Bit by Bit(Coin) — iGaming and bitcoin

By Christine Duhaime, BA, JD

Recent headlines on the digital currency phenomena, bitcoin, haven’t been entirely positive with news of regulatory clampdowns, the hacking of exchanges and the arrest of key market players over alleged money laundering.

Despite recent negative publicity, bitcoin is being accepted by an increasing number of merchants around the world. That includes two Las Vegas casinos - D Las Vegas Casino Hotel and the Golden Gate Hotel & Casino - that recently said their hotel and gift shops would accept the currency, although not for gambling.

The online gambling, or iGaming industry, is no different. More and more online gambling websites are investing in technological changes to accept bitcoin bets. And it’s easy to see why.

According to the American Gaming Association, the iGaming industry worldwide is worth $30 billion annually. Bitcoin offers business advantages to gaming entrepreneurs that they can’t get with any other payment method. Those include payment finality (inability of players to demand chargebacks, whether from fraud, dissatisfaction or error), low to no transactional costs, ease of funds transfers, privacy protection and freedom from prohibitively expensive know your customer rules.

On the other hand, gambling with bitcoin raises unique legal issues – it provides little consumer protection to players and, like cash, is susceptible to risks of money laundering and terrorist financing. It also has no mechanism to prevent underage gambling and deter problem gambling – issues that are paramount to upholding the integrity of gambling.

These issues create a dilemma for gaming regulators in regulated iGaming jurisdictions that want to facilitate innovation and growth in the iGaming industry but are prevented from doing so because the anonymous nature of bitcoin makes it impossible to supervise financial transactions and identify gamblers.

What is bitcoin?

Bitcoin is a digital currency, i.e., one that exists purely online in cyberspace. It was started in 2009 by a person known only by the pseudonym Satoshi Nakamoto. It is unique in many ways. Unlike traditional currencies that are issued and controlled by central banks, bitcoin has no central monetary authority and is not backed by any authority or government.

It’s different from other electronic currencies in that it has no physical counterpart with legal tender. Users perform all the steps to buy, sell and use bitcoin from creating online accounts, known as “wallets” and transmitting and verifying payments over the Internet. Central banks and financial institutions are not involved in bitcoin transactions and as a result, there is no financial sector regulation or supervisory oversight over bitcoin transactions.

The value of bitcoin is determined by supply and demand of bitcoin buyers and sellers in the marketplace. From an economics perspective, it’s as close to a true capitalist currency model as is possible to obtain.

Bitcoin competitors

Bitcoin is the most prominent digital currency, but it’s certainly not the only one in circulation. Two others, litecoin and vertcoin, are gaining in popularity.

Governments appear to be struggling in their response to the rise in these digital currencies and no consistent approach has emerged on how to regulate and police them.

Canada initially decided, as a matter of policy, to compete with bitcoin and the Royal Canadian Mint created a digital currency akin to bitcoin that would be backed by the Canadian dollar.

Transactions involving Canada’s MintChip, referred to as the “LoonieBit”, will be regulated as part of the national monetary system.

However, in this year’s Federal budget the government also outlined plans to update anti money-laundering and counter-terrorist financing legislation to clamp down on the virtual currencies. Details so far are scarce.

I’ve been told that China, which has the highest trading volume of bitcoin in the world, has consulted at least one digital currency attorney with a view to competing with bitcoin in the same manner as Canada in order to stabilize its monetary system and prevent billions of dollars in annual illegal outflows of currency from China, much of it through junket operators in Macau.

In the meantime, however, the People’s Bank of China issued a bitcoin Risk Notice of ten prohibited bitcoin activities and transactions (such as using bitcoin as a payment instrument, pricing bitcoin or operating a currency exchange), the effect of which is that as long as the bitcoin activities do not fall within that list, they are permitted in China.

Russia on the other hand has issued an outright ban as part of its recent counter-terrorism efforts, while New York bank regulators are considering licensing its use.

The divergence in government responses causes confusion for bitcoin gaming businesses that operate internationally.

Online casinos

As bitcoin moves out of the shadows of the Internet and into something more mainstream, the iGaming industry is taking notice with the emergence of hundreds of online betting sites that accept bets by bitcoin.

One major online bitcoin casino is Ultraplay, a Bulgarian-based entity which operates two sites – Peerbet.org, which says it has 6,500 users playing with 1,100 bitcoin per month and Bit777.com, which says it has processed over $2 million in bets to date and some 4,200 players.

The biggest player is SatoshiDice, launched April 2012, with reported profit of $500,000 in its first year. According to Forbes Magazine, last year players placed bets totaling $1.7 million in 2.3 million transactions on SatoshiDice. Its monthly bets grew at an astounding 78 percent per month.

CloudBet and CoinBet are two other betting websites that accept bitcoin from players for wagers and cashes out bitcoin for wins.

All of these websites, however, are unregulated in the traditional sense and operate without the oversight of gaming regulators.

There are not yet any regulated bitcoin iGaming websites. And there may never be any. One of the key features that make bitcoin transactions attractive to businesses and gamblers, its anonymity, makes it unpalatable to gaming regulators because they cannot verify both the source of funds and the identity of gamblers to uphold the integrity of gaming.

This catch-22 is not lost on the bitcoin industry that argues that increasing the transparency of bitcoin will reduce its appeal to the iGaming industry and kill the proverbial goose that has the potential to lay the golden egg.

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Christine Duhaime is an Advisor to AGB and a Gaming Attorney, Certified Financial Crime and Anti-Money Laundering Specialist.