When I spoke recently at the KPMG eGaming Summit about the use of cryptocurrencies for gambling transactions, some gambling executives looked deeply concerned. It became apparent that they feared having their bank accounts closed down by the traditional banks, if they started accepting “dodgy” Bitcoin. Of course, the traditional banks have a great deal to fear if cryptocurrencies take off and start to replace fiat money (government regulated currency).
Casinos catering for Bitcoin payments already exist. Many of these are licensed in Curacao, or not at all, and lack credibility with gamblers. The internet is full of stories of players “cleaning” dirty funds via Bitcoin casinos. There is no way of knowing how much of this is true, but if dirty funds can be converted into Bitcoins, gambled and converted back into fiat money anonymously, it’s clear that there is the potential for large scale money laundering to take place.
It might take a while for cryptocurrencies to shake off their association with illegal transactions on the dark web. Whilst the emergence of cryptocurrencies has become well publicised in the media, actual use for commercial transactions is limited. At the Isle of Man conference, a survey of the attendees showed that nobody in the room had ever made or accepted a payment using Bitcoin, personally or in a business capacity. Even in the IOM, where the Government is championing the adoption and use of cryptocurrencies, use of Bitcoins for transactions is rare. I was told that the Thirsty Pigeon pub in Douglas accepts Bitcoins and there are several Bitcoin ATM’s but I wonder how often they are used.
The remote gambling industry, which operates across international borders and caters for players in multiple territories, using multiple currencies, is perfect for the adoption of cryptocurrency as a payment method. Whilst anonymity is often cited as the most important reason for the use of Bitcoin by users, instantaneous transactions, no clearance procedures, irreversible transactions and low or zero payment processing fees make digital currency an attractive proposition for gambling operators and consumers alike.
As a result of regulatory acceptance, it is likely that use of cryptocurrencies for gambling transactions will increase. Offshore jurisdictions have adopted or are intending to adopt cryptocurrencies as acceptable payment methods. The UK gambling regulator has already given its approval.
On 31st October 2016, the UK Gambling Commission’s revised Licence Conditions and Codes of Practice (“LCCP”) will come into effect. The revised LCCP state that digital currencies are “cash equivalents” and are acceptable as payment methods for gambling transactions.
So far so good, Bitcoin gets the green light from the Gambling Commission. But for remote casino, bingo and betting operators, this is subject to a further condition that UK licensed operators must only accept payments from a regulated “payment service provider”. This is where things start to get complex and we have to delve into the Payment Services Regulations for the definition of a “payment service provider” which includes:-
• “authorised payment institutions” – a body authorised by the UK Financial Conduct Authority (FCA) e.g. a high street bank
• “small payment institutions” – a smaller body also registered with the UK FCA
• “EEA authorised payment institution” – a payment service provider authorised within the EEA but outside the UK
• electronic money institutions” – a body authorised under the Electronic Money Directive e.g. authorised by the FCA in the UK or elsewhere in the EEA
So whilst Bitcoin is an acceptable payment method in principle, it’s necessary to examine how Bitcoins transactions take place.
In order for customers to securely store and spend cryptocurrency, an electronic “wallet” is required, which is the “bridge” between traditional funds and electronic money, as well as allowing payments to be made to the recipient. There are a multitude of electronic wallets available which allow users to exchange traditional funds into cryptocurrency e.g. Bitcoin at the prevailing exchange rate and back out again. Some of these wallet providers undertake KYC checks to identify individuals as part of their money laundering procedures, whilst others do not.
HM Treasury in the UK has indicated that it is intending to regulate e-money wallet providers, but this is still under consultation. EU based wallet providers will be required to undertake customer due diligence when the 4th Anti-Money Laundering Directive (4MLD) comes into force early next year. But this will still leave non EU wallet providers who may not be subject to such thorough procedures, leaving the door open for laundering of “dirty” money.
One of the key advantages of Bitcoin, anonymity, will be eroded or removed, which may hinder its use. After all, some users of cryptocurrency were keen on Bitcoin for that very reason.
So it may be some time before UK licensed casino and betting operators can accept cryptocurrencies as a method of payment. To my knowledge, no Bitcoin wallet providers currently fall within the definition of a payment service provider, although I am told that some wallet providers are intending to seek approval.
It is clear that international recognition of digital currencies will legitimise these once “dodgy” payment methods. Time will tell whether cryptocurrencies fizzle out or become the payment method of choice for gambling operators. However, it would be unwise for operators to ignore these rapidly moving developments.
Joelson are a Legal Firm that specialises in the gambling industry
Phil Hails Smith