Tottenham Report: Should gambling laws cover cryptocurrencies?

January 17, 2023 10:00 PM
Photo: Shutterstock
  • Hannah Gannagé-Stewart, CDC Gaming Reports
January 17, 2023 10:00 PM
  • Hannah Gannagé-Stewart, CDC Gaming Reports

As European gambling regulation continues to evolve and the UK’s outrageously protracted gambling-reform white paper threatens to re-emerge at long last, the spectre of crypto’s role in the industry has also reared its ugly head. 

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While crypto casinos are a rapidly growing part of the gambling industry, the regulation of crypto in relation to gambling and its general definition as an investment asset versus a gambling mechanism have not been given commensurate consideration by regulators. 

The crypto question is reminiscent of the loot-box debate a few years ago, where for a long time, it was unclear whether the real-money purchase of unknown virtual rewards in online games could be considered tantamount to gambling. What seemed less uncertain was the potential for harm to consumers. But how to regulate it? 

Likewise, the question now is, do investments in crypto markets, which are notoriously volatile and prone to cause sudden and substantial losses to investors, actually more of a gambling product than an investment? Should they be regulated as such? And if so, where does that leave the regulation of sportsbooks and casinos that integrate them as payment methods? 

Earlier this month, European Central Bank (ECB) board member Fabio Panetta brought this very question into the light, arguing that the trading of unbacked cryptocurrencies should be treated as gambling by regulators. 

His opinion has been coloured, if not entirely informed, by the recent crash in the crypto market, which has seen numerous big-name crypto exchanges and lenders collapse in quick session.  

The most astonishing was the fall of crypto exchange FTX at the end of last year. Its former CEO, Sam Bankman-Fried, is facing a litany of fraud charges in the U.S., while crypto investors who had funds on the platform when it failed stand to lose millions.  

The bankruptcy was of such a scale that the restructuring expert who handled the collapse of Enron, John Ray III, is now at the helm. He described the downfall of FTX as an “unprecedented and complete failure of corporate controls”. It has, unsurprisingly, sent shivers down the spines of regulators across the globe, and a head of steam is mounting to bring decentralised digital currencies under control. 

What’s all this got to do with gambling?  

Well, as Panetta sees it: “As a form of investment, unbacked cryptos lack any intrinsic value. … They are speculative assets. Investors buy them with the sole objective of selling them at a higher price.” This, he said, makes them a gamble, rather than an investment asset. 

Some would argue that numerous investment instruments could be viewed the same way. The difference, I suppose, is that they are generally more closely regulated. There are rules around how much information investors must receive about the risk of investment, particularly where consumers are involved. 

“Uninformed investors were left with significant losses,” Panetta explained of the swift descent into a deep ‘crypto winter’. “That is why we cannot afford to leave cryptos unregulated.” As such, he recommended something akin to the existing regulation of online gambling. 

“Vulnerable consumers should be protected through principles similar to those recommended by the European Commission for online gambling. They should be taxed in accordance with the costs they impose on society,” he said. 

With this in mind, it feels as though gambling regulations themselves need to take crypto gambling and other emerging technologies, such as NFTs and the metaverse, into account much more than they already do.  

The regulation around remote gambling is desperately behind the curve as it is. European regulators have been trying to catch up for years, yet we are swiftly moving into the web 3.0 era where metaverse casinos are already proliferating across the internet. 

A recent McKinsey & Company report noted that metaverse technology and applications could be worth five trillion dollars by 2030. Its utility extends far beyond gambling, of course, into banking, health, education, and numerous forms of entertainment. But imagine the scale of the gambling industry’s slice of a five-trillion-dollar pie. 

After years of virtual and augmented reality seemingly going nowhere, their applications uncertain, the metaverse now offers them a home. It has the potential to create an online paradigm shift on a massive scale and, if regulators don’t get ahead of the game now, they stand to lose their grip on consumer protections that have been decades in the making and are arguably yet to become totally fit for purpose. 

Panetta’s rallying call may not have been directed at the gambling industry specifically, but they would be wise to take note. Crypto has become inextricably linked to gambling and understanding the role it has to play, its appeal to punters, and its expansive risk profile now could save considerable pain further down the line.