Tag: Gambling

Metaverse Casinos: A Regulatory Wild West

A New World of Gaming

The metaverse is an immersive online universe on the blockchain where users interact with a multitude of digital worlds and with each other. As in the real world, the metaverse offers a wide variety of activities and entertainment options. The metaverse has become a haven for gaming. Users can explore casino “districts,” offering slots, poker, roulette, blackjack and more, go to shows and nightclubs, and even purchase real estate, including an entire casino. Some platforms within the metaverse are more developed than others, with their own parcels of land, decentralized governmental structures and native tokens. As this space continues to expand into various aspects of daily life, participants in the metaverse ecosystem, and in particular, gaming operators, should proceed with caution as the line between fantasy and reality continues to blur.

The metaverse provides an alternative virtual reality for those who visit, seemingly outside of the legal and regulatory structure of the real world. Now, due to the development of digital assets1 including cryptocurrencies and non-fungible tokens (“NFTs”), visitors can add real-world economic value to some in-game activities. Players can buy, sell, or gamble items in the metaverse for digital assets that can convert to fiat currency, further blurring the lines between a virtual game experience and reality. What seems to some like a game will increasingly have real-world economic consequences for users, and the businesses with which they engage in the metaverse, resulting in more regulatory scrutiny and legal disputes.

Metaverse Gaming vs. Traditional Online Gaming

It is helpful to distinguish metaverse gaming from traditional online gaming. Gaming in the metaverse and online gaming both allow users to play casino games with their friends and social network virtually without the burdens and restrictions of physical travel. Unlike traditional online casinos, the metaverse attempts to replicate the full casino experience, allowing users to explore a digital representation of a casino using a unique avatar and virtual reality technology. Through advancements in technology, users can control their avatar’s behavior in a similar manner to controlling their own conduct in the real world. Essentially, avatars are digital representation of users – they physically walk around and engage with other avatars, including making observations of other avatars’ tells and contributing to an authentic casino experience, all from the comfort of home.

Metaverse casinos generally do not accept traditional fiat currency. A metaverse casino requires a participant to convert their fiat into one of the crypto currencies accepted in the metaverse and deposit funds using a crypto wallet. Users exchange the NFTs and cryptocurrency that they win in the metaverse for fiat currency in the real world, however.

The use of crypto in metaverse gaming has some clear benefits. In addition to providing an immersive interaction compared to fiat-based online gambling platforms, metaverse casinos offer higher levels of security, transparency, and privacy for users. For example, the history of the entire transaction history is accessible on a blockchain. Although the transaction is visible on a blockchain, users may remain anonymous without having to disclose certain personal information, thereby protecting privacy. Deposits and withdrawals are processed virtually instantaneously because there is no third party verifying the transaction.

Regulatory Considerations for Metaverse Gaming

Casino and sports gaming is one of the most heavily regulated industries in the United States. The regulation is primarily at the state level. Some mistakenly believe the metaverse is insulated from real life legal restrictions. To the contrary, any gaming and wagering activity, which constitutes a game of chance involving the risk of something of value and a prize,2 that is being offered to U.S. citizens in the metaverse (on an unregulated basis) is likely to draw the attention of regulators.

Despite the popularity of metaverse gaming, the top U.S. operators have largely stayed on the sidelines while offshore and smaller companies dominate the space. This is unsurprising for three reasons:

  1. The fact that metaverse gaming lacks a dedicated regulatory framework and online gaming is legal in only a handful of states;

  2. As we wrote previously, the reluctance of regulated gaming companies operating in the U.S. to pursue the legal use of cryptocurrency given its volatility, lack of acceptance, and regulatory and/or legislative hurdles; and

  3. General legal uncertainty.

An operator that wishes to offer a gaming platform to U.S. citizens in the metaverse would need to do so with the express permission and under the oversight of each state’s gaming commission whose residents they serve. This may also require new legislation and regulatory schemes. For example, Wyoming, an early adopter of cryptocurrency, passed legislation in 2021 that allows sportsbooks to accept “digital, crypto and virtual currencies.”3 Generally, however, regulators and legislators are not known for their speed in adopting new and emerging technologies and the industry as a whole is still working toward more immediate and attainable goals, such as expanding legal online gaming. Currently, fewer than 10 states offer online casinos and/or poker.

There is significant regulatory and legal uncertainty surrounding metaverse casinos. For example, which oversight bodies have authority to regulate metaverse casinos? Can users face consequences in the real world for the actions of their avatar in metaverse casinos? How are players protected from unlawful conduct in metaverse casinos? Can operators be held responsible for that misconduct? State gaming regulators would have jurisdiction over gaming activity being offered to their residents in the metaverse alongside other regulators including the SEC, the U.S. Commodity Futures Trading Commission, and the Financial Crimes Enforcement Network, given the use of cryptocurrency and NFTs.4 At this early stage, there are more questions than answers. The history of the real-world gaming industry suggests it is highly probable that metaverse casinos will be subject to direct regulation.

New Legal Parameters Around Metaverse Gaming Are Expected

The competitive nature of the U.S. gaming market, the vast lobbying power of licensed gaming operators, and the substantial fees for licensure indicate that it is not a matter of if, but when regulators will intervene in metaverse gaming. While the concept of metaverse casinos is exciting and creates the opportunity for significant growth in the gaming industry, like many innovations, it brings additional challenges and risks for operators.

In fact, earlier this year securities regulators in Texas and Arizona demanded that a metaverse casino developer cease its funding for the development of its metaverse casino (and expansion of its metaverse casinos to all other relevant metaverses) through NFTs for failing to register the NFTs as securities and on the grounds that it was conducting an illegal fraudulent securities scheme.5

About a month later, securities regulators in Texas, Wisconsin, Kentucky, New Jersey, and Alabama filed an action against another metaverse casino due to its alleged ties to Russia and a fraudulent investment scheme it was running in violation of securities laws.6 The Texas State Securities Board stated its concerns about scammers being able to hide their identities (also referred to as “going dark”), as they alleged occurred here, in metaverse casinos.

In addition, just a few months ago, 28 members of Congress urged the Department of Justice to work with the industry, and other stakeholders to prosecute offshore sports betting companies operating illegally in the U.S.7 Similarly, absent a known regulatory scheme, even “successful” operation of a metaverse casino at present does not foreclose adverse action or shutdowns in the future due to increasing regulatory scrutiny.

While it is unclear how, if, and to what extent, existing regulations apply to metaverse gaming, the actions referenced above demonstrate that some state regulators are taking the position that the same rules that apply to investments in the real world also apply to investments in the metaverse. The risk is not limited to the virtual world, but also exposes investors to the potential loss of real money. The above matters also highlight the broad range of risks government authorities could be motivated to address, from international policy implications to financial fraud scams.

Pioneering the Metaverse

Although there are significant barriers to operating gaming platforms in the metaverse, forward-thinking gaming companies have wisely been preparing to enter this new world when it is safe to do so. If the metaverse becomes as integrated into daily life as it is expected to be, those pioneers will reap the rewards. We recommend gaming operators in the metaverse proceed with caution and retain highly qualified counsel to help them navigate the developing regulatory landscape.

For more internet and cybersecurity legal news, click here to visit the National Law Review

Copyright ©2022 Nelson Mullins Riley & Scarborough LLP

FOOTNOTES

  1. Regulators in the United States including the Securities and Exchange Commission (“SEC”) use the term “digital asset” to refer to “an asset that is issued and transferred using distributed ledger or blockchain technology.” Statement on Digital Asset Securities Issuance and Trading, Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets, SEC (Nov. 16, 2018), available here. As the SEC has noted, digital assets include, but are not limited to, virtual currencies, coins, and tokens. Id. A digital asset may in certain instances be deemed a security under the federal securities laws. While not defined in the securities laws, the SEC often refers to digital assets that are securities as a “digital asset securities.” Id.

  2. The issue of what is a “thing of value” within the meaning of state anti-gambling law has been the subject of recent litigation. See, e.g., Kater v. Churchill Downs, Inc., 886 F.3d 784 (9th Cir. 2018) (virtual chips in online game held to be a “thing of value” for purposes of Washington’s illegal gambling law); Coffee v. Google, LLC, No. 20-CV-03901-BLF, 2022 WL 94986, at *13 (N.D. Cal. Jan. 10, 2022) (“loot box” prizes limited to use in in-app game not “things of value” under California illegal gambling law).

  3. Pat Evans, Cryptocurrency In Legal Sports Betting: What’s Next?, (June 9, 2022), available here.

  4. We will discuss the potential role of these Federal regulators in future articles.

  5. Dorothy N. Giobbe, et. al, Texas and Alabama Securities Regulators File Enforcement Actions Against Online Casino Developer Selling NFTs to Operate Casinos in a Metaverse, (April 29, 2022), available here.

  6. Five States File Enforcement Actions to Stop Russian Scammers Perpetrating Metaverse Investment Fraud, (May 11, 2022), available here.

  7. Chris Altruda, Congressional Group Calls on DOJ to Help Fight Illegal Offshore Sportsbooks, (Jun. 30, 2022), available here.

 

Ohio Votes to Legalize Sports Betting

Ohio lawmakers have reached an agreement that will legalize sports betting for those 21 and older. House Bill 29, which was passed by the Ohio House of Representatives and Senate on December 8 and is expected to be signed into law by Governor DeWine in the coming days, will allow licensed gaming operations to begin accepting wagers as soon as April 1, 2022.

Since the Supreme Court of the United States struck down federal law prohibiting state-sponsored sports betting in 2018, 33 states and Washington D.C. have passed legislation establishing regulated markets for wagering on sports. Ohio now becomes the 34th as it hopes to curb the flow of its residents’ entertainment and tourism dollars into neighboring Michigan, Pennsylvania, Indiana and West Virginia, all of whom have already legalized sports betting.

Oversight. The Ohio Casino Control Commission (“OCCC”) will be responsible for regulating and monitoring all sports gambling activity in the state. Once the bill is signed into law, the OCCC is required to establish a licensing process, consumer protections, advertising guidelines, and financial requirements for licensees. As an enforcement agency, it will also be given the authority to create other administrative rules it deems necessary to carry out its oversight duties.

Licenses. The OCCC will being accepting license applications on January 1, 2022 and can begin issuing a limited number of licenses on April 1, 2022. The law provides guidance as to how the OCCC will evaluate applicants, and establishes three classes of licenses: (1) Type A licenses for casinos, racinos and sportsbooks operating online and via mobile app; (2) Type B licenses for brick-and-mortar sportsbooks, which will be distributed throughout the state based on county population; and (3) Type C licenses for betting terminals to be placed in restaurants, bars and the like that possess D-1, D-2, or D-5 liquor permits.

Taxes.  A 10% tax will be placed on the new industry’s revenues. Combined with the fees and fines collected by the OCCC, most of this money will be earmarked for distribution by the Ohio General Assembly to public and nonpublic K-12 education programs and a state-sponsored Problem Sports Gaming and Addiction Fund. The bill also creates certain tax incentives for licensed operators beginning in 2027.

Be Ready. Businesses affected by legalization, whether pursuing a license, contracting with a license-holder or being indirectly impacted, need to stay vigilant as Ohio’s sports betting regulatory framework develops. From financial reporting to employment practices, failure to understand and implement processes to comply with the forthcoming regulations could result in significant fines or even criminal penalties.

©2021 Roetzel & Andress

Legalize Poker? Expert Witnesses Will Be Responsible

IMS ExpertServices - Expert Witness Search Firm

As poker continues to rise in popularity in mainstream America, it could very well be expert witnesses who ultimately cause the game to become largely legalized.

Over the last decade, poker (specifically Texas Hold’em poker) has emerged from the back rooms of smoky taverns, exited the underground gambling dens of low-level mobsters, and announced itself to conventional society as being a legitimate contest between skilled competitors.

The general public has been receptive. Multimillion-dollar tournaments are now televised on ESPN as more and more Americans are playing online every day, most of the time illegally through websites based offshore or overseas.

As the public watches often-familiar, famous faces continue to make final tables and win, television-viewers are able to witness each player’s strategy, lending to the idea that the game is based more on skill than chance. This fact, according to experts, distinguishes poker from “gambling” and should thus remove poker from the jurisdiction of state gambling laws.

“It is my considered opinion, based on my experience, on research that I have personally conducted, and on a review of the scholarly literature, that Texas Hold’em is a game in which skill predominates over chance in determining the outcome,” wrote expert witness Robert C. Hannum, a professor of risk analysis and gaming at the University of Denver, in an affidavit filed last month in a Wisconsin circuit court. “Thus, in my opinion, it would be incorrect to describe Texas Hold’em as a game of chance.”

The lawsuit, Verrett and Kroon v. Schimel, was filed by a poker advocacy group against the state attorney general and seeks declaratory judgment to have the court rule poker as a bona fide game of skill. A decision of such would thereby allow a poker player to gamble legally on the outcome of oneself, similar to lawfully betting on yourself in darts, pool, golf, tennis, or even pie-eating.

Hannum’s statistically exhaustive 22-page expert witness affidavit goes to great lengths to show how little chance (or how the cards are dealt) affects the overall outcome in poker. He cites statistics and mathematical analysis and extensively examines other scientific studies on poker.

“In contrast with these numerous studies finding that skill predominates over chance in poker, I am aware of no study reaching the conclusion that poker is a game predominately of chance,” Hannum writes. “In my opinion, the studies above establish conclusively that in the long run, skill predominates over chance in poker.”

To the average legal observer, it would seem that a judge will be hard-pressed to disagree with Hannum and the associated statistical science and would thus be forced by sheer mathematics to rule in favor of poker’s categorization as a game of skill rather than an act of gambling.

While the case will directly affect only poker players in Wisconsin, it’s difficult to think that the trend will not follow across the United States.

ARTICLE BY

Ryan Thompson, Esq.
OF
IMS ExpertServices

Bulgaria Adopts New Gambling Tax Regime

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Bulgaria has a new gambling taxation regime effective January 1, 2014, which, together with the reasonable and balanced regulations currently in place, makes the country attractive for local licensing and gambling operations based upon a low corporate tax and highly qualified and low-priced technical specialists. One and a half years after theGambling Act (“Act”) was introduced, the tax base for gambling has been changed and is now in line with good business practices: switching from a turnover base to aGross Gaming Revenue (“GGR”) base.

On December 19, 2013, amendments in the Act (“Amendments”) for liberalizing gambling regulation in Bulgaria passed successfully the second reading in the Bulgarian Parliament amidst tense disputes. The Amendments were promulgated in the National Gazette on January 3, 2014, and came into force effective January 1, 2014.

The Amendments assure that as of January 1, 2014, the taxation of any online games in Bulgaria will be based on GGR with a 20% tax rate. For games in which fees and commissions are collected (such as poker), the tax rate will be 20% of the collected fees. In addition, there is a single fee for issuing and maintenance of a five-year license in the amount of approximately EUR 50,000 (BGL 100,000). No annual fee will be required during the five years’ validity of the license.

Offline bingo and keno will be taxed at a 10% corporate tax rate.

The GGR-based taxation is not a part of the common tax system, but rather it is an administrative fee regulated entirely in the Act instead of the tax laws. Nevertheless, any operator who decides to have an establishment in Bulgaria can take advantage of a favorable and stable corporate tax – only 10%. The low corporate tax rate would apply only to operators who decide to establish a local company in Bulgaria, which might be strongly supported from other economic arguments – for example, a very well-educated and qualified labor force at insignificant costs.

The Amendments introduce a new requirement for any licensed operator not established in Bulgaria but established in any other EU/EEA country or Switzerland. Such operators must have an authorized representative in Bulgaria, but this would not constitute having a local business in the country for purposes of obtaining the 10% corporate tax rate. An operator, in all events, is required to have a local representative in Bulgaria, who should be authorized for representation before Bulgarian authorities and courts.

From a regulatory perspective, the Bulgarian gaming regime is now one of the most balanced in Europe. It does not require a local establishment and main server in Bulgaria for any foreign operator who decides to obtain a local Bulgarian license (nevertheless, a local control server in Bulgaria is required). There are no specific requirements for performing payments through a local bank or to make certain investments in the country. The operators are not required to operate a dot bg domain. Foreign operators – registered, investing, and having a main server anywhere within EU, EEA, and Switzerland – can apply for a license. Nevertheless, the restrictions the Act imposes on an applicant whose shareholder is an offshore company should be carefully considered in light of provisions of the Act relating to economic and financial relations with companies registered in preferential tax regime jurisdictions and their actual shareholders.

A significant number of online gambling operators are expected to apply for a license in Bulgaria. The first online operators have already submitted applications. They are eager to enjoy not only reasonable taxation but also liberal regulation. The Bulgarian government has further stimulated the licensing of online operators by approving amendments that allow the operator to be removed from the blacklist even before being granted a license if the online operator applies for such removal not later than March 31, 2014.

The Amendments also permit the operators to perform any other business activity apart from organized gambling, which was not the case until now.

The efforts of the Bulgarian Parliament are of major significance. Instead of concentrating on blocking measures (such as ISP and/or payment blocking), the government has focused on best practices and introduced regulations that motivate the online gambling operators to get a license and work not only in a balanced regulatory environment but also under a favorable tax regime. These changes are aimed at balancing and optimizing the new sector regulation model that was introduced back in 2012. They give the online operators promising conditions to work legally in the Bulgarian market. At the same time, the new regulations impose stricter administrative sanctions on illegal online gambling operations.

Nadya Hambach, of Velchev & Co., authored this article.

Article by:

Dickinson Wright PLLC

The 16th Annual National Institute on the Gaming Law Minefield

The National Law Review is pleased to inform you of the 16th Annual National Institute on the Gaming Law Minefield:

ABA Gaming Law 2012

Gaming Law Minefield 2012

Event Information

When

February 23 – 24, 2012

Where

  • Green Valley Ranch Resort & Spa
  • 2300 Paseo Verde Pkwy
  • Las Vegas, NV, 89101
  • United States of America

Program Description

The Gaming Law Minefield National Institute is one of the most comprehensive, state-of-the-law gaming programs available. Program attendees have consistently rated the program as a valuable
educational experience that provides participants with the opportunity to meet and talk with a wide variety of gaming law experts and leading state and Native American regulators.

  • The program will discuss revolutionary legal, regulatory, and ethical issues confronting both commercial and Native American gaming.
  • Two hours of ethics credit will be available.
  • Learn about global anti-corruption initiatives, Internet gaming, and the challenges faced
    by commercial and Native American gaming.
  • Gain knowledge on the latest techniques to cope with problem gamblers.

Who should attend:

Attorneys, compliance officers, Native American leaders, regulators, and legislators will gain invaluable insights into current trends, opportunities, and obstacles in the gaming industry.


The 16th Annual National Institute on the Gaming Law Minefield

The National Law Review is pleased to inform you of the 16th Annual National Institute on the Gaming Law Minefield:

ABA Gaming Law 2012

Gaming Law Minefield 2012

Event Information

When

February 23 – 24, 2012

Where

  • Green Valley Ranch Resort & Spa
  • 2300 Paseo Verde Pkwy
  • Las Vegas, NV, 89101
  • United States of America

Program Description

The Gaming Law Minefield National Institute is one of the most comprehensive, state-of-the-law gaming programs available. Program attendees have consistently rated the program as a valuable
educational experience that provides participants with the opportunity to meet and talk with a wide variety of gaming law experts and leading state and Native American regulators.

  • The program will discuss revolutionary legal, regulatory, and ethical issues confronting both commercial and Native American gaming.
  • Two hours of ethics credit will be available.
  • Learn about global anti-corruption initiatives, Internet gaming, and the challenges faced
    by commercial and Native American gaming.
  • Gain knowledge on the latest techniques to cope with problem gamblers.

Who should attend:

Attorneys, compliance officers, Native American leaders, regulators, and legislators will gain invaluable insights into current trends, opportunities, and obstacles in the gaming industry.