Tottenham Report: ‘Twas ever thus

August 16, 2023 8:00 AM
  • Andrew Tottenham — Managing Director, Tottenham & Co
August 16, 2023 8:00 AM
  • Andrew Tottenham — Managing Director, Tottenham & Co

I have been fortunate to have worked in the gambling industry for 48 years, over 35 of them as a consultant. My work has taken me to more than 75 countries and allowed me to observe and understand the culture and how gambling, both retail and online, works in those countries. In some, it was not legal. In some, it was legal, but not regulated (anything goes), and others it was legal and regulated. 

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I have written before about how most of the social and consequent political issues we face have happened before in history. The only difference today is technology, how the product is delivered. The issues, however, remain the same. 

As far as I know, the oldest surviving records of bans on gambling are in Indian writings from as far back as 1500 BC. These can be found in the Veda and Smriti, Hindu texts discussing life, goals, ethics, etc. 

Yagnyavalkya, a sage of the Veda writing in the 7th century BC, said that sons should not have to pay the gambling debts of their fathers. 

Kautilya, a philosopher and royal advisor who lived in the 4th century BC, wrote the Artha Shastra, a text that discusses the method of acquiring wealth and power. In it, he states that all gamblers are cheats and therefore gambling needs to be regulated and only allowed in public gambling houses. He goes on to write about how large the rake should be for the superintendent of the gambling house and how much people should be fined if they cheat. 

Katyayana, a mathematician and Vedic priest who lived in the 2nd century BC, wrote, “If gambling cannot be stopped in the kingdom, it shall be regulated. Gambling should be allowed to be carried on openly in the gambling hall. The gambling hall should be provided with an ornamental arch to indicate that it is a gambling hall, so that respectable men may not mistake the nature of the place. The King should impose tax on gambling and make it a source of income. Gambling could be carried on openly after payment of tax to the king.” 

Brihaspati, a 1st century BC Vedic sage, stated that although some before him had written that gambling should be banned, other lawgivers allowed it when conducted under state control, providing the king a share from every stake. In the immortal words of Mel Brooks, it’s good to be king! 

As you can see, the issues that politicians, regulators, and industry are dealing with today are nothing new. The tension between an outright ban and regulation and taxation continues. 

I suppose it shouldn’t, but what surprises me is that regulators do not take more notice of what happens elsewhere in the world when they make proposals for new regulations that will reduce harm or fix a societal ill.  

Currently in a few European countries, there is a debate about whether the imposition of deposit limits, stake limits, affordability checks, etc. will lead to an increase in customers leaving regulated operators and moving to unregulated operators who will not be obliged to do likewise. 

The regulators argue that the impact of the new regulations, if any, will be small. The industry takes the opposite position, that deposit limits, stake limits, and affordability checks will eat into revenues and therefore the receipts to the Treasury. 

The regulator has a couple of tools up its sleeve to make it difficult for unregulated operators to attract customers from their jurisdiction: IP blocking and pressure on the financial institutions to stop them from processing transactions for or accepting payments from these rogue operators. 

IP blocking is a game of whack-a-mole. No sooner is one IP address blocked that the operator continues with a new domain name and IP address. The regulator discovers the new IP address, applies for it to be blocked, and the operator gets another new one; roguecasino.com becomes roguecasino1.com becomes rouguecasino2.com. The game continues and the customer hardly notices anything. 

With regards to pressure on financial institutions, a whole ecosystem has been created to assist unlicensed operators in circumventing any constraints and accepting payments from and making payments to residents of regulated markets, including those where there is an outright ban on gambling. Not a day goes by where I am not offered the services of a payment service provider (PSP) that can provide processing for “high-risk” merchants. The fees are not exceptionally high, which indicates there must be quite a lot of competition. 

Beyond PSPs miscoding credit-card transactions to get around any blocking, a multitude of ewallets and crypto currencies help get around any restrictions. One operator advertises that they will accept deposits from 24 ewallets and crypto from 30 different sources. 

Companies have been specifically created to help operators navigate the hostile world of financial institutions, set up bank accounts, get merchant IDs, sign up with PSPs, and be able to accept and pay with crypto currencies. A medium-sized offshore operator told me that they could not survive without crypto. It allowed them to accept deposits, make payments, and get paid by the PSP. So crypto does have some use! 

Not all of this is without risk to the operator. PSPs will hold back a certain volume of transactions, building up a reserve in case clients request chargebacks, etc. PSPs can and do go bust, disappearing with the amount being retained vanishing into the ether. But to the operator, this is just a cost of doing business and a risk to be managed by balancing the load amongst a number of different PSPs.  

The more difficult you make it for people to gamble legitimately, it is inevitable that some will find operators who allow people to gamble on the products they like without limits on deposits or intrusive checks. This is no different from licensed operators moving to accept bets from only regulated markets where they are licensed or “soon-to-be” regulated markets. Some operators have decided it is too difficult and expensive to be licensed with all that entails and have started afresh, choosing not to be licensed and working from offshore. 

Success in online gambling has a lot to do with scale. The more customers who move to offshore operators, the larger they become and the higher their margins, allowing the offshore operators to better compete with their licensed rivals. 

I think regulators are playing into the hands of offshore unregulated operators, giving them a competitive advantage. Regulators need to open their eyes and see what is really going on and what the impact of their actions actually have been or are likely to be. But then, pigs might fly!