By: Lawrence G. Walters, Esq.1
For some, the terms ‘Bitcoin’ and ‘regulation’ are antithetical to each other. After all, the virtual currency that is Bitcoin was spawned from a desire to preserve anonymity and avoid the burdensome regulations that otherwise apply to financial transactions. But if legal online gambling sites ever hope to integrate Bitcoin deposits or wagers into their systems, some form of regulation is inevitable. With mainstream companies like Target, CVS, Expedia, and even Zynga Poker accepting Bitcoin payments, the virtual currency will be difficult for gaming regulators to ignore much longer.
While regulators have been hesitant to give their stamp of approval to Bitcoin transactions, it is estimated that over half of all Bitcoin transactions are for gambling purposes.2 Billions of dollars are routinely wagered through unregulated Bitcoin gaming sites, primarily as a result of the extremely low transaction costs.3 Sites like gambit.com also offer users the opportunity to wager in extremely small increments.4 While bitcoins, and other virtual currencies known as ‘alt coins’ have become exceedingly popular with users, legal gaming sites have been hampered in adopting the payment method due to the general lack of acceptance (and understanding) by the regulators.5
Bitcoin is not a fad, and is not going away any time soon. ‘The smart money is on a Bitcoin revolution’ in the gaming space.6 In order for licensed gaming operators to have a chance to compete with their low-cost, Bitcoin-accepting counterparts, regulators must address the issue. And the clock is ticking.
II. Regulatory Concerns
The most likely basis for opposition to Bitcoin by gaming regulators is the lack of transparency in financial transactions. In an industry that lives and breathes ‘Know Your Customer,’ the anonymity inherent in Bitcoin transfers spooks most regulators. This, along with the negative press surrounding Bitcoin during the ‘Silk Road’7 and ‘Mt. Gox’8 disasters, has been enough to stifle any real progress in Bitcoin gaming regulation.
Customer anonymity in the gaming space implicates three separate problems; 1) underage gambling; 2) compulsive gambler self-exclusions; and 3) anti-money laundering policies. The inability to identify the source of the gaming funds can permit minors, addicts, and criminals to participate in gaming activities. Regulated gaming sites have become accustomed to knowing the identity of their customers, and vetting any new accounts against various databases to ensure they are dealing with players who are on the up and up. Moreover, since many gaming sites geo-block customers by several methods, including their payment address, acceptance of wagering deposits from an anonymous source like Bitcoin eliminates this geo-location tool. Implementing an effective geo-location system is an essential requirement for any U.S. based, intrastate gaming licensee, for example.
III. Options for Gaming Regulators
The mere fact that Bitcoin transactions emanate from an anonymous source need not prevent the payment method from being incorporated into a regulatory regime. Gaming regulators can apply traditional KYC protocols to existing, registered players opting to make deposits in virtual currency such as Bitcoin. For example, regulators may opt to restrict virtual currency deposits to players who have already cleared existing KYC requirements, and who have previously deposited funds through a traditional payment source.9 Application of such criteria to Bitcoin deposits essentially eliminates concerns with underage customers, compulsive gamblers, or money laundering. Known customers, who have already provided identification and geographic information, should not be prevented from funding their accounts with payments from virtual currency accounts. The amount, time, and date of each transaction can be correlated to an existing customer, with a high degree of accuracy. Notably, GoCoin and gaming software provider Cozy Frog recently announced the creation of payment processing software for Bitcoin that integrates industry standard KYC procedures.10 Other software providers may be soon to follow.
A more difficult regulatory issue arises with the attempt to integrate Bitcoin transactions directly into a game, such as with sites like satoshidice.com or gambit.com. With these systems, players fund their accounts solely with bitcoins, and the gaming software automatically credits the winner’s account with the appropriate amount of bitcoins (or bit points). While this quick, easy, and inexpensive method of settling wagering transactions has resulted in widespread popularityfor Bitcoin gaming sites, the identity of the players is typically unknown to the operator, or the other players. Bitcoin transactions are also irreversible, which can result in the inability to effectively address customer complaints of software malfunction or cheating. On the other hand, players who gamble on Bitcoin-integrated games seem to be comfortable taking their chances in the unregulated environment. Whether gaming regulators will permit licensees to address such issues through conspicuous consumer disclosures and releases remains to be seen, but the automatic and irreversible nature of Bitcoin transaction settlements will be a key issue for gaming regulators in the 21st Century, as they wrestle with the various risks and options.
Licensing jurisdictions can choose an approach to virtual currency that falls along a regulatory continuum ranging from outright prohibition to permissive use of virtual currency by licensees. As is evident from efforts to prohibit gambling activity in general, it has been shown time and time again that prohibition does not work. The surging popularity of unregulated Bitcoin gaming sites is a testament to that principle.
Conservative regulation would look something like the existing licensing obligations, except that known customers would be able to fund existing accounts with additional payments from Bitcoin sources. Regulators might also require that virtual currency deposits be immediately converted to traditional currency upon reaching the player’s account. Refunds or payouts in Bitcoin may also be prohibited by conservative regulators.
More permissive regulation may allow customers to create and maintain accounts denoted exclusively in virtual currency, assuming they provided sufficient identification as the account holder when first registering as a player. This more liberal approach might also permit Bitcoin-integrated games, and allow payouts/refunds in virtual currency.
Each jurisdiction will be required to evaluate how it feels about the use of virtual currency by its regulated licensees, based on its risk tolerance and philosophical approach to gaming regulation. More libertarian-oriented jurisdictions will be expected to place more of the risk on the player, and impose less regulation on the operator. Others will take a more paternalistic approach, and cautiously allow virtual currency deposits only by known players. Regardless of the regulatory viewpoint, what is clear is that the time for gaming regulators to address the issue of virtual currency has come. Retailers are increasingly accepting Bitcoin payments, and initial concerns about the viability of Bitcoin are fading quickly. Turning a blind eye to this increasingly mainstream medium of exchange will put licensed gaming sites at an untenable disadvantage in the coming years.
1 Lawrence Walters operates Walters Law Group, www.gameattorneys.com, which has represented the online gaming industry since its inception. His practice includes representation of clients involved with virtual currencies. More information about his involvement with Bitcoin issues can be found at www.bitcoin-lawfirm.com.
2 Simone Pathe, Gamblers Wager Billions on Unregulated Bitcoin Betting Sites, PBS Newshour, Mar. 2, 2014, http://www.pbs.org/newshour/updates/bitcoin-gambling-sites-fly-regulatory-radar/.
4 Caleb Chen, Chess.com has a Bitcoin Sister Platform Called Gambit.com, Crytpocoins News, Oct. 19, 2014, https://www.cryptocoinsnews.com/chess-com-bitcoin-sister-platform-called-gambit-com/.
5 For example, Malta experimented with allowing Bitcoin gaming by licensees, briefly, before prohibiting the activity. Most other licensing jurisdictions either prohibit or have failed to address the issue, with the exception of Curacao, which licenses Bitcoin gaming. See PR Newswire, BitCasino.io Launches World’s First Bitcoin Branded Blackjack Game, Nov. 4, 2014, http://www.kitco.com/news/2014-11-04/BitCasino-io-Launches-World-s-First-Bitcoin-Branded-Blackjack-Game.html.
6 Giulio Prisco, Bitcoin will Revolutionize Gambling, Cryptocoins News, Sept. 26, 2014, https://www.cryptocoinsnews.com/bitcoin-will-revolutionize-gambling/.
7 Andrew Leonard, A Bitcoin Libertarian Disaster: The Silk Road Gets Busted, Salon.com, Oct. 2, 2013, http://www.salon.com/2013/10/02/a_bitcoin_libertarian_disaster_the_silk_road_gets_busted/.
8 Robert McMillan, The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster, Wired.com, Mar. 3, 2014, http://www.wired.com/2014/03/bitcoin-exchange/.
9 The author’s presentation to the North American Gaming Regulators Association, detailing some of these regulatory options associated with virtual currency gaming, can be found here:
10 Monica E., Cozy Games Becomes First Regulated Operator to Provide Software for Bitcoin Gambling Sites, GamingZion.com, Nov. 13, 2014, http://gamingzion.com/gamblingnews/cozy-games-becomes-first-regulated-operator-to-provide-software-for-bitcoin-gambling-sites-6128.