What crypto can learn from the online gambling industry
Online gambling is one of the oldest online industries and it has been around for more than 20 years. I´ve been working in the online gambling industry since 2010 and I´ve worked with gaming operators, developers, auditors, certification laboratories and also regulators. Contrary to the popular opinion, gambling is a highly regulated industry, with extensive requirements for operators and tight controls on their activities at all levels.
Blockchain, even if it is now almost a 10 year old innovation, is still at his youth and in his first phases of development. And it seems that there are lot of similarities between the cryptoassets and gambling industries.
Online gambling: How did we arrive here?
With the popularization of Internet in mid-90s, online gambling made also his appearence. Even if different versions can be found on who was the first online casino to accept bets, 1995 seems to be the year that started it all. From this moment onwards, several territories started issuing their gaming licenses to companies that followed their usually permissive requirements: Antigua, Gibraltar, Isle of Man, Alderney, Curaçao and Malta are probably the most representative territories to have regulated gambling during these first years, and quite before other “bigger” countries made the step.
After that, the “regulatory wave” reached Europe, where Italy, UK, France, Spain, Denmark and other territories decided to regulate the sector. And also, in parallel, USA decided to totally ban online gambling in one of the most shocking events for the gambling industry.
The thing is that when the “big” countries decided to regulate online gambling, the industry had already moved and established in other territories that saw the opportunity to attract the gaming industry with permissive regulations and low taxes. That´s why in 2016 gambling contributed a 12% of Malta GDP, or 25% for Gibraltar (a number that will certainly decrease after Brexit and other movements from certain countries that are forcing operators to move from Gibraltar and similar territories).
What are the similarities between gambling and crypto?
In my opinion, there are lot of factors that are quite similar between gambling and crypto. Regulation is one of them and I see a clear correlation between current and probable short-term announcements for crypto regulation and what we saw in the last 20 years for gambling:
- Good regulation: Even if “crypto is not regulated” (sic), there are certain signs that make me think that the evolution will be quite similar to the progress of online gambling but at x4 the speed. What Gibraltar, Malta or Isle of Man made with gambling 20 years ago, they will do again with blockchain quite before other bigger (and always slower) countries. More on that later.
- Bad regulation: USA banned online gambling in 2006 forcing international leading operators to leave the country (this article shows a clear summary of what happened). Even more, in 2011, what is known as the “black friday” meant that the government seized domains of 5 of the biggest poker rooms in the world and indicted their owners and employees. Also, more than seventy bank accounts with customer´s money were blocked with several hundred million dollars. This is like if tomorrow, USA government decides to ban crypto, blocks Coinbase, Kraken and Bitstamp, freezes all their banking accounts and arrests their owners. And I don´t see this option as impossible.
- Crypto and gambling involve money: or, at least, involve economically valuable assets. Money and assets that move from players to operators and from buyers to sellers and hodlers. And this usually justifies regulation, because it allows fraud, money laundering, etc. When money is involved, everybody wants to avoid risk and potential fraud. That´s why gambling operators expend high sums in fraud detection and players are very suspicious about making deposits in certain sites. And that´s why no one trust the n-cryptoexchange from Brazil with lowest fees ever.
- Social perception: Who was brave enough to bet online in 1999? Even today, lot of people still think that online casinos are not fair, that RNGs (random number generators) used in online casinos are flawed and that operators are constantly trying to trick you and not return your money back, but the perception of online gambling is undoubtly much better than 1999. I see more or less the same for crypto. Apart from certain circles, lot of people thinks that crypto is just for easy money and ilegal stuff and that regulation must fix that. This will certainly change but it took almost 20 years for online gambling.
- Trust: As commented above, social perception of gambling and crypto are not very high. In gambling it is usual that certification laboratories verify the behavior of the software used, including the RNGs (random number generators) to ensure that they are really random and the integration of games, payment methods, etc. The scenario for crypto is different and usually open source is used, allowing anyone to audit it, but trustworthy third parties will be probably needed anyway.
- Fraud: Online gambling, especially at the beginning was a place flooded with fraud, thousands of unlicensed casinos, constant scams and casinos that dissapeared with no trace. Even today it is not unusual to find untrustful operators, and read forum posts of players who never saw their casino deposits and winnings back. Does it sound like this? What about this? Do you remember when the biggest crypto-exchange was a giant fraud? Didn´t that also happen to the biggest poker room?
- AML & KYC: AML stands for Anti Money Laundering, something that is done through KYC (Know Your Customers) policies. Gambling operators need to follow strict AML and KYC rules to detect suspicious transactions and even communicate them to the relevant authorities. When money is involved, companies need to follow these rules, and crypto exchanges are no exception. Every territory has its ow AML regulations but, in general, gambling operators and crypto exchanges need to verify the customer´s identity, asking for a valid copy of his passport/ID, a proof of residence (i.e. utilities bill), etc.
So, what´s next?
In my opinion, it is very probable that we will see for crypto a similar evolution than online gambling. What I see is:
Short term
Innovative territories like Gibraltar, Malta, Isle of Man and the like will be the first to regulate crypto. In fact, they are already doing so: Gibraltar will probably be the first, Malta has also made some movements precisely in blockchain gambling, and Isle of Man seems to be very ICO-friendly.
It wasn´t surprising at all when Binance announced they were moving to Malta. These three territories are with no doubt, the leading territories for gambling operators and have also very advanced infrastructures, something that is very demanded by both gaming companies and crypto-projects.
In parallel, other countries will discuss long on crypto, publish and debate regulation projects during months or years and focus mainly on chasing crypto-hodlers while all the industry moves to more crypto-friendly territories.
Medium term
Bigger countries will finally decide to regulate crypto but their laws will be much stricter and tighter than the innovators. And also, taxes. Just compare gambling taxes in territories like Malta or Isle of Man versus taxes in countries like France, Italy, Spain or even UK. Taxes are like 5x.
A movement similar to the “regulatory wave” that gambling saw in late 2000´s and early 2010´s (where major European countries regulated online gambling with very similar models) will happen for crypto. But under this scenario, it is really complicated to move established gambling/crypto companies from Malta or Gibraltar to other territories.
At the same time, some territories will ban crypto and some execs from crypto-firms will be jailed, exactly what happened in USA with the ban on gambling. At one point in the future, we will probably see crypto exchanges in grey or “.com” markets licensed in countries like Gibraltar, Malta and the like, and “.country”.
This, more or less, also happens in gambling where access to “.com” operators is usually permitted, and customers can choose between playing in international operators or in their locally licensed ones, who usually offers a plus in security as it falls under local laws. In some cases, countries that regulate online gambling also (try to) ban access to “.com” operators with limited results (usually a VPN is enough) and the same will happen for crypto exchanges.
Long term
Again, similar to gambling, more and more countries will regulate crypto, an already mature and established industry. The effect will be the same than the one described for the medium term but much later. Same old story.
You can´t ban crypto
This argument is usually used by crypto-maximalists. Sure, countries can´t ban crypto. It is a decentralized system and all that. But they can cut the flow from the current system to crypto, similar to the ban of online gambling in USA. If you cut the flow, block exchanges accepting deposits and processing withdrawals, seize domains, freeze banking accounts and arrest their owners… it would be a hard hit for crypto. And remember, this is something that already happened for gambling just 10 years ago!
Who will be still using crypto if it was notoriously forbidden? Sure, this won´t kill crypto, but adoption will come back to 2011 levels.
Why some countries may decide to ban crypto?
(Please note some iroines in the following section, but I wouldn´t be surprised at all if certain countries decide to ban crypto under similar arguments)
- Threat to the establishment and monetary monopolies: There is no doubt that crypto is the biggest threat to monetary monopolies ever. States are the only ones who can print money and none of them is interested in losing this immense privilege. What is the quick solution? Ban crypto.
- Only the bad use crypto: This argument is also very recurrent and exploited by politicians, regulators and authorities. The supposed privacy of bitcoin transactions and other cryptocurrencies encourage its use for bad things like buying drugs, child pornography, gun trafficking, cybercrime, terrorism and so on. The state must protect us from all this bad things so… ban crypto.
- Protectionism: Lot of people losses money in gambling, that´s one of the reasons why there are so many limitations and controls. Even some countries decide to ban gambling (online and/or land based) under the protectionist argument. Lot of people loses money with crypto (and much more will in the future), very few people really uderstand it (I don´t know if this is even possible) and the state is supposed to protect us from unnecessary risks… solution? Ban crypto.
- Avoid fraud: There is no doubt that due to the youth of the crypto-industry and the lack of regulation, fraud is not unusual. In some cases it should be very obvious… but anyway, lot of people fall in these frauds. Even Google, Facebook, Twitter and Mailchimp have decided to ban ICOs under this argument. For example, Facebook states that ICOs are “frequently associated with misleading or deceptive promotional practices”. Isn´t the state supposed to protect us from these scams? Why is crypto still legal?!
- Bitcoin is a ponzi scheme: The ones who defend this thesis obviously don´t understand bitcoin (or any other crypto-project), ponzis or none of them. But it doesn´t matter. Even JP Morgan CEO said so, and if the CEO of the biggest investment bank in the world thinks so, it wouldn´t surprise me that certain politicians share his thoughts. If bitcoin is a ponzi, and ponzis are forbidden, bitcoin must be banned.
- Avoid money laundering and terrorism: As commented above, privacy is one of the key features of cryptoassets, and this means that, in theory, they can be used for these kind of illicit goals. It even seems that ISIS is funded through bitcoin. I can´t imagine a better argument to ban crypto than fight global terrorism.
- Crypto don´t pay taxes: As crypto is usually “out of the system”, states have less control and, as a consequence, collecting taxes is harder than in the “standard economy”. Yes, they can control movements FIAT-crypto and crypto-FIAT, but not crypto-crypto (we will see). Avoiding taxes is illegal, crypto “seems to allow that” (please note the quotation marks!) and controlling and identifying who is behind wallets and transactions is really complicated. Do we need more arguments to ban crypto?
Only time will tell the evolution of crypto and how the states face it, but it seems that there are lot of similarities between the evolution of online gambling and the possible evolution of crypto, so we have some clues of what may happen in the future. In any case, interesting times ahead!