Illegal online gambling has new life with Bitcoin allowing users to find loophole in laws that almost killed the industry.
The Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) started the downfall of legal online gambling in the US and gave rise to the underground operations that we have come to know today. The law states that: “prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law.” However, with the strengthening of forensic auditing tools, many operators started to look for an alternative system to remain in operation, including offshore operations. Net Teller was one of the first to run offshore operations from the Isle of Man in 2004 ahead of the UIGEA. They were the leader of US gambling transactions with 95% of their revenue coming from these operations. Accounts of US users were frozen as the firm exited the US, and funds were eventually returned after 30 July 2007. As a result of this enforced exit from the US market, and the risks associated with online gambling, the firm has sought to diversify. Despite this, Neteller fee revenues fell from $239 million USD in 2006 to $44 million in 2010.
This all came to a head on April 15, 2011, known by many as Black Friday and coincidentally was also Tax Day in the United States, the U.S. Department of Justice proceeded to close down the major players of the online gambling industry and indicted the heads of them for charges ranging of bank fraud, money laundering, and illegal gambling. Players were left in the dark as their accounts were frozen and some who did manage to get some out, sought protection for their funds in countries with strong banking protections, like Malta or Hong Kong. Gamblers in the U.S. had more than $100 million in online accounts frozen.
Michael Hajduk, a veteran of the industry who lost $20,000 USD in the crackdown was resilient and with his Calgary-based Infiniti Poker is planning to allow players to use Bitcoins to help circumvent the same laws that shut him down two years ago. When speaking with Businessweek earlier this year, he stated that, “Because we’re using Bitcoin, we’re not using U.S. banks—it’s all peer-to-peer,” Hajduk says. “I don’t believe we’ll be doing anything wrong.”
A loophole for many vices
Started by a programmer or group of programmers known only as Satoshi Nakamoto, Bitcoins are a decentralized non-inflationary digital currency which can be transmitted to any user with an internet connection and an application known as a wallet. The wallet and the currency are encrypted, thus not only protecting the funds themselves from regulation for the time being, but also the identity of the owner of the wallet and the funds inside. These transactions, which may breathe new life into online gambling, have also been tied to an underground exchange for illicit drugs, The Silk Road, which is one reason the currency has brought on new scrutiny, in addition to the price rising as high as $266 USD, though now settled at $104 USD.
The beauty of accepting Bitcoin not only lies in the ability for players in the US and other countries like Spain and France (where gambling is heavily regulated) to circumvent the regulations that they normally be held to. Paying into the games and getting money out is greatly streamlined, where normally funds can take 1-2 weeks to be transferred through bank transfers, depending on the jurisdiction and how the user needs to request them. With Bitcoin, the transaction in both directions can be cut down to a matter of minutes and with much lower transaction costs.
Questions of how to regulate what cannot be traced
It’s unclear whether the government will go after Bitcoin gambling sites. The question becomes how the Justice Department or any regulatory authority can go after either the players or the hosts. The IP’s may be blocked but the same proxy servers, which have allowed communication in heavily restricted countries like Iran and others, could be used to allow gamblers access to the sites. The funds many times are not held by the sites, in the case of games like Satoshi Dice, which allows users to make a single bet and following winning or losing automatically cash out.
Some challenges may come in the form of regulating the currency itself, rather than further regulations on online gambling. California’s Department of Financial Institutions this week has issued a cease and desist order to the Bitcoin Foundation, a group that does not administrate the currency, but promotes and assists companies who are using and encouraging the Bitcoin distribution on and offline. The foundation also accepts dues and donations in Bitcoin. The order states that the foundation is “allegedly engaging in the business of money transmission without a license or proper authorization. Should they be found to be in violation of the order, penalties can range from $1,000 (£650) to $2,500 (£1,625) per violation per day in addition to being charged for violation of the order (which could lead to more fines and possibly imprisonment). Based on Federal banking laws it is illegal “to engage in the business of money transmission without the appropriate state license or failure to register with the US Treasury Department.” Penalties under that law can be up to five years in prison and a $250,000 (£160,000) fine, on top of the state penalties.
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The issue with the letter however comes in the misconceptions about the foundation itself. The State of California demanded that the foundation stop “trading” the currency, but the foundation does not act as an exchange, but rather as a source to help those who wish to use or accept the currency in their businesses. This legal technicality, though a blessing in disguise should California pursue a judgment based on the order, is a clear warning that challenges are on the horizon.
Risks to users from within
There are other risks as well. Hackers have been able to find exploits in some users who they found had a large amount of bitcoins in their wallets and did not take proper precautions. Another risk lies in that Bitcoin wallets can vanish as a result of hard-drive crashes or other computer problems. The foundation and many others suggest users have backup copies on USB thumb drives, or using a cloud wallet service.
Though there are no major regulations in place to stop players from using their Bitcoins in online casino or gambling games, it is certain that there will be attempts coming in the coming months. However, many speculate that rather than trying to stop the transactions entirely, that regulations will be put into place that will allow a tax scheme to give a piece of the profits to the governing authorities, which especially in the US and Europe are cash strapped and heavily in debt. This will pose its own challenges as the currency by its nature is not able to be tied to individuals who hold the currency, but the sites which host the games could be monitored and audited. This taxation will only bite operators, as individuals would like any other form of capital gains would have to report their winnings. However, many feel that the need for new revenue streams and the proven difficulty of prohibitions will instead result in licensing and taxation on crypto-currencies.
Payment Magnates will continue to cover the legal implications of Bitcoins as they develop in the coming months.