Could Bitcoin be the Future of Internet Betting?

Hartley Henderson has published a prospicient article at Off Shore Gaming Association, "Could Virtual Currency be the Future of Internet Betting?". The author has identified a man known as R.C. who emphatically endorses bitcoin as a means of payment for online gambling and casinos across almost all jurisdictions. This supports our thesis that bitcoin is the digital equivalent of a physical casino chip. Henderson summarizes his discussion:

'If I had any say, all transactions at our book would be done in bitcoins,' the man said. 'They are untraceable and totally out of the control of any government. And most importantly they are an investment which someday I’m confident will rival silver prices.'

The author then asks R.C. specifically what makes bitcoins a better option than cash for online gambling:

"As you know, money transfer is vital to the sports betting, casino, and online poker industries. Bitcoin is an amazing solution. Through a combination of math and cryptography - it is a completely decentralized currency/commodity. That means no entity is in control, it is managed by all the nodes of the network, collectively. You can think about it like bitTorrent, if you are familiar with the file sharing protocol; purely peer to peer with no central management. 

Through this cryptography and decentralized design, each node on the network is a 'bookkeeper' of which bitcoin addresses own which coins. You cannot fake or forge a transaction or create coins outside of the system. Each node has a record and will not accept forgeries. So, even though there is a public record of all bitcoin transactions, the key is that nobody knows who owns a particular address and thus those bitcoins. So on the one hand it is completely transparent - all coins and transactions are public, but on the other hand nobody knows who owns those coins/bitcoin addresses. You can see how it could be useful to gamblers."

Peer-to-peer wagering, or social betting, is gaining quickly in popularity and Henderson makes the point that companies receiving a membership fee are distinctly different from companies that receive a commission on the winning bets:

"What R.C. didn’t mention is that in no country is peer to peer wagering illegal. There is nothing in the law that stops person A from wagering $20 with person B on the outcome of a game. What makes the transaction illegal in some countries is when an intermediary acts as the bookmaker. That is precisely why Betfair and Matchbook are seen as technically illegal by the U.S. government. Both are peer to peer wagering operations but they also take a commission on the winning bets. BTCSportsBet.com doesn’t do so. They simply have paid members."

Henderson also makes the bold case that bitcoin as a payment mechanism doesn't fall under the UIGEA because there is no money involved and there is no way the Department of Justice can effectively intrude. Our man R.C. perhaps explained it best:

"As far as UIGEA, there are no banks or processors involved. Moving bitcoins around is just like moving an image file or other data around. I would expect to see bitcoin-specific legislation before any attempt to apply the UIGEA. But even with legislation, I expect the future of bitcoin to be bright. There is no central authority to shut down. There are laws against file sharing copyrighted works, but due to the distributed nature of bitTorrent it cannot be effectively policed.

As far as pressure from the DOJ or other entity (it’s not a viable concern). Bitcoin can be classified as a commodity, or a currency, or nothing at all (it's just data). One can argue that it is like Facebook credits or World of Warcraft Gold. The government is not going after them. Also, the terms and conditions for BTCSportsBet.com states that the player is responsible for determining the legality of playing with bitcoins in his or her jurisdiction. Sign-ups are anonymous and the site does not know the origin of the players. No personal identification is requested; even an email address is optional. A player can sign up, send bitcoins, wager, and withdraw without the site ever knowing who he or she is. The properties of bitcoin allow this to happen. There can be no fraud, identity theft, or reversed transactions. All of those headaches are a massive cost to the industry - so you can see why bitcoin may be a significant factor in the future of online wagering."

Regarding the claims above, it remains to be seen if Facebook Credits will ever permit two-way exchange and, even if they did, that the U.S. regulatory authorities wouldn't move promptly to include them under the 'Prepaid Access Rule' for financial products. In the meantime, I agree that the resilient bitcoin is more suited to the monetary challenges ahead and it is another case of technology being ahead of the law.

For further reading:
"Leading Bitcoin Online Gambling Operator Opens Books", Bitcoin Money, January 18, 2012
"Could crypto-currency change how we pay?", Julian Bucknall, January 8, 2012
"Bitcoin and the Digital Currency Revolution", Dan Downs, January 5, 2012
"A Bitcoin Primer", Mike Koss, January 1, 2012