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Monday, January 23, 2012

Australian Senator Is Stunned To Find That Facebook Virtual Currency Gambling Is Not Regulated

Well, I never thought that the first political and legal challenge to Facebook gambling virtual goods and currency games would come from down under.  I have written several blogs about the loop hole in gambling law that considers cash payout as the only form of "consideration" and not other forms of payout such as virtual goods or virtual currency. 

Apparently, Senator Nick Xenophon sees things differently after spending money on a social casino game site in Facebook and not being able to get his conventional money equivalent for the chips he won and obviously lost. I suspect with Zynga's (ZNGA) public debut on  NASDAQ,  the soon to be listed Facebook IPO,  the onslaught of gambling companies putting their "cash" gambling propositions into Facebook taking advantage of US legal Internet gambling  are events that will put the virtual currency legal loophole into question.

The European gambling sites are just now realizing that they may be able to make more money using virtual currency as a transaction currency instead of conventional currency. There is no age restriction on buying virtual currency and using it to play Facebook "credits" gambling games creating a much bigger market for them and less regulation to deal with.  Anyone can buy these credits, wager on a gambling site and never see a single dollar, pound or euro as a result of their play. It all stays with  the gambling operator minus the 30% that Facebook takes on these transactions.

Certainly the legalization of gambling in the US is a big deal and gambling sites are all over this building, buying  and launching their own Facebook conventional gambling games with the hope  of capturing Facebook gambling market share. 

These same gambling operators may be the ones that challenge the off the books gambling revenue being scooped up by virtual currency and goods gambling sites once they realize that a significant portion of there expected revenue and players are still tied up in playing virtual currency/goods gambling games.

I would make a wager that a US state or federal politician is going to float a bill in the next year that makes virtual currency gambling sites to play by the same rules as the "real" gambling sites. 

Kevin Flood is the CEO of Gameinlane, Inc. Kevin writes extensively about online games and their impact and integration into iGaming and E-commerce environments. Kevin is a frequent speaker at online game events and conferences in Asia, Europe and the US. Kevin and his Gameinlane team are currently working with online gambling, social gaming and e-commerce companies integrating social gaming with online gaming operations and integrate game mechanics into e-commerce applications.


Steven Kane said...

Hi Kevin. I don't agree. My understanding os USA law (or the various states' laws) is *not* that they specify cash payouts, but rather that they carve out payouts that have no discernable value.

In other words, if a game 1) costs something to play (consideration) and 2) is a game of chance (not skill) and 3) has any payout of value then it is gambling. the payout does not have to be cash. it could be t-shirts. or frequent flyer miles. or minutes of cel phone time.

the reason virtual currency payouts are not gambling, then, is because they of no value. virtual currency in zynga poker has no other value, and no residual or otherwise tradeable value. so its not gambling

it never made the papers but a while back, third-party trading platforms sprang up, where zynga poker players could trade their zynga poker chips in for cash (and the platform operators would then resell the chips.) several state attorneys general's offices let zynga know this had crossed the line -- because now those virtual chips DID have a recognizable other value. and zynga forcefully made sure all those third party resellers got shut down, never to return, to my knowledge.

i never would have predicted that players (of any demographic) would get into games of chance which cost money to play but pay nothing of value. but they do! and, i dont think thats gambling now, or will be gambling in the future. unless lawmakers fundamentally change the core definition of gambling, how can it be? and if lawmakers do make such fundamental changes, well, then everything is on the table. maybe free games are gambling. maybe chess is gambling. maybe pinball machines are gambling. maybe...

Mario Herger said...

The law company Pillsbury has some extensive slide-decks on that issue of virtual currency and much more:


Kevin Flood said...

This is a good point. The issue/challenge I see coming from the Aussie politician is that if I contribute "real money" to gamble I should be able to redeem my investment or winnings in "real cash". This would turn the entire gambling/virtual currency world on its head.

Virtual Law said...

The interplay between social games and "gambling-like" activities is increasing and likely will continue to do so. Many industry forces are facilitating this. The disclosure of Zynga poker's value and Facebook's revenue has many game companies scrambling to cash in on this lucrative market. The DOJ's Christmas present, in the form of its December 23 announcement (http://www.justice.gov/olc/2011/state-lotteries-opinion.pdf), largely removed the Wire Act as an impediment to states offering certain online gaming. DC (http://www.myfoxdc.com/dpp/news/dc/dc-to-launch-online-gambling-041311)and Nevada (http://gaming.unlv.edu/reports/NV_online_reg_changes.pdf) have passed laws to permit online gaming, but the DC law is under fire as some folks are seeking its repeal (http://www.pokernews.com/news/2012/02/washington-dc-online-gaming-bill-headed-to-full-vote-repeal-11929.htm). Nevertheless, many other states are working on similar legislation. European gambling companies (e.g, Betfair) have invested in US social game companies. US companies, such as US Digital Gaming (http://www.usdg.us/)have sprung up to offer platforms to enable online gaming. There is a tremendous amount of money at stake and as a result this is an area that is likely to get increased legislative and regulatory scrutiny. This issue has even arisen in the current US presidential race (http://www.cardplayer.com/poker-news/12757-gop-frontrunner-mitt-romney-against-web-gambling), with front runner Mitt Romney coming out against online gaming. In the US, the legal issues are complex, largely due to the fact that gambling is primarily regulated on a state-by-state basis. Notwithstanding the DOJ's reversal of its position on the Wire Act, there are other federal statutes which relate to internet gambling, such as the Unlawful Internet Gambling Enforcement Act (UIGEA). However, this Federal statute is primarily designed to facilitate enforcement and largely targets payment processors (http://www.fdic.gov/news/news/financial/2010/fil10035.html). The substantive law regulating gaming is still primarily driven by the states. Another complicating factor is that many social games that involving gambling-like activity use virtual currency. The legal issues around virtual currency itself is complex, even when it is not used for things like poker or other gambling related activities (http://www.virtualworldlaw.com/Virtual%20Currency.pdf). The bottom line is that while there is tremendous opportunity in connection with social games and "gambling-like" games, there are many legal misconceptions about what is and what is not legal. Careful attention needs to be paid to the maze of legal issues that exist today and those that may arise due to the increased popularity that this area is experiencing. I am working on a legal white paper to address these issues, but due to the rapid pace of change in this area, I fear it may be obsolete before the digital ink dries!