Regulations and gambling: the impact of Blockchain

18 May 2022

Online gambling regulations can potentially be disrupted by the Blockchain technology. Currently, in the online gambling industry, it happens that a small company that has recently entered the industry focuses on a sector or specific aspects that were overlooked by the major companies at that time, taking advantage of the void and offering more suitable functionalities (and often at a lower price).

As a result, it may happen that new entrants to the industry rank at the top, offering services that the consumers of viral gambling at the time need, while still preserving the positive characteristics of the competition.

Blockchain gambling: what is it?

When we talk about blockchain in the online gambling sector, we must think of the same dynamics described above, however, instead of a new company entering the market affecting the competition, in this case, this technology would affect the industry as a whole.

The gambling industry would acquire unprecedented and top-notch transparency thanks to several features inherent to the blockchain (bets or transactions visible for any verification, automated result payments, no funds or accounts to be protected by operators for users and so on).

From these changes, it is easy to think that the role of the gambling regulator, i.e. the need for a third party to ensure trust and therefore act as an intermediary between the operator and the customer, becomes nearly superfluous.

The role of the regulator is not the only one that would become obsolete:

  • The whole industry that handles payments is of no use in the context of gambling developed on blockchain. The use of cryptocurrencies ensures that users have access to their funds directly, that there is no risk that payments will not take place, and that all transfers (bets, wins, deposits, withdrawals) are highly safe. Banking institutions and payment service providers are therefore useless.
  • Another phenomenon that does not make sense to exist in a context like this is the abundance of review websites that help potential consumers to understand which of the thousands of existing websites is reliable. All platforms developed with blockchain technology should inspire confidence, as customers have no risk of losing their funds since these are not stored within the platform itself but in a personal wallet.

One of the fundamental regulatory problems of online gambling developed on blockchain concerns the classification of cryptocurrency. The language generally used names them as currency, money or object of value. The legal framework, in general, is still very confusing.

A potential risk

Similar debates have taken place over the value of a virtual currency and other digital items, with numerous court cases inconsistent with each other. The use of virtual currency (which differs from classic electronic payments made with digital fiat currency transactions) has been mainly engaged in specific online games, primarily MMOs (Massively Multiplayer Online). The aim is to facilitate exchanges between players, and very often, there is no possibility to convert digital currency back into fiat money.

However, a black market has been built up for this replacement, facilitated by many third-party websites. In this regard, a noteworthy example is the one of the famous Second Life video game. Second Life had its own economy that revolved around a currency called “Linden Dollars”. The dynamics that have been created around this market have led to Second Life taking a gambling ban following an investigation carried out by the FBI into illegal actions related to unauthorised gambling.

The behaviour of jurisdictions around the world

Other lawsuits have voiced about money spent on virtual casino games and gambling in the form of virtual items called skins. In some judgments, the Courts of the Netherlands and the United Kingdom have confirmed that virtual currencies and digital objects have a monetary value (therefore, their theft would have been illegal).

The European Court of Justice has ruled that bitcoins can be considered as means of payment and, as such, are equal to traditional currencies for VAT purposes.

However, the case of cryptocurrencies like bitcoin differs from other types of virtual currency.

Bitcoins are meant to be used for commercial purposes and have no value within video games compared to their currency. Furthermore, bitcoins have no source of authentication, supply and control (as it could be a bank, a mint, a game developer or a government). These functions are performed by the so-called miners. Hence, bitcoin provides these functions for itself through voluntary users who are rewarded.

Given the particularity, cryptocurrencies often do not adapt to existing legislation and often need separate and ad hoc legislation. The situation is so confusing that some gambling sites that use bitcoins have stated that since bitcoin is not universally recognised as a currency, these sites should not be subject to gambling regulation.

Kyrgyzstan, Ecuador, Iceland, Bangladesh, Bolivia, and Vietnam are some of the countries that have banned bitcoins. China has banned their use from all financial institutions, and many other countries are moving in this direction.

The UK Gambling Commission has classified digital currencies as “money or values of money”. Consequently, their use in gambling is comparable to the use of real money in gambling, while being aware of the legal problems associated with the use of cryptocurrencies (the high degree of anonymity, the absence of specific anti-money laundering regulations, the decentralised nature of these and the massive fluctuation in prices). Australia regards bitcoin transactions as barter transactions, as a state mint does not issue this currency, and therefore they are subject to goods and services taxes. The Internal Revenue Service of the United States considers bitcoins as properties (stocks/shares). As a result, affected users are subject to tax on capital gains on transactions. Despite this, other US agencies consider bitcoin as a currency.

The Japanese government has recognised cryptocurrencies as a usable payment method and, therefore, as a “property of value”: sales and purchases made through cryptocurrencies would therefore be exempt from consumption tax. However, there is a discussion about implementing stricter KYC processes for consumers and adding additional regulatory requirements for digital currency exchanges.

Although the global picture is very confusing, this helps us understand that the use of bitcoin and other cryptocurrencies by consumers (but not only) is highly influenced by government regulation. But the lack of common legislation and a central regulatory body means that sites using blockchain technology remain highly resistant to censorship.

The DNS (Domain Name System) is a distributed network that allows devices to identify IP addresses easily. Governments exercise internet censorship when they seize and block domain names, and this solution has been used to curb offshore online gambling in numerous jurisdictions. However, this technique cannot be used on the blockchain. Blockchain-based domain names cannot be censored or seized by governments just as they are inviolable to criminals. This has important implications, both for regulators and policymakers trying to think of alternative censorship techniques.

Is all this safe?

Despite the problems and the fact that they are often associated with illegal activities, it must be borne in mind that the use of cryptocurrencies or the blockchain in general for gambling purposes does not mean that a gambling platform is not legitimate.

Cryptocurrencies have only recently gone viral. As they develop and reach more and more users, companies and institutions will begin to accept bitcoin as a valid payment method, and trust will grow.

Although the blockchain stands as a force contrary to the system we currently know, this should not be interpreted as a challenge but as a possibility. Indeed, the blockchain is also beneficial for online gambling regulators. The best thing traditional gambling regulators can do is figure out how to incorporate blockchain technology to achieve their goals and reach new markets and goals in new ways.

This is the case of some influential personalities who were part of the sector before the blockchain’s arrival and whom today are showing themselves very open to change. André Wilsenach, a former member of the Alderney Gambling Control Commission, is one example. He said that a novelty like a blockchain, a platform in which information is shared, digitised and decentralised, would provide regulatory authorities access to data of extreme and significant importance.

What’s next for regulators?

The Isle of Man is a significant player in the online gambling regulatory industry and has noted how this could benefit from reducing the burden of liability and duties through the passage of due diligence, compliance audits and testing and certifications to a decentralised system. Furthermore, it is not entirely true that cryptocurrencies can be obtained in complete anonymity (although there are tools that help mask the identity of users). Indeed, reputable and trustworthy cryptocurrency exchanges and wallets have implemented strict KYC procedures, and, in addition, blockchain technology uses a unique identification code. This could help investigate money laundering and other financial crimes.

The UK Gambling Commission has updated its Codes of Practice and License Conditions to include bitcoins as an acceptable payment method for obtaining licenses; the Isle of Man has also allowed virtual currency deposits for online gambling.

Hence, regulatory authorities in the online gambling industry are at a fork.

On the one hand, they need to consider whether the existing regulation is enough to respond to gambling sites developed on the blockchain or whether it needs changes.

On the other hand, consider whether the efforts to block, limit or ban blockchain gambling are in vain, and then start thinking about new strategies consistent with the new reality.

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