Crypto Gambling: Will the Shadow World Be Curbed?

Crypto has become an important aspect of online gambling — one of the fastest growing industries in the world. In 2022, online gambling was valued at around $105 billion, and it is expected to reach $213 billion by 2028.

According to Softswiss, a major global online gaming software provider, traditional online casinos (operating with fiat currencies) still hold the leading position, having 64% of total volume. However, crypto casinos are steadily growing every quarter, increasing from 26.3% to 35.9% YoY in Q1 2023. If this dynamic continues, crypto will match the volume of fiat in the online gambling space next year.

Why is the share of crypto casinos growing?

On-premises casinos are much more easy to regulate. After all, authorities can literally walk through the front doors and shut the place down. Online casinos, meanwhile, are a different topic, as they often operate in a jurisdictional gray area where no one regulator can assert top-down control. And when it comes to crypto gambling, regulation is even more scarce, as crypto exists in a gray area of its own. So it’s a gray area within a gray area. And gray areas have traditionally attracted gambling businesses, as they provide an opportunity to skirt profit-harming regulations.

When it comes to fiat-based online gambling, currency exchange is often not easy. Plus, players have to deal with account limits and considerable commission fees. With crypto, meanwhile, they can pay directly from their wallet in one click. This provides a sense of freedom that fiat doesn’t offer.

And since crypto isn’t quite tied into the traditional financial system, the compliance mechanisms used for fiat-based casinos don’t always apply. So, in some cases, if you stake crypto on a virtual roulette, you’re essentially dealing with monopoly money from a legal standpoint. This fundamental difference has a significant limiting impact on what regulators can do to reign in crypto casinos — especially when it comes to shutting down such websites.

Furthermore, the absence of clear rules in crypto gambling means that customers face little to no hurdles before they start playing. Unlike fiat-based financial institutions online crypto casinos can easily choose to not implement any KYC checks. This means that players can anonymously enter the platform, make deposits and withdrawals, without being questioned about their source of funds.

How legal is crypto gambling?

Regulators are trying to get a foothold on crypto gambling, and to do that they need to determine the status of crypto casinos at least to some extent.

For example, the Financial Crimes Enforcement Network (FinCEN), a US government institution in charge of financial regulations, issued its regulatory guidance on convertible virtual currencies in 2019. In it, FinCEN states that crypto casinos qualify as money transmitters, and therefore should be put under the requirements of Bank Secrecy Act (BSA) — inasmuch as they accept or transmit currency, funds, or other value that substitutes for currency.

At the same time, FinCEN conceded that crypto casinos may be regulated only in those US States where online gambling is licensable. These states currently include Connecticut, Delaware, Michigan, Nevada, New Jersey, Pennsylvania, and West Virginia.

Crypto casinos working with US audiences but unwilling to apply for licenses in the aforementioned states typically operate through entities outside the country. Popular havens for such companies include Costa Rica, Curacao, and Antigua. There, companies can obtain gambling licenses relatively easily and then accept US residents.

When it comes to the legality of offshore entities working with US gamblers, it’s worth looking at the famous US-Antigua World Trade Organization (WTO) dispute, in which the WTO Tribunal found that US laws restricting cross-border online gambling services were in violation of the General Agreement of Trade and Services. The US accepted this decision and offered certain concessions to Antigua, the nature of which, however, remained secret.

So is a crypto casino operating from, say, Antigua and Barbuda and onboarding US users legal? Well, it depends.

Recent regulatory developments

Whereas, in recent years, being a crypto casino meant having an opportunity to keep regulatory requirements loose, it’s clear that regulators are now tightening the screws worldwide.

From late 2022 to early 2023, the US Securities and Exchange Commission (SEC) brought a myriad of large enforcement actions worth millions of dollars for various violations to crypto entities with at least some exposure to the US. Interestingly, some of the defendants included crypto providers that weren’t necessarily registered in the US. Enforcement actions also targeted some of the largest crypto exchanges, such as Coinbase.

The outcome of this case is still far away, but the trend here is clear. US regulators are determined to curb the crypto industry, irrespective of whether each given entity is or is not officially working in the US. So, if in previous ways crypto was a way to remain in a legal gray area, now it’s directly in the crosshairs of regulators seeking to reign in the sector.

The Travel Rule

Now, let’s talk about another important regulation called the Travel Rule. It requires virtual asset service providers and financial institutions engaged in virtual asset transfers to collect and share the personal data of transaction originators and beneficiaries. This is done to prevent crimes such as money laundering.

Since crypto, unlike fiat money, doesn’t use traditional banking infrastructure and SWIFT connections for payments, entities dealing with crypto operations should set up infrastructure to record personal information about each crypto transaction going through them.

However, to say that crypto gambling providers are willing to demonstrate how much they’ve implemented Travel Rule infrastructure would be an overstatement. Still, the requirements of the Travel Rule will nonetheless force these entities to record and transmit quite a lot of information to other crypto providers in real time.

These regulatory novelties will create hurdles for crypto gambling. Plus, they come on top of general KYC standards, which are becoming more and more stringent. For example, in a recent SEC case against Bittrex, a clear point was made that the usual customer check (documents plus facial biometrics) is not really enough to satisfy the current interpretation of applicable Anti-Money Laundering (AML) requirements. What is mandated now is “data leveraging”, which means that an obligated entity should collect and check as much of customer information as possible, including IP address, geolocation, proof of residence, and so on.

What is the future of crypto gambling?

Crypto is now in the crosshairs of every financial regulator. AML concerns that were previously considered insignificant for companies working from Curacao or Antigua and Barbuda may become a serious risk in the future. So now, the shadow world that emerged at the intersection of crypto and offshore online gambling has suddenly become less cozy and less anonymous. Therefore, we should expect that, sooner or later, crypto will become fully regulated, while companies in every corner of the world will have to comply with the fullest extent of the law.

Read more

Crypto Gambling Regulations in the US, UK, and Canada

What is the FATF Travel Rule? The Ultimate Guide to Compliance (2023)

A Global Guide to AML Compliance in Gambling, Gaming, and Betting (2023)