Risk Markets And Politics

Sunday, October 01, 2006

The "top" of the anti-gambling movement?

In the oh-so-very important crusade against internet gambling, Republican law-makers, led by Bill Frist and Jon Kyl, scrambled to include a version of the Unlawful Internet Gambling Enforcement Act in the Safe Port Act as the clock approached midnight on Friday. Ostensibly a defeat for proponents of online speculative markets, the passage may actually be a blessing in disguise and signal a weakening anti-gambling hand in the US. Consider these bright spots:

  • Only the section eliminating payments to online gambling establishments from US-based institutions was passed in Congress. The broken Wire Act of 1961 was not amended, and the legality of placing non-sports bets online is still ambiguously intact in most States.

  • The commercial banking sector and other financial institutions (which are far larger than the casino and gaming industries) have 270 days to cooperate with the law upon final passage. Because of the high cost of compliance, along with the risk of blocking lawful transactions, it is possible that the eventual procedures may lack effectiveness. Significantly, the prescribed regulations are in the hands of the Secretary of the Treasury and the Federal Reserve Board, who only have to "consult" with the US Attorney General. Since not blocking a restricted transaction is not in itself initially a criminal offense, and might only result in an injunction, it is not hard to imagine that consultations with financial institutions might actually carry more weight than those with the Attorney General. (The financial institutions must not, however, "own" "unlawful" gambling businesses, as we know that many in the past have, in the form of stock.)

  • Even if there is effective implementation of payment blocking, options such as NETeller (NLR.L), FirePay (FPA.L) or MoneyBookers are somewhat untouched by the legislation. In reality, little has changed for US traders. Overseas internet gambling companies will bear the main brunt of the legislation, as US clients may be reluctant to use alternative payment methods, and even if they do so in large numbers, gambling companies will then face increased counterparty risk. At least one alternative payment company might actually benefit from this law.

  • Opponents of online gambling are further disgraced. It was embarrassing enough that they were already catering to the interests of casinos, lotteries and exempted gambling interests in an almost cartoonish fashion. Now they also being called negligent in terms of national security. Anti-anti-gambling animus is growing.

  • There are rumors that "tax haven" nations such as Gibraltar and Antigua, among others, are considering legal action against the United States, which was already in violation of a previous WTO trade treaty ruling.

The most worrying section of the bill to some concerns Internet service providers and reads that enforcement, "be limited to the removal of, or disabling of access to, an online site violating section 5363, or a hypertext link to an online site violating such section, that resides on a computer server that such service controls or operates". The question is then: does "reside on a computer server" apply to "an online site", or, more generally, "access to" an online site? The latter interpretation is far stronger and would suggest that ISPs can be prevented from redirecting connections to gambling sites, but I think enforcement of that interpretation would be highly contested, and comes back to the central difficulty of internet regulation. Since UIGEA principally makes the acceptance of gambling payments illegal, and overseas companies are not governed by US code, the entire bill is arguably devoid of force with respect to them. Financial institutions made to comply with the law might say as much in the 270-day window. The venal nature of exemptions for favored gambling interests will only help to undermine the law one way or another.

10/3/06 Update: The market strenuously disagrees with my appraisal of the alternative payment companies like NETeller and Firepay, but it is unlikely that such companies will be specifically targeted in the recommended procedures of The Secretary of the Treasury and The Federal Reserve Board —— after all, they also process non-gambling transactions. This leaves the companies with a choice: respect US law though they are (arguably) not governed by it, or take the opportunity to gain market-share in a vacuum of sorts. I would guess that at least one will take the latter path. The market is instead saying that they will be somehow targeted, or meekly fold like 888 and Partygaming (who the DOJ already considered to be in violation of the Wire Act, not to mention tax evasion). NETeller's statement gives no indication that they will be voluntarily closing-off their US business. As Gambling911 reports, 888 and Partygaming seem to be pursuing buyout strategies at this point. Yesterday, considering that each group was down about 60%, I suggested a spread trade (long the processors, short the casinos & books) on Patri Friedman's journal that is working out nicely so far.

Meanwhile, The Poker Players Alliance is taking an increasingly parochial viewpoint. The organization's president was recently quoted as saying, "Our desire is to achieve the same type of exemption from legislation that other interests have received (Horseracing, Lotteries, and Fantasy Sports). [...] This is our most immediate short-term goal" Well, everyone is a special interest of course, but perhaps they ought to rethink that goal as it won't gain them any friends outside of their immediate sphere. Perhaps a more robust, longer-term goal would be appropriate considering that in the "short-term", poker is a game of chance.

Speaking of gamers, I notice from my access logs that a certain three-letter agency read, among other things, my post on the gambling that might be taking place in virtual locales operated in the United States. Yet something else to keep an eye on.


  • There is hope! It appears that outlawing online gambling violates the US agreements with the WTO. We better get a Democrat in office soon.

    You can sign the petition on my site

    By Blogger Eric Bergen, at 9:53 AM  

  • i agree with the legislation which aims to ban credit cards as a payment method for online gambling of any sort... and i think it should be enforced worldwide – not just in America. In fact, gambling with a credit card should be banned full stop. Not just on the internet. It’s a no brainer when you consider you are placing somebody else’s money on an uncertain event happening, with the aim to recoup more than you invested. Chance and credit do not mix well in my opinion, and continuing to allow it would only contribute further to negatively affecting the high levels of personal debt many citizens today find themselves in. I do however, think that the prohibition won't work; or at least it won’t be received well amongst gamblers - i mean what’s the point in banning a credit card payments made on an online poker game, for example, but not online sports betting? Slightly hypocritical no? I mean how can you allow someone to participate in online horse racing betting, but not put any money on a hand of texas hold’em poker? both activities involve a large degree of chance, and neither are guaranteed to yield financial return.
    What really infuriates me is that the minority of irresponsible gamblers [those paying with someone elses money!] have now ruined the fun of online betting for everyone else - those like me who pay with money they actually have in their bank!!
    At least for the Americans there is always the free online poker games!

    By Anonymous Anonymous, at 12:15 PM  

  • Very crooked politicians. It is time to regulate the online gambling industry and let people do whatever they want from the comforts of their own home.

    By Anonymous Jimmy, at 10:09 PM  

  • Its a bit disconcerting the amount of money people will spend on online casino gambling, especially if they happen to come across (and can afford) a high roller casino.

    I think they shouldn't ban credit cards as its up to the people themselves to learn self-control and stop themselves losing what they can't afford to spend.

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