Bit by Bit

Virtual Currency Takes Online Gaming by Storm

By: Lawrence G. Walters www.firstamendment.com

The virtual currency Bitcoin has been making headlines since its inception in 2009. Billed as a secure, non-regulated, decentralized currency[1] with the added benefit of user anonymity[2], Bitcoin has grown dramatically in the past several years, with more businesses accepting the form of payment (and more of the populace aware of its existence) every day. How will the online gaming industry be affected by the proliferation of Bitcoin? As yet, its future is uncertain, but the impact of this virtual currency is being felt throughout the world.

Bitcoin Overview

Bitcoins have been around since January 2009, when the first Bitcoin block, known as the “Genesis Block” was mined. Even before that, however, in November of 2008, a design paper was published online entitled “Bitcoin: A Peer-To-Peer Electronic Cash System,” under the pseudonym “Satoshi Nakamoto.” To date, no one is certain of Nakamoto’s identity[3], but theories abound, from Nakamoto being an individual cryptographer or game developer to the possibility of Nakamoto as a computer collective.

Bitcoin is meant to be an anonymous, peer-to-peer currency that is self-regulated by the community at large. Bitcoins cannot be created or destroyed: there is a finite number that can ever exist. More Bitcoins are brought into circulation through “mining.” Bitcoin “miners” assist in the processing of transactions (known as blocks) on the public ledger and are rewarded with a certain number of the newly issued (or “mined”) Bitcoins. Users can keep track of all the Bitcoins currently in circulation on the public ledger, known as the block chain.

Bitcoin transactions take place on virtual markets known as exchanges and are stored by users in unique “wallets,” which contain private keys that allow users to prove ownership of their Bitcoins and protect themselves against dual transactions.

Where is Bitcoin headed?

The future of Bitcoin as a legitimate currency is still unfolding. Although proponents of Bitcoin are full of faith in the medium’s ability to overcome infrastructure problems, the currency has not been free of flaws. Bitcoin critics frequently cite issues that would hinder development of Bitcoin into a legitimate currency, such as its extreme volatility and vulnerability in the electronic system.[4] As of this writing, the value of Bitcoin plunged dramatically following the halt of withdrawals by major exchange, Mt. Gox.[5] While the exchange promised[6] to resume normal trading after implementation of a “work around,” sceptics expressed deep concerns[7] about the future of the currency. Bitcoin has also received a slew of negative attention due to its use on the online market for illegal goods that was known Silk Road,[8] and other money laundering cases.[9]

Bitcoin as a Recognized Currency?

Although Bitcoin is still currently unregulated by the U.S. government, that may soon change. A recent federal court decision found that Bitcoin is indeed a form of ‘money.’ In that case, the judge noted that because Bitcoin could be “used as money” and “used to purchase goods or services,” and “exchanged for conventional currencies,” that it was, in fact, a currency.[10]

Additionally, at a recent Senate committee hearing, the U.S. Department of Justice found that Bitcoins could be considered a “legal means of exchange.” Although Federal Reserve chairman Ben Bernanke also weighed in, saying the Federal Reserve “does not necessarily have authority to directly supervise or regulate” virtual currencies, legal precedent is still evolving on that issue.[11]

New York’s financial services superintendent, Benjamin Lawsky, has also announced plans to regulate Bitcoins[12] by the end of 2014. Lawsky’s plans begin with issuing licenses to companies that deal in Bitcoins. It is unclear whether this will have a substantial impact on Bitcoin exchanges, as Bitfloor and BitInstant, two large exchanges based in New York, are no longer active.

Some, however, do not believe that Bitcoin regulation would be productive. Bruce Fenton, a member of the Bitcoin Financial Association, believes that financial regulation for Bitcoin could also spell the end of innovation.[13] Fenton doesn’t dismiss all possible regulation, however, noting that consumer protections laws would be most helpful in the Bitcoin arena, as opposed to traditional financial oversight. Consumer protection regulation for Bitcoin would also be the area most germane to the online gaming industry.

Bitcoin & Online Gaming

Bitcoin gaming is surging in popularity. At least one major news outlet for Bitcoin[14] and other virtual currency has suggested that online gaming could be the next great market for Bitcoin. CoinDesk, which analyzes trends in the digital currency world, recently noted that due to Bitcoin’s “privacy, immediacy, and payment finality,” it may be perfect for online gaming.

Users and operators, alike, favor the anonymity provided by the virtual payment system. This anonymity facilitates access to gaming activity that might otherwise be geo-blocked for players – in certain regions – by sites accepting traditional payment methods. The increasing interest in Bitcoin by the gaming industry will force regulators, operators, and service providers to consider how the industry will grapple with the maverick currency.

There are, of course, already online gaming websites utilizing Bitcoin[15] in a variety of ways. SatoshiDice, one of the top Bitcoin-based gambling sites, launched in 2012, but U.S. players are blocked. Recently, Vera&John, a major online gaming site registered in Malta, announced that it would soon accept Bitcoin deposits.[16] Vera&John immediately and automatically converts all Bitcoin player deposits into Euros, thus insulating itself from the market risk of holding Bitcoins over a period of time. Additionally, customers that do make deposits in Bitcoin are required to withdraw funds only in Bitcoin. Vera&John’s strategy is similar to the one announced by WinPoker last year.[17] Importantly, neither website accepts U.S. play.

Legality of Bitcoin-Only Gaming

Recently, NPR journalist Cyrus Farivar spoke on the topic of Bitcoin and internet gambling.[18] The question he posed was about the legality of online gambling with Bitcoins: If the customer bets exclusively in Bitcoin and the winnings are exclusively in Bitcoin, is it still illegal? Jerry Brito, a senior research fellow at the Mercatus Center at George Mason University, says that no one, including the operators of Bitcoin-based online casinos, is really sure. However, the more recognized the virtual currency becomes, the more likely it will be deemed to be a ‘thing of value’ that could fulfil the ‘consideration’ or ‘prize’ elements of gambling.[19]

The legal risks associated with any online gaming activity often boil down to whether the games are knowingly offered to customers in jurisdictions where Internet gambling is illegal. Thus, licensed and regulated gaming operations undertake extensive Know Your Customer (“KYC”) efforts to identify players located in jurisdictions that clearly prohibit online gambling. Ultimately, there is no rational reason to prohibit the acceptance of Bitcoin, or any other reliable virtual currency, from being accepted by an online gaming site that has implemented industry-standard KYC protocols. The location and identity of the customer will already have been verified. Moreover, the site will already have conducted due diligence on issues like age of majority, compulsive gambler exclusion, and location of the player.

The more difficult question arises in the context of Bitcoin-only gaming sites. Theoretically, such sites could accept deposits from minors, compulsive gamblers, and individuals in jurisdictions where online gambling is illegal. However, the increased popularity of virtual currency in general, and Bitcoin in particular, will compel the development of standards and procedures to be employed by gaming sites that accept only anonymous currency. Presumably, gaming regulators could impose existing KYC requirements upon operators that accept virtual currency, and achieve the same degree of compliance generated by those entities which restrict player deposits to more recognized (and traceable) currencies. Once the customer has been identified by the gaming site, the customer should arguably be able to utilize any payment method deemed acceptable by both parties. Some complications are generated by the inherently anonymous nature of Bitcoin, and the inability to reliably trace a particular Bitcoin transaction to a specific individual. However, security features can be built into account management software to enable transaction verification, and ensure that the known customer has initiated a particular deposit or withdrawal. With the use of virtual currency becoming increasingly commonplace, such technology will only improve.

Online Gaming Regulatory Issues

So, how should gaming regulators respond to the rapid proliferation of Bitcoin? As with any other social change, the most reasonable solution is to adapt. Gaming operators and licensing authorities have the ability to identify the concerns associated with Bitcoin (or other virtual currency) and implement viable solutions to address specified problems. Treating Bitcoin as a “tainted” payment method, merely because of its inherent anonymity and capacity to be used for nefarious purchases, is irrational. As is true of the Internet, itself, Bitcoin has the propensity for good, evil, and neutrality. By isolating the regulatory concerns associated with anonymous payment methods, the industry can work together with regulators to develop a viable solution to the intriguing legal and policy concerns generated by use of virtual money.

Lawrence G. Walters, Esq. heads up Walters Law Group, which represents clients involved in all facets of the online gaming industry. Nothing in the foregoing article is intended as legal advice. Mr. Walters can be reached via www.FirstAmendment.com, or 800.530.8137.

Legal Online Poker Slowly Spreading State by State

When Nevada unveiled a trial run of legalized online poker this spring, it became the first and — so far — only state to allow the Internet version of the game since the federal government shut down a number of sites two years ago. Ultimate Poker offers an opportunity for anyone in the state to join in a poker game while sitting in their living room, with no need to make the trek to a casino. While Nevada is unique in this respect to date, it could soon be joined by other states with their own online gaming halls. Games hosted by overseas companies had widespread clientele across the United States, but the government seized their domains in 2011 and shut them down in a cyber raid known as “Black Friday,” resulting in thousands of players not being able to access the money they had put into them. Online gambling in general has been considered illegal under the 1961 Wire Act that criminalizes betting on sporting events. However, in December 2011 the Justice Department issued an opinion that the Wire Act only applied to sports betting, which gave a green light to states to legalize other forms of online gaming as long as it was restricted to people within state limits. That means the Nevada law applies to people in-state only. “Nevada has issued some licenses, but the applicable regulations prohibit non-residents from actually playing for real money,” says Lawrence G. Walters, managing partner of the Walters Law Group, who follows online gaming law. “All licensed poker software is required to have robust geo-location verification built in. So it is unlikely that a non-resident will be able to participate, unless they are a skilled hacker.”

Poker Pockets

Delaware is the only other state where online poker playing could technically be legal under current law, but current projections indicate that poker will not be included when they roll out live online gambling sites in September.   Lawrence G. Walters Because the population of the state is so small, at under a million people, there are questions about the viability of an in-state only poker industry. Officials may wait until more states allow the game so they can partner together and increase the pool of potential players. “Ultimately, states where legalization has occurred may form compacts so that they can share players with each other, resulting in ‘pockets’ of legal online poker throughout the U.S.,” Walters says. New Jersey is hoping to join the online gambling party by November. Someday, online poker that is open to all citizens could return to the United States, and there are a few related bills currently sitting in Congress, but it could take some time before anything actually happens on that front. “My prediction is that legalization is unlikely in the current Congressional Session, given the tremendous gridlock in Washington, DC,” says Walters. “Congress can’t even seem to pass a simple Farm Bill, so something as controversial as online gambling legislation will be an uphill battle.” Congress might surprise us, but absent movement on their part would-be gamblers will have to wait for their home states to take action on their own. “Federal legalization could occur by attaching a stealth bill to some omnibus piece of legislation,” Walters notes. “While anything is possible in the realm, it is more likely that the states will tackle the legalization issue – one at a time.”