The regulated gaming industries are facing a number of critical threats. Not only do they have to comply with increasingly restrictive regulation, but they are also experiencing competition from the unregulated markets.
Some of these unregulated markets are undoubtedly growing because consumers find that regulated operators no longer provide the products they want to play. Offshore dotcoms do and without any of the hassles that regulated gambling businesses are required to impose on their customers.
In the hope of reducing gambling harm, regulators have demanded that entire games or the features that made them exciting be removed. These requirements may make those with no risk of gambling harm stop or go elsewhere, while they have no impact on the playing habits of those that are a much higher risk.
VIP customers are no longer afforded the special services that they have come to expect. Operators now see high-spending customers as representing regulatory risk, which they want to avoid. Operators have a much greater risk of being sanctioned over somebody who bets €10,000 per month than someone who bets €200 per month. Hence the move by some of the large operators to focus on lower-spending customers.
At the same time, AML and/or affordability checks are highly intrusive and many customers object to them. Plenty of offshore operators are happy to take this business without asking the customer for any information. They’re happy so long as the deposit payment clears.
Evolution, a provider of online live casino games, has (finally!) drawn the attention of regulators about its business practises. The British Gambling Commission has discovered that those residing in Britain can play on Evolution’s products provided by offshore unlicensed operators. I am not sure that Evolution can get out of its licence contracts to stop this from happening.
Sweepstakes casinos, historic horserace machines, and prediction markets offering contracts on sporting-event outcomes are all unregulated, at least not by gambling regulators.
All of the above represent competition for the gambling dollar and do not generate any gambling tax revenue. Because the providers of these products pay no tax, they can be much more competitive with offers to their customers, either higher bonuses, cashback, and the like or lower fees.
Regulators are starting to take the concerns of operators seriously, but there is not much they can do.
To battle offshore operators, the first port of call for a regulator is IP blocking. Regulators ask or demand that ISPs block access to various websites. In practice, this is like a game of whack-a-mole. No sooner is the IP address blocked than the operator changes to a different address that customers easily find — an inconvenience, but no more than a cost of doing business. This goes on for as long as there is a willingness to block access or the number of IP addresses the operator can obtain.
In Germany, the courts ruled that the gambling regulator does not have the power to request that an ISP block an IP address. It is the sole competence of the ISP regulator (BNETZA) to block IP addresses, so this weapon is not available to the German regulator.
The next weapon in the regulators’ arsenal is asking that the big search engines do not provide the URLs of offshore sites in their search returns. This can be effective, but a small change in the name of the operator’s site can overcome this challenge.
Pressure can be put on the financial institutions that make up the ecosystem for payments, asking them to block transactions for non-domestically regulated operators. Many of these institutions will comply, but a huge number of payment service providers are happy, for a premium price, to miscode gambling transactions. You only have to look at the offshore operators’ sites to see how many of them accept Visa, Mastercard, Amex, JCB, etc., most of the payment wallets (Payz, Skrill, Jeton), and a plethora of cryptocurrencies.
Another method is to send the rogue operator a cease-and-desist letter in the hope that this will make them pull away from that particular market. The question is, what happens if the operator ignores the letter?
Kalshi, one of the more aggressive and well-financed prediction markets, has fired back at regulators in New Jersey and Nevada who sent Kalshi cease-and-desist letters with a lawsuit of its own. So far, six states have sent Kalshi these letters and Kalshi is adamant it will continue until its regulator tells them to stop.
Kalshi makes the case that it is perfectly entitled to offer what it used to call “bets” and now calls “contracts” on the outcomes on sporting events, given that the company and its products are regulated by the Commodity Futures Trading Commission (CFTC), a federal regulator.
They further argue that gaming regulators do not have the jurisdiction to make these demands, because Kalshi is not offering betting. Funny, a few months ago, that is exactly what their advertising said they were offering.
Some state attorneys general are following the same cease-and-desist path with sweepstakes casino operators. If these operators do not comply, the cases could be tried in state courts and would revolve around whether sweepstake casinos meet the legal test of gambling under state law. The state could also decide to pass a law specifically proscribing sweepstake casinos.
The Kalshi case is likely to be more difficult. It will ultimately revolve around who has jurisdiction, the state regulator or the CFTC. Given that Donald Trump, Jr. is a strategic advisor to Kalshi and the current chair of the CFTC is Caroline Pham, a Trump appointee, I do not see the CFTC giving up jurisdiction any time soon. I can see this going all the way to the Supreme Court.
Not so long ago, being a gambling regulator was not a particularly difficult job. Operators were investigated to make sure they were suitable to hold a licence and the gambling operations were audited to make sure the laws and regulations were being complied with. Nowadays, entrepreneurial ingenuity and technical advances have made the job much more complicated, demanding much broader skills.
Now, the regulator’s role has broadened to cover gambling harms. What are gambling harms? How can we quantify them? Which measures can we implement to reduce them? What aspects of games “cause” the harm? If the “cause” is removed, is the harm reduced?
Regulators are now having to police what is and isn’t gambling and the geographical coverage has expanded dramatically. Illegal gambling used to be physically happening within their jurisdiction, while today, the gambling can be accessed from within the jurisdiction.
Most regulators are funded by the fees they charge operators. It does seem unfair that operators are being asked to fund the fight against illegal operators. Are breweries and distillers being asked to fund the fight against illegal alcohol? But I digress.
I was speaking with a former regulator who said they thought that many regulators do not have the stomach for a legal dispute beyond sending cease-and-desist letters, nor do they have the resources, both human and financial, to undertake much more. If that is the case, it takes only one rogue operator to call their bluff before the regulated industry is in serious trouble.
