Some Conclusions on Online Gambling Law

•December 11, 2014 • Leave a Comment

1205_bigOn December 5, 1933, at 6:55 p.m. President Franklin Roosevelt signed an official proclamation declaring the end of alcohol prohibition in the United States.[1] In doing so he, he had declared to the entire world that the United States experience with prohibition had been a monumental failure. Society did not benefit from a new moral order whereby alcohol was criminalized. Rather, the eighteenth amendment led to an unprecedented increase in crime, which has still yet to be matched to this day. For instance, in the first year of prohibition, all number of crimes in the United States increased by twenty four percent. Worst of all, alcohol related crimes saw the greatest increase, with arrests for drunken and disorderly conduct increasing by forty percent. Prisons were quickly filled to capacity with everyday citizens just looking to get a little buzz after a hard days work.

What the failure of the eighteenth amendment teaches us is that outright prohibition rarely has the effect of decreasing demand for the prohibited product. In fact, it often leads to increase demand. Demand in turns leads to a black market to fill that demand which in turn leads to an increase in violent crime. This pattern has been demonstrated time and time again with vices like drugs, pornography, and more recently, online gambling.

The federal government should have known better. They had decades of experience with which to draw upon, yet as we saw in the first blog post, they decided to prohibit or at least attempt to prohibit online gambling across the U.S. Here we are in 2014 and as expected, prohibition has failed. In the second blog post, we saw how the federal government was forced to embarrassingly accept this when the DOJ issued their letter declaring that they would not longer attempt to regulate online gambling through the Wire Act. I predict that it is only a matter of time before UGEA is overturned.

China’s online gambling industry is another example as mentioned in blog post four. In China, online gambling continues to thrive with the support of some of china’s biggest retailers, much to the embarrassment of many Chinese officials.

Today, in the U.S. online gambling is in a quasi/legal/illegal conundrum. In some states, online gambling operates legally, undisturbed by the federal government, while in others, prohibition persists. For some people, this state-by-state system is the preferred option. These anti-federalists believe that each state should have the right to decide whether or not to legalize gambling. However, this system often works better in theory than in practice. For example, no one would believe that every person gambling on New Jersey’s website is playing from New Jersey. Of course, new technologies like geolocation have kept this to a minimum but these technologies are almost more trouble than they are worth. As we saw in blog post four, the geolocation technology was partly to blame tax revenue reaching only 9.3 million as opposed to over 100 million as predicted.

Yet, as we saw in the Malta and E.U. example, uniform regulation can have its own problems. If the E.U. attempted to regulate the online gambling industry uniformly, Malta’s economy would be ruined.

The lesson to be learned from these examples is there may not be one perfect answer. Even outright prohibition has been successful in many countries and certain U.S. states. Rather, I think that each country must evaluate its own unique circumstances and create a regime that works best for them. For example, maybe the E.U. should implement uniform online gambling legislation but exempt Malta. Malta would be permitted to continue their current framework, maintaining their large market share of the industry while Europe would have the uniformity they desire.

Whatever the future may hold, online gambling is not a passing phenomenon. Countries can no longer afford to ignore it. Whether they choose to regulate or prohibit, they must do something.

[1] http://www.nytimes.com/learning/general/onthisday/big/1205.html

The International Response to Online Gambling

•December 11, 2014 • Leave a Comment

This week, Mexican authorities have taken what may be the final step before formally regulating online gambling in the country.[1] Benefiting from bipartisan support, legalization has happened faster than anyone could have predicted in a country pre-occupied by more pressing concerns like drug war violence.

For decades, an unregulated online gambling black market has existed in Mexico. In fact, Mexico, and in particular Mexico’s pacific coast has been a popular relocation destination for American poker players from states like California, where online gambling is currently prohibited.

With the advent of these regulations, Mexico will no longer be an online gambling paradise and haven. In fact, the rules are far stricter and narrower than many in the gambling industry had hoped. Under the rules, Mexico’s online gambling industry will be firewall-protected entity serviced by a very limited number of servers. Websites must be operated within Mexican borders and players outside Mexico will be unable to gain access to them.

Many poker enthusiasts in the Americas had hoped that Mexico would become like Malta, Europe’s capital for online gaming. Malta is a member of the E.U. where online gambling is permitted.[2] However each E.U. member state is authorized to makes its own laws and policies regarding the legalization of online gambling. Many countries in Europe have banned it outright. Germany, in particular, has harsh criminal penalties for violations of its online gambling ban. However, even the Germany has found it difficult from preventing Germans citizens from accessing Malta’s websites from within Germany.

As a result, many in the E.U. have called for specific, harmonized regulation across all member states. Malta is highly opposed to such legislation. To understand why, one must examine how Malta became the European capital for online gaming. The origins of Malta’s online gaming industry can be traced back to the year 2000, when Malta became the first European Union country to authorize online gambling under its then existing Public Lotto Law. Companies began flocking to Malta in record numbers. The business-oriented government of Malta recognized the tremendous potential of this industry and began creating even more friendly regulations and policies toward online gambling. As an additional incentive, the Maltese government implemented a very favorable tax regime. Even as larger countries, such as the United Kingdom entered the online industry, they could not compete with Malta’s tax rates.

The online gambling industry has become a vital to the continuing success and well being of the Maltese people. Any change in E.U. regulation could send the country into a downward depression. Online gambling represents nearly twelve percent of its economy. It is doubtful that the E.U. will ever ban online gambling completely but many countries are frustrated with the Maltese governments lack of oversight with regard to those countries that ban online gambling.

A ban on online gambling is not always the answer to those issues. Outright prohibition can lead to an increase in online gambling. Online gambling is illegal in China for instance, yet China has one of the largest and most successful online gambling markets in the world.[3] How can this be possible? Well China does authorize state run lotteries but those lottery tickets are not sold online. During the recent world cup in China, thrifty Chinese businessmen saw a great opportunity to benefit from the sports betting. They partnered with the locally authorized lottery ticket sellers and began offering “sports lottery” tickets on their commercial websites. The websites began generating profit at an incredible pace. They quickly used the proceeds to pay of the local Chinese government officials and an entire sport betting industry was born. Efforts to crack down on the practice have proven unsuccessful. The major retailers were not willing to give up this burgeoning revenue source without a fight.

The next blog post will conclude the series with some lessons gleamed from the federal, state and international response to online gambling.

[1] http://www.flushdraw.net/news/mexico-online-gambling-regulation-nears-reality/

[2] http://www.timesofmalta.com/articles/view/20110325/local/malta-is-europe-s-gambling-hub-brussels.356481

[3] http://www.chinalawblog.com/2014/10/china-online-gambling-illegal-but-everywhere.html

Online Gambling not the Tax Boon Many States Had Hoped it Would Be

•December 11, 2014 • Leave a Comment

A recent survey indicates that nearly 8/10 Americans are against the current federal prohibition of online gambling. Only 18.9% of respondents favored an across the board ban of online gambling.[1] Following “free speech,” the most strongly favored argument for lifting the ban was increased tax revenue.” There is good reason for this- state governments are currently running a tax deficit, collectively owing more than $4 trillion dollars. Online gambling taxation represents untapped revenue that states urgently need.

After decades of inaction, desperation has lead many states to consider online gambling legislation. The 2011 DOJ letter regarding wire act enforcement was the catalyst. Following this announcement, states began scrambling to legalize gambling. Several states have passed laws permitting online gambling within their borders. Unsurprisingly, Nevada, the country’s leader in brick and mortar gambling revenue, lead the charge. In April 30, 2013, Nevada launched the nation’s first legal gambling website. With a model in place, other states quickly followed suit. Delaware and New Jersey have passed similar legislation while many states are currently considering similar proposals. These states include California, Hawaii, Illinois, Iowa, Massachusetts, Mississippi, Pennsylvania, and Texas. 6 of these states are on the list of top ten states with the worst debt problems. New Jersey, for example, owes nearly $300 billion.

However, online gambling was not as great a revenue source as Delaware, Nevada and New Jersey were anticipating. New Jersey officials had predicted that online gambling would bring in nearly $180,000 in fiscal 2014. By the end of may, which is just one month shy of the fiscal years end, the state had collected only 9.3 million. Worse yet, April and May collections were less than those in March, meaning that revenue is not growing but declining.

Delaware did not fare better. Because of various startup costs, gambling revenue made no net contributions whatsoever to tax coffers. They had projected a $7.5 million revenue gain.

A similar story unfolded in Nevada. Officials there refused to make any predictions but even they could not have been pleased with the $700,000 revenue gain.

Experts have blamed the slump on marketing and a lack of consumer education. Online gambling “exists in exists in a weird gray area because it was perceived to be illegal for so long, said Chris Grove, editor of the Online Poker Report.[2]

Experts also believe that New Jersey’s revenue predictions were inflated from the start as a way to garner more political support for the legislation. In contrast, New Jersey officials have citied a number of different issues that lead to the less than expected revenue. One of those issues was with the geolocation technology. This technology is a requirement, as it determines whether a prospective gambler is indeed within state borders. Other issues include obstinate banks that refused to process payments and credit card companies that declined charges made to online gambling websites. “A research report released by Morgan Stanley in March estimated that about 60 percent of online gaming transactions in New Jersey were rejected and that about half of those users did not make other attempts to fund their accounts.”[3]

The framework of New Jersey’s online gambling is also partially to blame for its slow start. Gambling was first authorized in New Jersey in January of 2011, but because the state’s constitution only allows gambling in Atlantic City, the legislation specified that all computer servers must be located at licensed Atlantic City Casinos. [4][5]

Currently only five websites are approved to conduct online gambling operations in New Jersey. [6] To obtain a permit in New Jersey, a website must fill out an Internet Gaming Permit Application as outlined in Chapter 69a Subchapter 5.19 of the New Jersey Statutes. That application as well as the regulations and requirements can be found here http://www.nj.gov/oag/ge/docs/Regulations/MergedRegulations110413.pdf.

New Jersey is however, far from accepting defeat. They are looking towards new and innovate ways to promote and expand online gambling options. For instance, they have hired a team of mobile app developers to create games that appeal to the cell phone/tablet market, a market that is growing at a breakneck pace. Still, New Jersey has learned their lesson, and the their forecast for fiscal year 2015 was much more reasonable.

The next serial blog post will cover the international response to online gambling.

[1] CasinoFYI Finds 81% of Americans Do Not Support Online Gambling Prohibition, Marketwired (July 17, 2012, 9:00 AM), http:// http://www.marketwired.com/press-release/casinofyi-survey-finds-81-of-americans-do-not-support-online-gambling-prohibition-16807 43.html. Dallis Nicole Warshaw, Breaking the Bank: The Tax Benefits of Legalizing Online Gambling, 18 Chap. L. Rev. 289, 314 (2014).

[2] http://www.usatoday.com/story/news/nation/2014/06/24/stateline-online-gambling-revenues-fall-short/11306661/

[3] id.

[4] “N.J. Senate Bill No. 490 (2010)”.

[5] Dan Cypra (January 11, 2011). “Intrastate Internet Gambling Bill Passes New Jersey Legislature”. Poker News Daily.

[6] http://www.nj.gov/oag/ge/gamingsites.html

THE FEDS START TO GET CLARITY ON MONEY LAUNDERING AND VIRTUAL CURRENCY

•November 5, 2014 • Leave a Comment

Virtual Currency and Anti-Money laundering Compliance

Last week we explored the timeline for the life of a bitcoin, from creation to transfer in exchange for goods or services. We identified multiple opportunities for crime to occur at each major stage in the life of the bitcoin. The one area which we reserved for this week was the issue of how digital currency impacts money laundering and in the opposite direction, how ant-money laundering regulations may impact the manufacture and use of virtual currencies such as Bitcoin.

Much has changed for digital currency in the regulatory environment over last 18 months. The first significant event came in March 2013, when FinCEN (Financial Crime Enforcement Network) issued guidance on how digital currency would be evaluated with respect to enforcement of the Bank Secrecy Act’s regulations on money laundering. At once we see that FinCEN has established terminology that it will use to differentiate virtual currency (“convertible” virtual currency) from “real currency,” as well as identifying what the agency believes to be the key participants in the system. The agency divides participants into users, administrators, and exchangers. FinCEN’s guidance covers centralized virtual currencies as well as de-centralized ones.

A “user” who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not an “money services business (MSB)” (go to definitions in §1010 and scroll down to (ff)) under FinCEN’S regulations. The guidance about what is meant by “obtaining” virtual currency in fn 7 of page 2 , “obtaining” includes earning, harvesting mining, creating, auto-generating, manufacturing or purchasing. That is a pretty broad umbrella for “obtaining” and covers most of the terminology we have used in the class. The ruling states it is not how the person obtains the virtual currency but what they do with it and for whose benefit that governs whether the user has become a MSB.

The guidance establishes that FinCEN is primarily concerned with the “administrators” and “exchangers” and finds they do qualify as money services businesses, specifically money transmitters, under the regulations and must therefore comply with money laundering regulations. A business transmitting convertible virtual currencies would be subject to registration requirements and more importantly, establishing an anti-money laundering compliance program as well as reporting requirements for suspicious activities.

Since the Guidance was issued, many companies have requested rulings from FinCEN that they were not money services businesses and therefore exempt from the registration requirement. In January of this year FinCEN issued a ruling on whether miners were subject to BSA regulations. It reiterated its position from the Guidance that miners were included under “users” and thus not subject to the regulatory framework for MSB, however there was an interesting caution in the ruling. The ruling states it is not how the person obtains the virtual currency but what they do with it and for whose benefit that governs whether the user has become a MSB. However, a user, not otherwise considered an MSB, may have to scrutinize a transaction if at the behest of the sellers, the user has to transfer currency to third parties, as this may constitute money transmission, which would be subject to FinCEN regulations. This raises an interesting question about the decision PayPal made to use its partners to process digital currencies on its behalf. And in fact, a ruling was made just last week that appeared to be a petition from a third party payment processor arguing that it should not be considered a MSB. FinCEN ruled that the payment processer was a money transmitter and therefore a MSB. It will be interesting to see how PayPal handles that decision.

The more difficult regulatory environment is imposed upon “exchangers” and “administrators” if those administrators engage in money transmission. The government uses Liberty Reserve as the poster child for an “exchanger” that flagrantly violated the requirement to both register and meet the anti-money laundering compliance requirements.   In a Treasure Department, Notice of Findings, the government accused Liberty Reserve of using a “network of virtual currency exchangers to move funds. Follow the link, there’s an interesting flow chart in the write up. The company adopted an anti-money laundering policy, which met none of the requirements established by FinCEN and then it flouted even those policies. The action by Liberty Reserve demonstrated that the company knew it had obligations under BSA, but was intentionally disregarding them.

There has been quite a bit of press on the indictment of Silk Road and its owner Ross William Ulbicht. The prosecution of the owner of SiIk Road was not surprising in the least. The Federal government is not going to allow people to sell schedule I narcotics and openly flout the law. The majority of the indictment against Silk Road and Ulbricht is for the conspiracy and drug violations, as one would expect, but it does include one count which covers a money laundering conspiracy (Count 7).

The much more interesting cases to me were the prosecutions of two exchangers in the Silk Road network. Charlie Shrem, a founding member of the Bitcoin Foundation and CEO of BitInstant, an exchange for buying and selling Bitcoin, and Robert Faiella, a bitcoin seller, operating as BTCking seem to be the first two publically known casualties from the fall out over Ulbricht’s indictment. They were both charged with running an illegal money transmission business. Faiella was selling Bitcoin on Silk Road to drug dealers and Shrem knew it, or so the feds allege. In an ironic turn of fate as reported by WIRED, Shrem became aware of Faiella’s identity when he made a purchase by check instead of cash. Shrem banned him from BitInstant and Faiella threatened to go the feds to report BitInstant. Shrem then threatened to tell the feds Faiella was an unlicensed money exchanger. But evidently, the two contacted each other privately and agreed to work together. Ultimately Faiella pled to running an unlicensed money transmitting business and Shrem pled to aiding and abetting Faiella’s business.

 

I suspect FinCEN will be busy issuing rulings on the virtual currency regulations for the foreseeable future. The recent high profile Bitcoin has achieved may actually end up being its undoing. Will the virtual currency community still want to use Bitcoin if the Feds are watching?

State Online Gambling Law: Express Prohibitions

•October 29, 2014 • Leave a Comment

Recapping the last post:

The Justice Department appears to have backed of from enforcing the wire act as it applied to online gambling (other than sports betting), as evidenced by their 2011 letter. While some Congressmen have attempted to pass legislation banning online gambling completely, those bills have been unable to garner enough support to even stand a chance at passing. But where does that leave the state of online gambling law in the U.S.. Well the short answer is no one is really sure. The complex, overlapping regulatory framework has left even gambling law experts baffled. Still, at least one inference may be drawn from the justice department’s recent letter: it appears that the federal government has left the majority of online gambling regulation up to the states. As mentioned in the previous post, some States have used their regulatory authority to enact laws legalizing online gambling. Many states have however taken the opposite approach and enacted express prohibitions on online gambling. This post will examine some of those prohibitions.

 

Washington State:

Although brick and mortar gambling in Washington State is legal to an extant, online gambling is not. In 2006, the Washington legislature amended the Washington Revised Code 9.46.240 (the Gambling Act) to include a ban on all forms of bets or wagers over the Internet from Washington. Not only is it illegal for a person to place bets online from Washington but it is illegal for an internet gambling business to accept bets placed by people in Washington, whether or not the business operates within the state’s borders.

That law was challenged in the case of Rousso v. State.[1] In that case, Rousso, a online gambling enthusiast sought a declaratory judgment that the law impermissibly interferes with congress power’s to regulate interstate commerce, thus violating the Commerce Clause. The Washington Supreme Court affirmed the states authority to regulate internet gambling, finding that the burdens imposed on interstate commerce were not “clearly excessive” in light of the state interests.[2] Washington’s law is uniquely punitive, making the offense of online gambling a Class C felony.[3]

Illinois:

In Illinois’s statute Article 28 Ch. 38, any person who “knowingly establishes, maintains, or operates an Internet site that permits a person to play a game of chance or skill for money or other thing of value by means of the Internet or to make a wager upon the result of any game, contest, political nomination, appointment, or election by means of the Internet.” However, the law does not prohibit online lottery. In fact, Illinois was the first state to create an online lottery ticket program.

Recently, a bill was introduced in the Illinois legislature that would legalize many forms of online gambling including online poker.[4] According to legal sources, this bill will likely pass in some form. Therefore, online gambling prohibition in Illinois may soon be over.

Nevada:

Nevada has had perhaps the most interesting online gambling law development. In 2001, Nevada passed legislation that legalized all interactive online gaming including internet gambling. Unfortunately for Nevada, Department of Justice still believed that the Wire Act prohibited online gambling and thus the Nevada statute was in conflict with this law. Faced with this pressure, Nevada completely reversed course and became one of the only states that have expressly prohibited online gambling. [5]

Yet the story does not end there. In 2013, Nevada partially reversed its course by enacting legislation legalizing online poker (At the time, Nevada was the only state to have any form of online gambling legalization).[6] More recently, Nevada has made a deal with Delaware to permit individuals in each state to play poker against each other.[7] Under the agreement, both states must adhere to certain regulatory minimum standards.

Next Post

The next post will focus on those states that have enacted legislation legalizing online gambling in some form.

[1] Rousso v. State, 170 Wash. 2d 70, 91, 239 P.3d 1084, 1095 (2010)

[2] Rachel J. Schaefer, Must the House Always Win?: A Critique of Rousso v. State, 35 Seattle U. L. Rev. 1549, 1551 (2012)

[3] Charles P. Ciaccio, Jr., Internet Gambling: Recent Developments and State of the Law, 25 Berkeley Tech. L.J. 529, 550 (2010)

[4] http://www.kleinmoynihan.com/blog/online-gambling-may-soon-be-legal-in-illinois/

[5] Charles P. Ciaccio, Jr., Internet Gambling: Recent Developments and State of the Law, 25 Berkeley Tech. L.J. 529, 550 (2010)

[6] http://abcnews.go.com/US/story?id=93177

[7] http://www.foxnews.com/politics/2014/02/25/raising-stakes-nevada-and-delaware-sign-agreement-to-allow-interstate-online/

Bitcoin Regulation Imminent in Response to Money Laundering Crimes

•October 20, 2014 • 2 Comments

On November 19, 2013, Director Jennifer Calvery of the Financial Crimes Enforcement Network of the U.S. Treasury (FinCEN) offered a statement detailing the dangers that virtual currencies pose to the legitimacy of the United States financial system. According to Director Calvery, virtual currencies such as Bitcoin may be classified as either centralized or decentralized virtual currency. [1]. Calvery cited Liberty Reserve, an institution which participated in various fraud and money laundering schemes, as an example of a centralized virtual currency. [id.]. Bitcoin, however, follows the decentralized model, as users interact only with each other, and the currency is not moderated by any centralized administrator. [id.]. The government’s interest in regulating virtual currency stems from its initiative to deter fraud and money laundering, as well as from its desire to prevent discreet funding of terrorist operations. [id.].

Decentralized virtual currency systems, such as Bitcoin, are commonly viewed as opportune mediums through which users can pay each other for goods or services without regulation or scrutiny. Many users remain unaware, however, that every bitcoin transaction is recorded in a ledger called a block chain. [2]. This block chain makes it possible for IRS investigators, tasked with the burden of uncovering tax fraud and tax evasion, to track users who transmit virtual currency. “The IRS knows that to use bitcoins, one needs a virtual wallet along with private keys and public addresses… While the public address itself does not identify the user, the IRS has been very clever in associating the public address with the identity of the Bitcoin user.” [id.]. Apprehension toward virtual currency is fueled by situations in which bitcoins were used illicitly, to effect gun-for-hire solicitation, or help tech-savvy drug dealers launder over one million dollars. [3,4].

The potential for criminal abuse is enhanced by the utilization of bitcoins as a method of payment on the former “illicit Silk Road website”, which—with the aid of BitInstant—transmitted nominal payments to drug dealers. BitInstant, a bitcoin exchange, is no longer up-and-running after its operator, Charlie Shrem, pled guilty to helping drug dealers launder over one million dollars using bitcoins. [3]. In that case, judge Katherine Forrest “found [that] federal money-laundering statutes ‘encompass use of Bitcoin’ — and that ‘any other reading’ of the law would be ‘nonsensical.’” [4]. Judge Forrest explained, “There is no doubt that if a narcotics transaction was paid for in cash, which was later exchanged for gold, and then convert[ed] back to cash, that would constitute a money-laundering transaction. One can money launder using Bitcoin…”. [id.].

Practical dangers of using bitcoins are far less criminally implicating, but nonetheless problematic. Because the Bitcoin exchange is peer to peer, decentralized, and “at a crossroads between a lightly regulated industry–software and technology–and a heavily regulated one, which is banking,” users transmit bitcoins without any guarantee of value in their currency. [5]. “Bitcoin, which isn’t backed by any country and doesn’t have an interest rate, has been one of the most volatile currencies in the world this year, falling more than 45 percent to about $407.23 [in just one day].” [6]. Because of the large amount of transactions processed through Bitcoin, an estimated $8 billion between October 2012 and October 2013 alone, federal agencies like FinCEN and state officials like Benjamin Lawskey (NY) are trying to implement regulatory measures to curtail both criminal involvement and consumer deceit in the Bitcoin exchange. [1, 7].

Lawskey, Superintendent of the New York Department of Financial Services began his plight against Bitcoin perhaps too aggressively, proposing registration requirements that would stifle the efficiency and convenience of the system. [7]. After having been met with much resistance from the public, namely Bitcoin users, Lawskey dialed it back and proposed new regulations that would take place in New York next year in 2015. [id.]. Under Lawskey’s proposal, banks attempting to take part in the trade and transmission of virtual currencies would be required to apply for a special banking license, a BitLicense, designed to regulate virtual currencies. [id.]. Some of Lawskey’s revisions, however, resulted in the exemptions of software developers, bitcoin miners, and individual users who take advantage of the bitcoin service but otherwise do not offer any financial service to the general public. [id.].

New York is one of the first states to recognize the need for bitcoin and virtual currency regulation in order to protect consumers. Additionally, FinCEN has dedicated significant resources to combat the crime in the virtual currency context. Because of the vast array of retailers and large-scale corporations now accepting Bitcoin as a legitimate method of payment (PayPal, Expedia, Dell, to name a few), the collapse of the noninsured virtual currency exchange could further complicate matters. [8]. Complications from non-regulation could result in not only consumer mistrust, but perhaps an entanglement of large, do-right corporations, with illegitimate criminal enterprises.

If anyone would like to reference the federal money laundering statute, please take a look at 18 U.S.C. § 1956. You may also view a link to the Bank Secrecy Act (BSA) here: http://www.fincen.gov/statutes_regs/bsa/

Chris

Footnotes:

[1] http://www.fincen.gov/news_room/testimony/html/20131119.html

[2] http://www.forbes.com/sites/irswatch/2014/10/03/are-virtual-currencies-the-next-offshore-bank-account-for-tax-evaders/

[3] http://nypost.com/2014/09/04/bitcoin-operator-admits-to-aiding-drug-dealers-launder-1m/

[4] http://nypost.com/2014/07/09/judge-rules-bitcoin-as-legal-tender-in-silk-road-case/

[5] http://www.inc.com/jeremy-quittner/lawsky-and-new-virtual-currency-regulations-for-new-york.html

[6] http://nypost.com/2014/10/15/lawsky-relents-on-bitlicense-regulations/

[7] http://blogs.wsj.com/moneybeat/2014/10/14/bitbeat-lawsky-outlines-changes-to-bitlicense/

[8] http://www.fool.com/investing/general/2014/10/15/bitcoin-and-retailers-who-accepts-the-virtual-curr.aspx

The New Federalism: The Wire Act and How Congressional Inaction Regarding Online Gambling is Unsustainable

•October 15, 2014 • 2 Comments

Ostrich-man-head-in-sand

When we last left our discussion regarding Federal Online Gambling Law, the Justice Department was reeling from the 5th’s Circuit’s interpretation of the Wire Act (that it only applies to sport gambling.) More than five years later, the federal governed finally acquiesced to that decision. On December 2011, the Justice department issued a letter in response to inquires from Illinois and New York regarding proposals to use the internet to buy out-of-state lottery tickets. In the opinion, the Justice Department concluded that interstate transmissions of wire communications that do not relate to a ‘sporting event or contest’ fall outside the reach of the Wire Act.[1] This has essentially eliminated most federal restrictions on online gambling other than the relatively weak Unlawful Gambling Enforcement Act. [2]

Many thought that this was the end to the wire act debate. Yet, leave it to lawmakers in Washington to reignite a seemingly settled issue. In March of this year, a group of lawmakers, led by Utah Rep. Jason Chaffettz, proposed a bill that they say will “re-establish” the 1961 Wire act. According to Chaffetz, there was a specific reason why they used the word “re-establish” in the proposed bill.[3] “This bill is not as much about gambling as it is about restoring the law to what it was before the Justice Department decided to unilaterally reinterpret it. This is just one of any number of issues on which this administration has failed to consult Congress and ignored the law,” Chaffetz said. [4]

The Chaffetz bill has not been the only response to the Justice Departments letter this year. In February, the attorney generals for 16 different states sent a letter to Congress requesting that they act to stay the Justice’s department’s interpretation, because it would “give federal and state law enforcement agencies time to fully assess and report on the implications Internet gambling has on our respective charges to protect the citizens of our states.” [5]

In contrast, some lawmakers have taken the momentum gained from the Justice department’s remarks to propose bills for federal legalization of online gambling. A bill proposed by Peter King, Rep. from New York seeks to legalize all forms of online gambling while a similar bill from Rep. Joe Barton would legalize online poker specifically.

Conclusion:

The Justice department was correct to issue the letter. The Fith Circuit’s interpretation of the act is so much more logical. The Wire Act, as enacted in 1961 was simply not broad enough, to cover online gambling nor was it ever intended to cover anything other than sport’s betting. The gray area in the law was not good for the economy. Of course, it is always difficult to admit that you were wrong. Likely, this is why it had taken over seven years for the letter to be issued in the first place. Moreover, the bills brought by Peter King and Joe Barton are a step in the right direction. The federal government cannot ignore the fact that online gambling is growing in popularity. Without proper federal regulation, inconsistency in the law will continue to plague the U.S. (hurting the economy) and the black market for online gambling will flourish. Next week, I will cover the state’s responses to online gambling.

[1] http://www.forbes.com/sites/nathanvardi/2011/12/23/department-of-justice-flip-flops-on-internet-gambling/

[2] http://www.Newsmax.com/Newsfront/online-gambling-gaming-ban/2014/04/04/id/563757/#ixzz3GEwu9c3U

[3] http://www.Newsmax.com/Newsfront/online-gambling-gaming-ban/2014/04/04/id/563757/#ixzz3GEwu9c3U

[4] http://www.Newsmax.com/Newsfront/online-gambling-gaming-ban/2014/04/04/id/563757/#ixzz3GEwu9c3U

[5] https://www.scribd.com/doc/214631788/State-Attorneys-General-Letter-on-the-Wire-Act

 
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