Bitcoin Seen as Solving Gambling, Payment Processing Issues, as Debate Continues over Proper Role of Digital Currency Regulation

The relative dearth of regulation of Bitcoin “cuts both ways,” said Garrick Hileman, economic historian at the London School of Economics. The “low level of Bitcoin regulation,” which keeps “transaction costs down,” makes large companies, like Zynga, which offers gambling services outside the U.S., and Overstock “clearly comfortable with the existing level of regulation,” he said. “The lack of regulatory clarity and guidance also makes banks and other companies hesitant” to use digital currencies, Hileman said. “Many Bitcoin wallets, exchanges, payment processors, and other service providers are effectively dead in the water because they have been unable to find banks willing to work with them.” The potential for “money laundering and other illegal activities” through Bitcoin is a “huge concern for banks, particularly given how small the overall Bitcoin economy is still today,” he said. “The rewards simply are not yet worth the risks for most banks.”

Because one “cannot exercise prior restraint on Bitcoin transactions,” gambling seems “right up there” with the kind of transaction that wouldn’t otherwise be possible without Bitcoin, said Jerry Brito, director of the Mercatus Center’s Technology Policy Program at George Mason University. Roughly half of the total number of Bitcoin transactions are gambling-related, he said. Even if regulating the customers of Bitcoin payment processors were attempted, Bitcoin users could produce as many different Bitcoin addresses as they want, said Brito. “It would be difficult for intermediaries” to know whether they are sending Bitcoin to gambling sites or not, he said. “It’s going to be very interesting to see how the regulators react to this,” because “I don’t see what they can do,” he said.

Regulation of online gambling and Bitcoin comes down to “jurisdiction,” said Jon Matonis, Bitcoin Foundation executive director. Depending on jurisdiction, gambling regulations typically require customer identification, in which case Bitcoin would also be “covered,” he said. Bitcoin regulation “will vary greatly across jurisdictions, especially on the tax treatment as a currency (private money) or as an asset with capital gains taxation,” said Matonis. The digital currency’s regulation will also depend on whether gambling operators can exchange Bitcoin for “national fiat currencies (and vice versa) or if they only allow the Bitcoin (BTC) to be deposited, played, and withdrawn without the exchange rate risk,” he said.

The application of “anti-money laundering tools and know-your-customers requirements under the Bank Secrecy Act” by FinCEN is a “crucial” tool in stopping “malicious actors from exploiting virtual currency systems in furtherance of illicit activity,” said Mythili Raman, acting assistant attorney general of the criminal division, at a Senate Governmental Affairs Committee hearing in November (WID Nov 19 p1). The Justice Department referred us to Raman’s statement at the hearing when asked for comment. Committee Chairman Tom Carper, D-Del., had no comment.

Avoiding Fraud

Digital currencies help gambling operators solve “credit card fraud and chargebacks,” said Jiten Melwani, CEO of Bitgame Labs, a digital currency payment processor. Bitcoin is also “absolutely universal,” which keeps operators from having to “integrate hundreds of local payment methods around the world” for specific markets, said Melwani. The gambling industry has taken interest in Bitcoin in the last year, but “operators have little idea how to manage the risk, currency, and technical components around bitcoin,” said Melwani. That’s where payment processors, like Bitgame Labs, are finding their niche, he said. “We allow any operator to accept bitcoin payments in their own currency with no currency risk or technical knowledge.”

Brick-and-mortar casinos, such as those owned by Las Vegas Sands Corp. CEO Sheldon Adelson, should be “scared to death,” said John Bauer, vice president of CoinBet, a recently launched digital currency-based gambling company based in Panama. Digital currencies are solving longstanding gambling problems by reducing payment fees and providing more anonymity, he said. “Anytime you streamline and perfect an entire industry,” good things will happen, said Bauer. Las Vegas Sands Corp. didn’t comment.

The reasons for merchants to use Bitcoin are obvious: “It’s cheaper, it’s faster, it’s more secure,” said Brito of the Mercatus Center. The real question is why consumers should use Bitcoin instead of Visa or MasterCard, he asked. Bitcoin will “succeed” when and “where it makes more sense to use it,” such as “international remittances,” which is “clearly a boon for consumers” over traditional payment systems, he said.

Some of Bitcoin’s first users valued its anonymity “because they had something to hide,” said Jeremy Liew, partner at Lightspeed Venture Partners, an early-stage venture capital firm that invests in “disruptive” technologies. Current Bitcoin enterprises and users are “embracing regulation as a necessary condition to widespread use and acceptance,” he said. The “best approach” to Bitcoin would “apply existing regulatory frameworks that govern behavior, not create technology specific regulation,” said Liew. “Regulators appear to be educating themselves” on Bitcoin to “clarify how existing regulation” would apply, he said. The “worst case scenario” would be for regulators to outlaw Bitcoin under negative assumptions, he said.

The FinCEN ruling was “a positive” for Bitcoin because it “removed uncertainty over whether Bitcoin miners or Bitcoin investment vehicles would be classified as money transmitters and forced to register with the government,” said Hileman. “How much impact it will actually have on expanding Bitcoin adoption, however, remains to be seen.” The FinCEN ruling was “terrific,” said Liew. Clarifying “existing regulation is exactly the right approach,” Liew said.

Some kind of “regulation is inevitable,” especially “along the lines of consumer protections,” said Steve Beauregard, CEO of GoCoin, a digital currency payment platform. Industry has an “absolute responsibility to know the customer and the funds,” Beauregard said. Regulators should understand that digital currencies are “evolving,” and that the Bitcoin community doesn’t want to “revert back to big monopolies,” he said. The “nature” of digital currencies is based on “decentralization,” he said.

"Regulators tend to focus on costs and risks,” instead of “benefits,” although U.S. regulators have done a “pretty good job” striking a balance, said Gavin Andresen, Bitcoin Foundation chief scientist, at a Bitcoin event at the Council on Foreign Relations Thursday (http://on.cfr.org/LB54aB). Even if Bitcoin is a “miserable failure,” if it forces governments to recognize that payment systems are outdated, that would be a “success,” said Andresen.