Before providing an update on the crypto-gaming landscape, it is important to note the prevailing laws that regulate gambling in the United States:
Current Regulation
Wire Act
The Wire Act specifically prohibits the transmission of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest through wire communication facilities. Initially, it was interpreted to apply to all forms of online gambling. However, in 2011, the Department of Justice (DOJ) issued an opinion clarifying that the Wire Act only applies to sports betting. The 2011 DOJ opinion stated that the Wire Act’s prohibitions are limited to interstate sports betting and do not extend to other forms of online gambling, such as casino games and poker. This interpretation opened the door for individual states to legalize and regulate online gambling within their borders, apart from sports betting.
The Unlawful Internet Gambling Enforcement Act
The Unlawful Internet Gambling Enforcement Act (UIGEA) is a federal law in the United States that was passed in 2006. The primary objective of the UIGEA is to regulate and prohibit certain types of online gambling activities by targeting the financial transactions associated with them. The UIGEA does not explicitly make online gambling illegal. Instead, it focuses on prohibiting financial institutions, such as banks and credit card companies, from knowingly processing payments related to unlawful online gambling. Under the UIGEA, “unlawful internet gambling” refers to gambling activities that are illegal under any federal or state law. It includes bets or wagers that are prohibited or not authorized by the state or tribal laws where the bet or wager is initiated, received, or otherwise made.
The UIGEA places the responsibility on financial institutions to identify and block transactions that are associated with unlawful internet gambling. It requires them to implement and maintain policies and procedures to prevent such transactions from being processed. However, while the UIGEA has had a significant impact on the online gambling industry in the United States, it’s important to note that it does not apply to all forms of online gambling. It primarily targets sports betting and certain other forms of gambling that are deemed illegal.
State Regulation
Online gambling regulations in the United States are now primarily governed at the state level. Some states have passed legislation that specifically legalizes and regulates certain forms of online gambling. These states typically establish licensing requirements, age restrictions, consumer protection measures, and oversight mechanisms to ensure the integrity of the industry. Examples of states that have legalized online gambling include New Jersey, Pennsylvania, Delaware, and Michigan.
Following the Supreme Court’s 2018 ruling that struck down the federal ban on sports betting (PASPA), many states have also moved to legalize and regulate sports betting.
Cryptocurrency & Online Gaming in 2023
The UIGEA does not specifically mention or address cryptocurrency transactions – perhaps in large part because it predates (2006) the advent of cryptocurrency. However, while the norm in most cases, no additional guidance has been issued concerning the use of cryptocurrency by US residents on offshore casinos (i.e., casinos and sports not holding a gaming license anywhere in the US). For that reason, many have argued that the use of cryptocurrency as a means of betting and wagering on otherwise unauthorized casinos and sportsbooks are somehow exempt from UIGEA.
That is a dubious proposition at best.
Nevertheless, let us go down the rabbit hole in an effort to explore this proposition. The UIEGA defines a “financial institution” as any entity which:
- Is engaged in the business of financial activities,
- Is regulated or supervised by a federal or state agency, and
- Is one of the following: a. A depository institution (such as a bank or credit union). b. A credit card issuer. c. A money transmitting business. d. An operator of a terminal at which an electronic fund transfer may be initiated. e. An operator of a casino, gambling ship, or similar business.
Recall that the UIEGA assesses liability on the financial institutions – banks, money transmitters, money service business and payment gateways for facilitating transactions where the offshore casino is the recipient of the funds. Contrary to popular belief, the actual player (i.e. gambler) does not face liability for their actions in placing a bet. Again, the focus is not the illegal gaming but rather the financial transactions emanating to and from the online casino.
The argument I have come across often is that the basic transfer of Bitcoin to an offshore casino would not trigger the UIEGA because no financial institutions necessarily are involved (unless a transfer was made by a crypto exchange, which are regulated as money transmitters). Notably, the UIEGA does not explicitly define the term “payments” within its text. Rather, there are a number of references within to the transfer of “funds’ which is also not defined and presumably would refer to fiat currency – which is logical considering the UIEGA predates cryptocurrency.
This argument has not been tested in any court in the US – whether in the criminal or civil context. Given the generally expansive reading of US Courts relating to gaming-related laws, I would not want to be in first position to have to try to win that argument. Ultimately, the transfer of value (e.g., cryptocurrency) is likely to be what government successfully points to in making their case.
Gaming in Web 3.0 and the Metaverse
Another argument that I am often confronted with concerns gaming in a decentralized environments such as Web 3.0 and the Metaverse. Again, I would argue that there is little legal precedent to justify an exemption from the UIEGA. Notably, a federal court in California recently held that a court has the potential to render all DAO members jointly and severally liable for any claims against a DAO. In my opinion, too much prospective liability – especially in the context of potentially illegal gambling, to justify relying on this untested legal argument.
Games of Skill v. Games of Chance
One “safe harbor” that crypto gaming ventures may rely on is the dichotomy of games of skill vs. games of chance.
Games that are predominantly based on skill rather than chance are generally subject to less strict regulations than games of chance. Games of skill are generally considered legal across the United States, although specific regulations and restrictions may vary by state. Examples of legal games of skill (in a majority of states) include poker, daily fantasy sports and eGaming.
On the other hand, games that are primarily based on chance, where the outcome is predominantly determined by random events will be subject to the UIEGA and other regulation.
Conclusion
The barriers for entry for obtaining a gaming license have been coming down in the US as more states have legalized online casinos and sportsbooks. Thus, crypto-based operators may be well advised to explore those options. Conversely, popular offshore jurisdictions such as Curacao, Isle of Man, Malta, Gibraltar and more offer a less costly alternative but will specifically prohibit the introduction of US players. At the end of the day, it comes down to target markets and the anticipated capital outlay.
As always, be sure to reach out to me with any questions or book a meeting here.
About Adam Tracy
Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.
Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.
In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.
Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, CoinDesk, and Bitcoin Magazine.
Find Adam: https://linktr.ee/adamtracy