Bitcoin gambling runs into familiar obstacles

Bitcoin’s return into the spotlight after the value of the crypto-currency recently hit a two-year high has reignited interest in gambling industry circles in the potential of harnessing blockchain technology.

The launch in May of a new Bitcoin-only sports-betting offering – going by the familiar name of Sportsbet but with the fashionable-in-the-tech-world domain suffix of .io – has once again highlighted issues thrown up by the confluence of bleeding-edge technology and gambling regulations.

Like many of its fellow Bitcoin-friendly brethren in the casino and gaming sectors, Sportsbet.io has chosen the domicile itself in the offshore-licensing haven of Curacao, often the jurisdiction of choice for those operating at the margins of online gambling. Alongside the Isle of Man, Curacao remains one of the few jurisdictions that have as yet opened their doors to Bitcoin-based gambling transactions, although in the case of the Isle of Man it classes it as property rather than a currency.

It is the inherent anonymity of Bitcoin that both explains the crypto-currency enthusiasm among the more libertarian elements of the tech community and why many gambling regulators are so wary of embracing the form.

The most recent communication from the UK Gambling Commission on the issue suggested the regulator will continue to monitor the use of crypto-currencies in the sector and cautioned operators that they “understand the risks posed… with regard to any payment method that they use”.

But David Clifton, a partner and legal consultancy Clifton Davies, says that while the anonymous nature of bitcoin transactions was “clearly a challenge” when it comes to KYC, he doesn’t believe that it remains a “no-no”. “The need to have an effective and risk-based approach to AML (that includes establishing a customer’s source of funds) presents obvious compliance issues when dealing with digital currency transactions,” he adds. “It may be that future technology developments will provide the means of satisfactorily addressing those issues by making the use of digital currencies more transparent and clear.”

One issue that will have to be addressed before Bitcoin finds wider regulatory recognition is that of sports integrity. Leigh Thompson, policy manager at the Sports and Recreation Alliance, an umbrella body for sports organisations in the UK, points out that without access to information on suspicious betting patterns and the ability to identify individuals involved in any given transaction, it would be very difficult to either track or indeed trace anyone involved in sports-betting corruption.

As it stands the majority of Bitcoin gambling that takes place globally is casino and according to Nick Garner, the founder Oshi.io, one of the recent new entrants which followed in the wake of the launch of SatoshiDice in 2012, the revenues generated remain insignificant at present. But this might change as growing cost of compliance within the gambling industry severely curtails what the larger operators can achieve with regard to innovation.

“The question will be whether tech-savvy consumers will go to crypto-currency gambling because of the freedoms and innovations it offers,” he says. “I think crypto-gambling will evolve and in five years’ time become a real issue.”

Countering Clifton’s hopes for technology to provide regulators with the solution to their concerns over the nature of Bitcoin, Garner is rather more downbeat on the chances of the world’s regulators ever being able to get to grips with the basics behind crypto-currencies. “A lot of the technology is so incomprehensible to a typical middle-aged civil servant that it would be very hard for them to sensibly legislate for this area,” he says.

Perhaps the bigger opportunity lies away from arguments regarding strictly payments-related transactions and instead might be found in the possibilities being opened up by the blockchain or distributed ledger technology that underpins them. Hans Lombardo, the chief executive at blockchain business intelligence group Chain-Finance, points out that not all blockchains are like Bitcoin.

“They can be closed and permissioned-based systems,” he says. “A permissioned system is one where users must have permission to use the system. The Ethereum blockchain has been used to create prediction markets, for instance.”

Sites such as Augus.net and Groupgnosis.com have an obvious application in sports-betting, although at present they are primarily aimed at financial and trading communities. San Francisco-based Augur raised a total of $5.3m via a crowdfunding process late last year. It recently launched an Ethereum-based beta of its site and at the same time announced it had joined the Microsoft Azure ‘Blockchain as a Service’ (BaaS) cloud offering.

“Some of the emerging blockchain-based developments, such as Ethereum, which provide the potential to operate so-called smart contracts would appear to be applicable to gambling and may enable the development of new, more dynamic products,” says Thompson from the Sports and Recreation Alliance.

While sports prediction sites may be a way off yet, there are poker sites up-and-running which are also based on the Ethereum blockchain such as EtherPoker which has been built by ConsenSys, the same development studio behind Groupgnosis. The product is, according to Lombardo from Chain-Finance, a “cryptographically secure P2P poker site”, getting around some of the KYC and AML issues by avoiding using a centralized website.

“No third party can look at the cards or mishandle their money,” he adds. “The money bet is put in an Ethereum smart contract for the duration of the game and then is distributed to the winners after the tournament ends, or when a player leaves a cash game.”

It’s very tech utopian, and indeed the latest news in mid-June regarding an Ethereum app concerns a ‘hack’ at the Distributed Autonomous Organization that was intended to work as an investment vehicle which has resulted in the ‘theft’ of approximately $60m.

Without getting into the detail of the hack (a thoroughgoing understanding of how the blockchain works in this instance is beyond this author) but it demonstrates that whatever claims are made for the transparency and incorruptibility of blockchain and smart contracts will for now be looked on with suitable suspicion by the world’s gambling regulators.