Jan. 23, 2003 — After seven years of trying, lawmakers are widely expected to crack down on illegal Internet gambling during the current session of Congress. But in doing so, some observers say, they could breathe life into a greater menace than the one they are trying to strangle — an untraceable form of electronic cash that could undermine the ability of governments to tax their citizens and trace the flow of money around the globe.
Concern about the possible unintended consequences of anti-gambling legislation comes amid signs that Congress is serious about putting the brakes on the rapidly growing online wagering industry. With both houses of Congress now under Republican control, most legislative handicappers say chances are better than 50-50 that a bill will land on President Bush’s desk before the end of the current session.
The legislation considered most likely to win approval aims to knock the financial legs out from under the offshore betting Web sites by prohibiting Americans from using credit cards or other financial instruments — electronic fund transfers, wire transfers, checks, money orders and the like — for Internet wagering.
That has gambling site operators scrambling for other means that can’t be easily blocked, such as digital e-cash, that will allow them continued access to their biggest market, the United States.
‘We're going to try to survive’
“We’re going to try to survive as an industry,” said Jessica Davis, vice president at the Antigua-based BetWWTS.com. “We always are trying to be a step ahead and we will do whatever we have to do and use whatever means necessary to allow our clients to remain active.”
The House approved the Unlawful Internet Gambling Funding Act, introduced by Rep. James Leach, R-Iowa, last year, but it died when the Senate failed to act in the waning days of the 107th Congress. Leach reintroduced the bill in the House on Jan. 7, and Sen. Jon Kyl, R-Ariz., whose name became synonymous with early efforts to ban online betting, plans to introduce identical legislation in the Senate, probably in February, a spokesman said.
Passage of the Leach bill could have a severe impact on the online gambling industry, which gaming analyst Sebastian Sinclair of Christiansen Capital Advisors LLC estimates will generate $6 billion in revenue this year.
Voluntary ban on credit cards
Gambling Web sites already have been jolted by a near-total ban on the use of U.S.-issued credit cards for Internet gambling. Banks and credit card companies imposed the ban because of concerns that they could be held responsible for aiding an illegal activity or left holding the bag if U.S. courts ruled that online gambling debts were uncollectible.
Some sites were initially able to evade the crackdown by disguising the nature of gambling transactions, but new credit card company policies tightening reporting requirements are expected to put an end to that dodge.
“We have a policy that Visa and its members should engage only in legal activities, so it’s imperative that activities like gambling and Internet gambling be identified clearly so that the issuer can determine whether they’re processing a legal or illegal transaction,” said Casey Watson, a spokeswoman for Visa International.
Most gambling sites still allow customers to attempt to use credit cards to fund their accounts, but they have added other less-convenient means, including wire transfers, electronic remittance services and Automated Clearance House transfers, a banking procedure similar to direct payroll deposits, to keep the money coming in. All those mechanisms would be cut off if the Leach bill becomes law.
Facing that likelihood, industry insiders are hinting at plans to move to some sort of e-cash or smart card system that would match credit cards for convenience and be widely embraced by bettors.
An 'ace in the hole'
One gambling site operator said the industry has an “ace in the hole” that it will play if it is denied access to traditional financial mechanisms. The operator, who spoke with MSNBC.com on condition of anonymity, declined to discuss the nature of the financing scheme, saying, “It wouldn’t be an ace in the hole if I told you, would it?”
Most experts say e-cash — a digital form of money capable of being stored on hard drives and transferred over the Internet — will eventually become the coin of the realm for online commerce because it is instantaneous, inexpensive enough to be used for payments as small as a few cents and does not require third-party clearance.
Melody Wigdahl, a consultant who has worked with companies trying to develop an alternative payment system for online gambling sites, indicated that industry leaders may act in concert in an effort to ensure that the e-commerce solution they select achieves critical mass with consumers.
“Sometime over the next six months we’re going to see major players in the industry step forward and fund their own (alternative payment) project,” she said. “There are probably half a dozen good products that are in the beta testing stage right now.”
The systems “are cost effective and more or less independent of the banking system,” she said.
Wigdahl, also declined to discuss specifics of the systems, saying the companies “don’t want their names mentioned” until they are sure they are on secure legal footing.
Law enforcement concerns
Despite e-cash’s promise, regulators and law enforcement officials have warned that its anonymous nature could provide new opportunities to commit numerous crimes, including tax evasion, money laundering and financing of terrorism.
The U.S. Treasury Department warned in its 2002 Money Laundering Strategy that widespread use of e-cash or smart card payment systems would “make it more difficult for law enforcement to trace money laundering activity and potentially easier for money launders to use, move and store their illegitimate funds.”
It also would be “extremely difficult” for U.S. authorities to attempt to take any action to shut down an e-cash system incorporated overseas in accordance with banking laws in that jurisdiction, according to Joe Kelly, an associated professor at New York’s Buffalo State College and an expert on Internet gaming law.
“Will all these electronic money systems be subject to the whims of a U.S. ban?” he said.
“The answer, I think, is ‘no.’ With e-gold (a digital cash backed by real gold), for example, you could transmit it to an offshore casino without ever going though a bank.”
Gambling site operators say that belies the Leach bill’s stated purpose — combating money laundering.
“I would much prefer that the transaction be completely transparent as it is with a credit card, where there is a complete audit trail,” said David Carruthers, CEO of the Costa Rica-based betonsports.com, which bills itself as the world’s largest online sportsbook with more than $1 billion in revenue last year. “It would be much more sensible to regulate this business as opposed to taking draconian action to force it into the shadows, where who knows what would go on.”
A similar point was made by Gord Herman, chief operating officer of Neteller, a Canadian electronic remittance company similar to PayPal that is used by many gambling sites.
‘You will cause a black market'
“Right now, we operate in a regulated environment and we are compliant with all Canadian and U.S. reporting regulations,” he said. “By eliminating organized programs such as ours, where everything is very trackable and accountable, you will cause a black market … that will create opportunities for less-than-scrupulous individuals and companies.”
A spokeswoman for Leach did not respond when asked if the congressman was concerned that his bill could speed development of e-cash and actually aid money launderers. But Andrew Wilder, a spokesman for Kyl, indicated that future legislation could address the issue if it becomes a problem.
Not all experts are convinced that the online gambling industry is capable of launching e-cash into the mainstream.
“It hasn’t caught on primarily because people are worried about the security,” said James Dorn, vice president for academic affairs at the Cato Institute, referring to the commercial failure of companies such as Digicash that pioneered the e-cash concept. “I don’t see that as being a viable alternative at this point.”
Others say that early e-cash efforts failed because there was no existing demand for the product.
“In the past it was too difficult, but now you’ve got a captive audience that wants to gamble and can’t use their cards, so they’ve got no choice but to figure out how to work this,” said Ken Kerr, a senior research analyst with the Gartner market research firm.
The key to creating a successful e-cash product that can be easily used by Internet gamblers is ensuring it can be used in multiple venues, said Wigdahl, the payment industry consultant. Otherwise, banks and credit card companies could refuse to approve transactions to the service just as they are blocking them at online gambling sites, she said.
High-risk merchants targeted
Mark Lesnick, a New York-based consultant for the Internet gaming industry who earlier this month hosted a conference in Costa Rica devoted to alternative payment solutions, said the e-cash companies are initially attempting to solve that problem by targeting other Internet merchants classified as “high risk” by banks and credit card companies, notably porn and travel sites.
Kerr predicted that an e-cash provider might make significant inroads with such retailers, who often are plagued by costly “charge-backs” from credit card companies that hurt their bottom lines. But a company would have a much tougher time selling outside the “high-risk” niches, he said.
“You’ve really got to have a compelling reason, something that makes their eyes light up,” he said. “You have to show them that your fraud rate is going to be lower and that your processing costs are lower than Visa and MasterCard. Some merchants are going to listen, but it’s going to be difficult.”
As CEO of Payment-zone.com, one of the dozens of small companies seeking to position itself as the winning e-cash solution for the online gambling industry, Clark Russell can appreciate the difficult task he faces in establishing a business that won’t be limited to the sin-and-vice niche. But at the same time, he sees opportunity in Leach’s efforts to stamp out the business that he hopes will launch his Netherlands Antilles-based company, which relies on digital certificates to authenticate a user’s identity and thereby prevent fraud, on an unlimited upward trajectory.
“I think mass market prohibition is basically the fuel for these types of developments,” he said. “What the market is looking for will spark creativity and make new ideas come to life.”
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