In May this year, the Asian Racing Federation (ARF) issued a report that laid bare the extent of the challenge across the continent. The report identified four areas where cryptocurrencies and blockchain are being used in illegal lotteries and gaming operations:
- As an alternative to fiat currencies and established fiat payment processes
- In gambling applications built on blockchain technology
- Transferring funds to betting agents, and
- Laundering profits taken from illegal betting
Cryptocurrencies as a payment for illegal gambling
The ARF reports that nearly one-fifth of over 4,000 betting websites accept one or more cryptocurrencies, a number that doesn’t even include unlicensed websites. It also states that the four most popular sportsbooks accepting cryptocurrency payments are licensed in Curaçao. All offer products that would typically be illegal in many jurisdictions, such as in-play markets on all types of sports, e-sports, and casino games.
Other research backs up the ARF’s findings. For instance, in 2020, a study from NGO Transparency International found that Asia’s illicit gambling market was worth USD 400 billion in 2018. And neither is the problem limited to Asia.
A recent investigation by Wired Magazine uncovered that online cryptocurrency casinos are targeting prominent influencers on streaming platform Twitch, which is popular with gamers. Wired found one influencer who streamed videos of himself winning as much as USD 400,000 each day in cryptocurrencies in uninterrupted winning streaks while promoting a gambling site.
Cryptocurrencies are an attractive medium of payment for illegal operators, as they don’t require any Know Your Customer (KYC) checks or traditional payment processors to operate. Furthermore, an operator can take payment quickly and without any risk of chargeback, 24/7, from anywhere in the world.
Keeping up with the success and simplicity of these illegal operators may be daunting, however, that’s not to say that there is nothing regulators can do. The French National Gaming Authority (Autorité nationale des jeux) recently obtained a court order requiring Internet service providers to block access to two well-known online gaming sites offering cryptocurrency payments.
Blockchain-based lottery and gambling applications
Beyond accepting cryptocurrencies as payment for gambling operations, blockchain technology allows anyone to configure the smart contracts necessary to run a gambling application. In the previous segment, we examined PoolTogether, a decentralized no-loss lottery application that runs completely autonomously on the Ethereum blockchain.
The ARF report highlights other examples, naming Tron, a blockchain platform that’s heavily skewed towards simple dice-type gambling applications due to its low transaction fees. It also name-checks Augur, an Ethereum-based decentralized marketplace for “predictions” – effectively bets. Like PoolTogether, Augur is one of the many applications that fall under the umbrella of “decentralized finance,” or DeFi, which demonstrates how speculative many of these so-called financial applications really are under the hood.
There’s already plenty of conjecture around how and when regulators will tackle DeFi and the existence of unlicensed gambling activities dressed up as finance. Indeed, it’s evident that they have their eye on the situation. However, there are inevitable challenges with policing, particularly where applications have anonymous founders or development teams. The Internet generally has no jurisdictional boundaries, and when attempting to enforce single-jurisdiction regulations in such a place, the difficulties in enforcement are high and could require a technical enforcement mechanism or a different method of enforcement rather than relying on jurisdictional authority.
Transferring funds to betting agents
Cryptocurrencies are increasingly becoming the means by which bettors can access betting agents such as Citibet, facilitating issues such as race-fixing or match-fixing. As unregulated marketplaces, these agents have no obligation to report on suspicious activities and indeed make a profit from bet-matching, making them a hive for illicit activity in the industry. The Hong Kong Jockey Club has previously highlighted this issue to the press, including the role that cryptocurrencies play.
The ARF report found that a key principal at an online crypto-only sports bookmaker had a criminal record and had been disqualified as a company director, linked to previous allegations of match-fixing and corruption.
Laundering profits from illegal betting
Another key finding from the ARF report is that betting operators are increasingly turning to cryptocurrencies as a way of laundering their illicit proceeds. It uses Macau’s notorious junket industry as a prominent example, highlighting how the Chinese government estimates that illegal betting operators transfer around one trillion Chinese yuan (USD 154 billion) in gambling-related funds out of the country.
In fact, there are multiple facets to the challenge of illegal gambling operations and cryptocurrency money laundering. To be clear – cryptocurrencies are not inherently anonymous, as if you know someone’s public address, you can trace all of their transactions on the public blockchain ledger. However, due to the availability of privacy-preserving technologies, it’s still feasible to obscure financial trails with some know-how.
Therefore, cryptocurrencies are still used by money launderers involved in all kinds of illicit activities. Blockchain analytics firm Chainalysis was able to trace USD 2.8 billion in Bitcoin that moved between known criminal entities and exchanges in 2019 alone.
Another facet to the problem is that money launderers will often set up online casinos or use gambling sites as a way of laundering their ill-gotten gains. Another report from Chainalysis found that gambling websites are the most popular recipients of funds procured from online scams.
The good news is that the cryptocurrency industry is steadily picking up its game in this regard. The reason that so many criminals now use illegal gambling sites is because regulation has made it difficult for them to use centrally operated cryptocurrency exchanges. These days, most of them require a KYC check, making them unviable as an outlet for money laundering. However, there’s plenty of work still to do in making sure cryptocurrency is less attractive as a means of cleaning dirty money.
Harnessing the benefits
The cases outlined here may seem like enough to make an argument for banning cryptocurrencies and blockchain outright. However, it’s not so straightforward. In fact, digital currencies and blockchain could also prove to be useful in the fight against illegal lotteries, gambling, and gaming operations.
For example, many governments are examining the use of state-backed digital currencies that may ultimately replace cash. They’re known as Central Bank Digital Currencies or CBDCs, and China is currently the nation with the most advanced version of a CBDC. It’s based on a centralized ledger operated by the Chinese government, and even still at the trial stage, has recently reached USD 5.3 billion in transaction value.
Now, it seems that Macau could follow suit with its own digital currency, leading to speculation that such a move could cause irreparable damage to the illegal gambling industry.
This is just one example. As we covered in the previous segment, blockchain has properties that could be deployed for good in the lottery and gambling sector – transparency, security, and trustlessness, among others.
Overall, regulation has a long way to go to catch up with developments in the cryptocurrency and blockchain sector. Yet, sensible regulation seems to be one of the most powerful weapons against the use of these technologies for illicit purposes. It will certainly be an invaluable tool to prevent licensed industry operators from being damaged by unlawful operations. Nevertheless, legitimate players should not be deterred from exploring applications of blockchain and cryptocurrencies where they’re permitted and can bring meaningful value.
There is a significant open question that potentially can be answered through the legal and regulated use of blockchain. Can industry operators offer the wide range of games, everywhere the world, that can compete with their illegal competitors? It is possible, even probable, that the majority of online betters would prefer a legal way to play every time, while still seeing that their local charities and regions benefit from the operation.
Regulation that moves to a global level with local payout using standardized blockchain smart contracts which enforce a globally-agreed set of principals could be a way to authorize a larger set of games or gambling options when folks wish to use their Internet-centric connectivity and coins to play. Perhaps after all, the existence of this new and unregulated market points to an opportunity to re-engineer the status quo to fit with the demands of a more digital and global society.