Cryptocurrencies & Gambling

Cryptocurrencies & Gambling

Allowing players to wager with cryptocurrencies
has proved to be an alluring idea for gambling
companies in all corners of the world, but
regulators have, for the most part, been
predictably cautious to wholeheartedly embrace
a form of payment which promises freedom from
government control.
With many cryptos also beset by massive
fluctuations in value and an association with illicit
dark web activities, the future of cryptocurrencies
in gambling is as complex as the technology that
underpins them.
What are cryptocurrencies?
Cryptocurrencies are digital or virtual assets. They
can be used on platforms that rely on advanced
cryptography to ensure secure transactions by
preventing counterfeiting and double-spend.
Why are operators considering using them?
Using cryptocurrencies to gamble offers operators
numerous opportunities, and new gambling
products and regulations have been established as
a result of the underlying technology.
Already, offbeat unregulated casinos that exist on
the blockchain are processing millions of dollars per
day in crypto-based transactions.
Freedom from any central bank means fewer fees
to pay and should, in theory, make the process of
deposits and withdrawals lightning fast.
Off the chain … and on the chain
Off-chain cryptocurrency gambling refers to
online as well as land-based casinos accepting
cryptocurrencies into a virtual casino account. The
cryptocurrencies can then be exchanged via a third
party into a local national currency, often referred to
as “fiat currency”.
In contrast, on-chain transactions rely on blockchain
technology to facilitate a gambling transaction using
smart contracts, where “a program enforces the
contract built into the code”, according to a 2018
U.S. Senate report.
Decentralised and centralised
On-chain transactions take place on a blockchain
using numerous smart contracts, which rely on
decentralised networks. These are known as
decentralised applications or DApps.
As decentralised networks do not rely on a single
server, the risk of being overwhelmed by internet
traffic is removed, ensuring high-speed internet
connections. However, running a decentralised
network can be costly due to the large amounts of
computer processing they require to operate.
This disseminated system is also designed to be
safer than a traditional network; however, in theory,
if one group gains more than 50 percent of control
over the decentralised servers then it can gain
complete control over its functions. Cryptocurrency
exchange Binance confirmed in May 2019 that
leading cryptocurrency identities considered
orchestrating a wholesale “rollback” of the Bitcoin
blockchain in a move that would have erased days
of spending and allowed crypto-gamblers to reclaim
lost wagers.
Existing and upcoming regulation
The gambling industry appears to be at the forefront
of cryptocurrency regulations, due in part to its
popularity with tech-savvy gamblers. Despite
this, the regulation of cryptocurrencies is still very
much in its infancy compared to other areas of the
gambling industry.
In 2017, the Isle of Man began to offer licences
to crypto-betting operators and skins betting
operators. Crypto-betting operators Unikrn and
Luckbox received their licences in 2018 and 2019,
respectively.
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The Malta Gaming Authority (MGA) has also made
inroads into regulating the use of cryptocurrencies
in gambling. Its regulation is now in its second
“sandbox” phase.
The Gambling Commission in the UK advises
consumers to be cautious when using digital
currencies to gamble due to what it sees as
associated risks:
» There is no central authority that supports the
value of digital currency (Bitcoin, for example, has
a history of large price fluctuations).
» There is a history of hacking, theft and other
criminal activity associated with digital currencies.
Other international regulators, such as in South
Africa, have also expressed a desire for future
regulation on the use of cryptocurrencies in the
gambling industry to ensure its proper supervision.
Cryptocurrency regulatory risks
Some regulators see the security and decentralised
appeal of cryptocurrencies as a risk to money
laundering, terrorist financing and know your
customer (KYC) checks and the verification
procedures they already have in place.
“The issue with cryptocurrency is people want
to have anonymity talking about payments and
payment sources,” said Louis Rogacki, deputy
director with the New Jersey Division of Gaming
Enforcement (DGE).
“It’s the anonymity that right now is causing a
problem and anything we do concerning payments
from a regulatory standpoint, we are going to be
guided” by the U.S. Department of the Treasury’s
Financial Crimes Enforcement Network (FinCEN),
anti-money laundering regulations and our
department of banking, he added.
Since at least 2017 there have been numerous
gambling products running on a blockchain,
and although some have made inroads in to the
traditional online gambling market, many exist a
world away from the regulated sphere.
These bootstrap outfits are not built by online
gambling incumbents, but crypto specialists with
little regard for regulation.
Many financial institutions also remain highly
cautious about the use of cryptos for payments of
any kind and for the most part do not consider them
to be of equal practical use to fiat currencies.
Sweden’s central bank in March 2018 said “cryptoassets
or cryptocurrencies are not the same thing as
money. This is because these assets lack an official
issuer and because at present, they do not meet
the conditions required of an efficient means of
payment.”
In 2019, a research report from blockchain
analytics firm Elliptic found close ties between
cryptocurrencies traded on the dark web and money
laundered through online gambling sites.
U.S. Treasury’s FinCEN director Kenneth Blanco
said U.S. casinos facilitating cryptocurrency
transactions fall under the authority’s remit, urging
them to enforce the same controls applicable to
money services businesses.
Where are they banned?
According to the Library of Congress, trading or
using cryptocurrencies has already been banned
in eight countries: Algeria; Bolivia; Egypt; Iraq;
Morocco; Nepal; Pakistan; and the United Arab
Emirates. An “implicit ban” applies in Bahrain,
Bangladesh, China, Colombia, the Dominican
Republic, Indonesia, Iran, Kuwait, Lesotho, Lithuania,
Macau, Oman, Qatar, Saudi Arabia and Taiwan.
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Authors: Harrison Sayers, Douglas Clarke-Williams
Editors: Joe Ewens, Louise Coleman, Hannah Frost
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a product of VIXIO Regulatory Intelligence. Information
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