Erin Duffy, an associate professor at Cornell University, feels this case would encourage other companies to think again about their policies on virtual currencies and child protection.
At a time when digital currencies are gaining the trend, especially on social media, this lawsuit should remind everyone of how important it is to protect the younger generation from fraudulent financial exploitation.
How this case will be judged will serve as a landmark precedent in determining the future conduct of social media companies with respect to virtual economies and their user protections.
Aside from this lawsuit, the ByteDance-owned platform is facing a lawsuit filed by 13 US states. They claimed that the app was "too addictive" to kids, making it a harmful tool.
