I-Gaming: Gold Rush or Boom-and-Bust?

Eureka! The United States sits on billions of dollars in gaming revenue and taxes that are lost to inaction. Globally, Internet gaming is a legal and lucrative industry. Domestically, there are millions of players seeking i-gaming who are forced to extraterritorial vendors. But readers beware: A 21st century gold rush should be avoided in favor of carefully planned development. The federal government must establish a framework for domestic i-gaming that states may opt in to, before alternatives cause irreparable harm to the industry and consumers.

On Sept. 20, 2011, the United States Justice Department (DoJ) dealt a “death blow” to the opposition of Internet gaming in the Uniting States, concluding “that interstate transmissions of wire communications that do not relate to a ‘sporting event or contest’” are not illegal.1 In interpreting the Wire Act (18 U.S.C. § 1084 (2006)), the DoJ specifically held that online lottery proposals by New York and Illinois are not “sporting event[s] or contest[s].”2 While not interpreting the Unlawful Internet Gambling Enforcement Act (UIGEA) (31 U.S.C. § 5362), the DoJ explicitly states that UIGEA only prohibits the acceptance of credits or funds from another person “in a jurisdiction where applicable federal or state law makes such a bet illegal.”3

Seemingly, the DoJ opinion legitimizes i-gaming websites, aside from those that offer sports wagering. If this is true, then offshore sites can continue to offer unregulated i-gaming to U.S. citizens without fear of reprisal from the federal government at least, while U.S.-based companies are forced to sit on the sidelines.

But what it really means is that i-gaming in the United States is a reality, as illustrated by Delaware, California and New Jersey’s recent online gaming bills, which are clear efforts to tap an untapped market.4 The Internet, however, is a unique marketplace that does not respect a state or country’s boundaries and that necessitates a framework as well as minimum standards set at the federal level.5

The alternatives are simply unsustainable. Complete prohibitions on i-gaming drives consumers to unregulated foreign markets. This results in the potential exploitation and the actual loss of revenue and jobs that would otherwise remain in the United States.

Yet, leaving i-gaming solely to the states creates concerns that have, at one time or another, plagued numerous frontier industries.6 Rapid expansion into a void creates a mad dash that places the integrity of the industry behind immediate profits and creates numerous systems with different standards and regulations. Further, in a haste to “be the first,” the likelihood of shoddy systems that inadequately protect game integrity increases. Inevitably, fissures in the industry will require 50 different patches. This stifles i-gaming efficiency, leads to consumer protection issues and devalues a potential boon.

We do not suggest, however, that the federal government run Internet gaming. Rather, the licensing and actual regulation should be placed in the hands of states that possess the infrastructure and regulations to properly regulate i-gaming. This system would allow states to decide whether to offer Internet gaming, the types of games offered and the desired regulations, all of which would be subject to a federal framework. The operators of i-gaming websites could then decide in which state to obtain a license to operate their i-gaming platform.

While perhaps not perfect, such a federal framework is the only way to ensure that i-gaming is sustainable. Further, it provides the best vehicle to ensure that national concerns with underage gaming, game integrity and problem gaming are uniformly regulated, as well as to ensure that issues that arise are efficiently and immediately addressed nationwide.

We have identified the money, we know how to get at it, but we must first develop a framework that prevents the lawlessness that consumed the Wild West. Otherwise, the shells of boom-and-bust servers will litter the landscape, and consumers will be left with no means to redress an unplanned and unsustainable i-gaming gold rush.

1 Whether Proposals by Illinois and New York to Use the Internet and Out-of-State Transactions Processors to Sell Lottery Tickets to In-State Adults Violate the Wire Act., 35 Op. O.L.C., at 1 (2011).
2 Id. at pp. 12-13.
3 Id. at p.2.
4 Mark Fowser, “Proposal to expand Delaware gambling,” NEWSWORDS, March 28, 2012, available at www.newsworks.org/index.php?option=com_flexicontent&view=items&id=36047:… Demian Bulwa, “Legalized online gambling sought in Calif. Bill,” SF GATE, April 9, 2012, available at www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2012/04/08/MNK31NOGM8.DTL&ao=all; “Online gaming plan inches ahead,” APP.COM, April 9, 2012, available at www.app.com/article/20120409/NJNEWS1002/304090011/Online-gaming-plan-inc….
5 By acting on the i-gaming issue, Congress will be able to set up a framework that clearly outlines, among other things: (i) the type of games that are legal across the country; (ii) safeguards to ensure that underage gaming does not occur; (iii) mechanisms for dealing with problem gaming; (iv) territorial safeguards; (v) licensing standards that ensure operators meet the rigorous standards currently applied across the U.S. for land-based operators; (vi) a tax structure on the marketplace; (vii) penalties for unregulated operation; and (viii) protocols for Native American participation.
6 See the specific blights of 19th century mining operations in California, Alaska and Nevada that led to wasteful practices, unsustainable growth, the eventual creation of a federal framework, and also the expansion of railroads that resulted in incompatible railways, stifled growth and resulted in a federal framework.