What is Bitcoin Gambling?
Wanna bet? A number of online bitcoin casinos, sportsbooks and poker rooms are popping up that take advantage of the bitcoin network. Harnessing provably fair technology as a gambling solution has the potential to be a disruptive force in the online gambling market. It eliminates distrust gamblers might have when playing roulette, blackjack, or other games like dice, offering operational savings that can be translated into additional value for players.
Players are able to register, deposit and withdraw in literally seconds. Additionally, bitcoin players enjoy greater insight into game integrity due to provably fair methods adopted in the bitcoin casino market.
We outline below the advantages of bitcoin betting over mainstream online fiat gambling, discuss a few drawbacks, and look at where the market is headed.
Fiat payment processing is a multi-headed beast.
First, it is expensive, with the most popular e-payment solutions charging high fees on deposit and/or withdrawal of funds. Market coverage varies depending on the payment solution, and thus operators are forced to integrate multiple options per market which requires additional overhead and technical integration.
Second, payment options allow users the ability to reverse payments. Otherwise known as chargeback, this practice is particularly damaging on the poker side of the industry. Operators get hit with a double whammy, as not only do they lose the potential rake earnings of the chargeback account, they need to pay out of pocket when the charged-back funds are withdrawn by a winning player.
Lastly, payment processors can adjust their gaming policy based on market. If a particular government changes its position on gambling online, payment processors can shut their doors to the market. This adds a degree of uncertainty to the operation of casino sites.
So payment processors are fickle and expensive both in terms of direct costs and overhead. The expense must be passed on to players in the form of worse odds and/or additional processing costs. Additionally, casinos are forced to set minimum deposit thresholds, as too low a deposit won’t cover the eventual transfer costs.
Bitcoin solves all of this. Bitcoin transactions are fast and cost pennies, if anything. Bitcoin payments are irreversible eliminating the threat of chargebacks. And the bitcoin network is decentralized, available wherever there is internet and managed by nobody. Bitcoin will be in any market, regardless of government’s position on it or online casino.
All this leads to drastically reduced operational costs, reflected in better odds and no-transaction costs for players.
It used to be a breeze to operate an online sportsbook, poker room, or casino site. There was no real regulation. Players from all countries were subjected to the exact same registration process. Large payment solutions, such as Neteller, worked in most markets, and thus provided a convenient method of accepting payments worldwide. This was the golden age of online gambling for operators and players alike.
Then came the Federal Unlawful Internet Gambling Enforcement Act (UIEGA) in the United States, and country-by-country regulation in the European Union. Different requirements were established by country. Large taxes were placed on betting activity, sometimes, as was the case in France, to a degree which undermined market viability. Payment solutions, such as Neteller, closed their doors in many markets, including the United States.
This all had a large effect on the quality of gaming for the player. On the one hand, only the biggest and most solvent gaming companies were able to operate within regulated markets, and were strictly governed to ensure player security. On the other, choice has been curtailed, high costs of operation has been passed on to players, and certain markets are closed, either de facto or de jure, to particular game categories.
Bitcoin, it might be said, provides an alternative market with the potential to restore the old golden days.
Legality in the United States
In 2006, The Federal Unlawful Internet Gambling Enforcement Act (UIEGA) made processing online transactions for internet gambling operations illegal. Banks, credit cards and money transmitters like Western Union were obligated by law to identify and block payments destined for online casino and gambling sites.
It also made it illegal for gambling sites to knowingly take payments in connection with online wagering, prohibiting operators from accepting credit cards, electronic fund transfers, checks, or any other financial transactions involving a financial institution, as decided by the government. What the law does not do is make the physical act of gambling online illegal.
As UIEGA regulates poker, casino and other games of chance by restricting the payment transfer methods allowed, and as bitcoin does not fall under any of these categories, have we identified a bitcoin-sized loophole?
If a particular state has additional laws making gambling online illegal, this would obviously pertain to whatever unit of value is used in the wagering. But what about if there are no state-specific laws, the gambling operation is based off shore to avoid interstate regulations, and the entire operation is run using virtual currency?
It seems that, as UIEGA definitions of payment option restrictions clearly do not pertain to bitcoin, bitcoin casinos are not illegal in the United States. Not illegal, that is, until UIEGA is adjusted or bitcoin is regulated as a money transmitter on a federal level. However, there is no definitive answer to the question until it is tested in court, and reasonable people disagree. Until then, US bitcoin casino, sportsbook and poker sites operate in a legal gray area.
Licensing is a double edged sword. On the one hand, a license carries with it a level of gravitas that reassures players as to the reputable nature of a casino operation. On the other hand, in practice, while certain fair-gaming practices are required – and these practices can be independently verified without a license – the main benefit of licensing is that it allows the integration of payment processing solutions and merchant bank accounts. While certain bitcoin casinos do get licensed, it isn’t a requirement as bitcoin circumvents the payment processing issues.
So on the positive side, reductions in licensing costs and associated overhead theoretically leads to greater value for players. On the negative side, it becomes more difficult for players to differentiate between reputable and seedy operators. Although, if we are being honest, a license is no guarantee of either integrity or solvency.
Opening an account
Depending on the market, online fiat operators must enforce different types of know your customer (KYC) standards. KYC requirements are currently fiat-specific regulations designed to protect against money laundering and other unsavory activity. While KYC guidelines are followed when money is exchanged from fiat to bitcoin and vice versa, within the bitcoin network transactions are anonymous and not subject to KYC requirement.
The nature of the bitcoin network allows for a registration process that is simplified to the verge of being non-existent. Transactions between bitcoin addresses are anonymous – well, that is to say – the person behind the bitcoin address is anonymous. What isn’t anonymous is that a payment was generated at a certain time from a particular address, which was digitally signed by that addresses private key. This information is broadcast throughout the entire network, and is readily available to anyone looking for it. By virtue of the signature alone, the transaction is known to be secure and authentic. Thus, a casino needn’t really get any biographical information from a user – all that is needed is the user’s corresponding bitcoin address.
Disadvantages of Bitcoin Gambling
Bitcoin gambling operations are young, and have not amassed the large capital reserves of many fiat operators, many of whom are publicly traded. There is not the same consumer protection offered in regulated markets – in the rare case of player-operator dispute, the outcome is often decided in the court of public opinion rather than by a regulatory agency.
There are some mitigating factors on the above. A handful of operators, like bitcasino.io for instance, have received licenses. This means that disputes can be taken directly to the licensing agency. However, and this is essentially true for both fiat and bitcoin online gambling sites alike – and not restricted to gaming – there is little that can be done in the case of insolvency or fraud.
The youth of the industry also leads to a liquidity gap between mainstream and bitcoin operators. This impacts the gambling experience in a number of ways. In bitcoin poker, it is difficult to find massive tournament seeds and high level cash game action. In casino, progressive jackpots – which are amassed by collecting a small amount of each spin on a particular game or network of games – are must lower than in mainstream casinos. And in sports it is difficult for bitcoin operators to offer the variety of odds in more obscure games or leagues, simply because there are not enough bettors to balance the sportsbook.
Whither Bitcoin Gambling?
There is massive amounts of capital, both technical and commercial, pouring into the bitcoin gambling market. Mainstream end-to-end software suppliers are looking for ways to integrate bitcoin as a payment solution. This has had the effect, felt most strongly in bitcoin casino, of replicating the massive gaming content libraries within the bitcoin ecosystem. The same content can be supported at a fraction of the cost due to the absence of payment processing costs and overhead, and the potential market is larger due to many fiat-specific statutes within many closed or regulated markets. This is without even discussing a more satisfying player experience resulting from a near instant and registration, deposit and withdrawal processes.
There is nothing to suggest that this investment trend will reverse. Players are voting with their feet, as while the mainstream market is contracting, the bitcoin gambling market continues to grow.
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