Online Gambling in the Age of Cryptocurrency
Gambling, in one way or another, has been part of American life for centuries—early colonists participated in activities such as lotteries, betting on cock fights, and other games of chance. Throughout our history, gambling has remained a source of moral debate. On one hand, it is argued that Americans should be free to use their money how they see fit, and gambling typically consists of ‘harmless’ games. On the other, gambling can become a crippling addiction that leads many to economic hardship and is often tied to corruption and crime. This tension has resulted in a complex regulatory relationship between the government and the gambling industry. Nevertheless, gambling has only grown in popularity over the years and is now a massive industry that generated over 40 billion dollars in revenue in 2019 alone. The United States is now facing even more regulatory complexity as the rise of the internet and cryptocurrencies has rendered the existing regulations largely ineffective.
Throughout American history, regulating gambling has largely been the responsibility of each state. The federal government has taken a back seat role and typically gets involved only to supplement and support state law in the face of interstate gambling.
As with many aspects of modern life, the rise of the internet has quickly and drastically changed the gambling landscape. Online gambling sites began cropping up in the 90s, and people who lived in states where gambling was illegal were suddenly able to sign up online and make bets from anywhere. Even people in states where gambling was legal took advantage of the convenience of online gambling.
Many of these gambling sites were hosted abroad, resulting in the shift of a large portion of potential gambling revenue to offshore operations. Further, these online gambling hubs lacked any regulation and were much more likely to rig odds in their own favor or participate in money laundering schemes.
Finally, in 2006, the federal government deemed it necessary to take a more active role in regulating online gambling and passed The Unlawful Internet Gambling Enforcement Act (UIGEA). The UIGEA did not go so far as to outlaw online gambling. In fact, it didn’t impose any liability on individual online gamblers and included a clarification in its purpose section that emphasized that the Act should not be construed as “altering, limiting, or extending any Federal or State law . . . prohibiting, permitting, or regulating gambling within the United States.” Instead, the Act prohibited businesses from accepting payments from people engaging in any form of illegal online gambling. The main provision reads: “No person engaged in the business of betting or wagering may knowingly accept [any form of payment], in connection with the participation of another person in unlawful Internet gambling.”
In effect, the Act put online gambling purveyors that accept payments from players in the United States in violation of the law unless they are directly authorized by a state and acting in accordance with that state’s laws and all bets or wagers are initiated and received within that singular state. It also prohibited financial institutions from processing any gambling payments.
Naturally, many online gambling sites stopped allowing players in the United States from gambling on their websites to comply with the law. But of course, some online gambling sites remained in operation. Online poker sites, for example, hoped that the vague language of the UIGEA did not cover poker, since poker can be characterized as a game of skill rather than of chance.
In 2011, though, the Department of Justice exercised its first major enforcement of the UIGEA and shut down these online poker sites, while at the same time freezing millions of players’ accounts, many of which held enormous sums of money. Mass chaos ensued. Avid online poker players refer to the date of the shut down as “Black Friday,” and as a result, ‘illegal’ online gambling largely tapered off for several years.
Currently, online gambling is legal in six states: New Jersey, Connecticut, Delaware, Michigan, Pennsylvania, and West Virginia. Gamblers in these states can access and legally gamble on a small selection of state-authorized casino websites. These states have seen massive benefits from the legalization of online gambling. New Jersey, for instance, has generated over $600 million dollars in tax revenue since it first authorized online casinos in 2013.
However, those located in the remaining 44 states where online gambling is illegal were largely out of luck. Recently though, thanks to the rise of individual VPN use and cryptocurrencies, online gambling has had a huge resurgence. But of course, with this resurgence comes new legal implications and gray areas.
A Virtual Private Network (VPN) is a service that allows you to encrypt your data and mask your computer’s IP address when you surf the web. It does so by connecting you to the internet via a secured private server, rather than through your own internet service provider. When using the internet through a VPN, websites you visit do not know your IP address, which normally connects your location and identity to your online activity. Instead, sites only know the IP address of the VPN. VPNs themselves are legal and a valuable way to use the internet while also protecting your personal data. But they also give people the freedom to do things they wouldn’t, or couldn’t, do if their activity were tied to their personal IP address.
American online gamblers have taken to using VPNs located in more gambling friendly countries in order to circumvent online casinos’ bans on American users. However, most of these sites ultimately require users to provide personal information in order to validate users’ identities prior to allowing them to deposit and withdraw funds. This validation step effectively filters out most American online gambling attempts. That is, until the rise of cryptocurrencies.
On a basic level, cryptocurrency is a type of digital money that is encrypted and decentralized. Cryptocurrencies allow users to anonymously participate in transactions without the help of a traditional bank or financial institution. Over the past few years, as cryptocurrencies have gained major traction, online casinos have kept up with the trend and many now accept cryptocurrencies. Some casinos have even cropped up that run exclusively on cryptocurrencies. The anonymous nature of using a cryptocurrency has made it possible for virtually any American, especially if they are masking their IP address with a foreign-based VPN, to gamble online at offshore online casinos that accept cryptocurrency. And not only are they able to do so, but it is virtually risk free.
Since the UIGEA didn’t criminalize the act of online gambling for players, there is currently no federal legal risk for those who choose to skirt location restrictions and gamble on sites that technically are not allowed to operate in the United States. And while some states have laws that make it a misdemeanor to participate in unauthorized gambling, these laws are seldomly enforced and rarely specify the rules surrounding online gambling in particular.
The online “crypto casinos” themselves also face little risk. First, it is not yet established whether cryptocurrencies fall under the definition of ‘payments’ set forth in the UIGEA. And second, cryptocurrencies make it much harder, if not impossible, to trace the physical location origins of payments. Therefore, it is much harder to pin any misconduct on crypto casinos.
Online gambling has recently become even more widespread and has reached younger audiences it otherwise may not have via live streaming on sites such as Twitch. Popular online personalities and influencers have developed a new niche in which they live stream themselves online gambling, most often playing slots, and often for hours on end. Thousands of people tune in to watch them win, or squander away, incredibly large amounts of money. These influencers also often share incentives or bonuses for their viewers to sign up with these online casinos, which opens another can of legal worms given it is unclear whether the streamers are gambling with their own money or have the odds rigged in their favor to draw in more customers. This is on top of the fact that they are influencing people to partake in a legally ambiguous activity (and often they are influencing children to gamble, which is certainly illegal).
There are no signs of the online gambling fad slowing, which leaves the United States in murky waters with respect to the legal and policy implications it raises. Some have suggested that criminalizing the act of online gambling is the only viable solution. Others argue that the UIGEA should be repealed and that online gambling should be legalized and further regulated to make it safer and more fair for American residents, as well as to generate tax revenue. The government will likely need to determine a course of action sooner rather than later to combat the undoubted consequences of unchecked online gambling.
Mari Earhart-Price is a second-year law student at Northwestern Pritzker School of Law.