Casino 2.0: Integrating blockchain technology and crypto-assets into the gambling industry

Tuesday, 28 November 2023

by Phd. Atorney George Zlati[1]

Context

Due to the rapid adoption of blockchain technology and crypto-assets (e.g., bitcoin, NFTs – non-fungible tokens, utility tokens, etc.), it’s essential to assess the potential impact of these on the gambling industry. This global trend towards blockchain adoption prompts the question: Is there a need or opportunity for a paradigm shift in the gambling industry?

The DeFi (Decentralised Finance) sector, a decentralized financial system based on smart contracts, had a market capitalization exceeding 170 billion dollars in 2021. This raises the question: Is the gambling industry ready for a transition towards these emerging technologies?

Legislative challenges and the future of gambling

The current context presents numerous hurdles. One of the issues is that the regulation of crypto-assets is largely absent at the national level. Thus, in Romania, we are currently discussing the following regulations: (a) taxing the income obtained from the sale of virtual currency – see the provisions in the Fiscal Code; (b) defining virtual currencies in the Criminal Code and in the Law of Anti-Money Laundering; (c) defining the offence concerning initiating fraudulent transactions involving virtual currency – see the provisions in the Criminal Code; (d) establishing reporting duties for legal entities to prevent money laundering – see the provisions in the Law of Anti-Money Laundering. It is therefore evident that the main problem relates to the fact that the current legislation exclusively addresses virtual currencies, even though not all crypto-assets are virtual currencies.

Additionally, even though there are discussions and legislative initiatives at both the European level (e.g., the MiCA regulation proposal on the crypto-assets market) and internationally, the regulations are still in their early stages and can be considered insufficient or even debatable.

Given the strict regulations applicable to gambling, using crypto-assets without a clear legislative framework could lead to numerous unforeseen legal consequences.

Nevertheless, we believe that the symbiosis between the gambling industry and blockchain technology can be achieved in steps. Throughout this period, the following interests must be considered: the prevention of money laundering; the protection of gambling consumers; the prevention of gambling fraud. The ideas presented below do not take into consideration the current regulations applicable to gambling but provide a perspective on what the future of the gambling industry might look like.

Receiving crypto-assets as winnings

A first step would be to allow the possibility to receive winnings in the form of a crypto-asset, whether we’re talking about units of value in bitcoin, NFTs, etc. Thus, the consumer would use fiat currency as a means of payment, but the winnings would be received wholly or partly in a crypto-asset. The main issue in this context would be the taxation of these winnings – when would we consider it as taxable income and how could it be quantified?

blockchain

The use of utility tokens for accessing products, services or premium content

Given there’s reluctance regarding the authorisation of using crypto-assets by gambling consumers, the question arises as to whether it would be worthwhile discussing the use of utility tokens by gambling operators to grant consumers privileged access to certain products, services or premium content.

In the sports and entertainment industry, there’s already a point of reference – the Chiliz token and tokens associated with various football teams. Gambling operators could issue such custom tokens that they could transfer to specific premium users, following a Know Your Customer (KYC) procedure.

Using stablecoins instead of fiat currencies

According to a study conducted by Chainalysis, in 2022, a total of 21 billion dollars in crypto-assets were identified at the blockchain level, compared to a total capitalisation of crypto-assets of over 2 trillion dollars. Consequently, the assumption that crypto-assets are mainly used for money laundering is incorrect and statistically contradicted. This doesn’t mean, however, that a gambling consumer couldn’t use crypto-assets for money laundering. What needs to be emphasised here is the fact that the gambling industry can’t be entirely shielded from such risks, even if it continues to use fiat currency exclusively. For instance, there’s the risk that an individual might control multiple accounts in an online poker game, to transfer fiat currency that was obtained fraudulently.

Using stablecoins (e.g., USDC or USDT) that have a 1:1 parity with the US dollar would primarily address the volatility issue of crypto-assets. The money laundering issue could be counteracted both by employing internal procedures and by restricting the use of non-custodial digital wallets. To the extent that the gambling consumer would use a CEX (e.g., Binance, Kraken, Coinbase) that has strict rules from a Know Your Customer perspective and analysis of the origin of funds used for purchasing crypto-assets, the associated money laundering risk would be mitigated.

Conclusion

In the context of the rapid adoption of blockchain technology, the gambling industry faces the possibility of a technological revolution. However, any potential transition is complicated by challenges related to insufficient regulation and associated legal risks. Therefore, any move towards a full integration of blockchain technology in the gambling industry needs to be well-thought-out, considering consumer protection, fraud prevention, and compliance with future regulations.





Author: Editor

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