Bitcoin: next big thing or passing fad?
Bitcoin is broadly accepted by the igaming sector in 2017. How much further can it expand and what opportunities and challenges should the sector look out for?
By Amanda McCormack
As a payment method many within the igaming industry have long recognised the potential of bitcoin, with its low cost and ability to wipe out costly chargebacks. But while it’s been hyped by some as ‘the next big thing’ for several years now, it hasn’t really taken off as an igaming payment method.
There were some big steps forward for bitcoin in the UK market in 2016, with the UK’s Gambling Commission adding bitcoin to its list of acceptable currencies and NetBet becoming the first UK-licensed site to begin accepting the cryptocurrency.
Nick Garner, chief executive of bitcoin casino Oshi Casino, admits the market remains small within the wider gambling market. “Gross gambling revenue in online casino is estimated by various accounts to be around US $6.5bn per year. I would say gross revenue across all bitcoin casinos is probably US $80m – $100m per year.
“If you look at player acquisition numbers for a brand like LeoVegas, in Q4 2016, it had 85,000 new depositing customers. By my estimation in the whole of the bitcoin casino universe, you might get 15 to 20,000 new depositing customers per month, but these customers tend to join lots of different brands so my guess is there are probably around 25,000 actual gambling customers in this ecosystem.”
There have been two main factors working against bitcoin being widely accepted: its slightly ‘shady’ image as an ‘anonymous’ currency associated with illegal activity in places like the dark web, and worries about its fluctuating value against fiat currencies.
But a number of developments in recent years have meant both these issues have perhaps become less relevant.
KYC concerns overblown?
Bitcoin is commonly referred to as anonymous, although it is more accurately described as ‘pseudo-anonymous’. In an industry such as gambling, where financial institutions will often frown on gambling transactions from individual bank accounts, it’s easy to see why this pseudo-anonymity appeals to punters.
But Garner points out that it is also probably the biggest single reason bitcoin gambling is not welcomed by legislators. He says: “If I register a normal account, there is an immediate way of knowing your customer. In theory there is virtually zero chance of money laundering or underage gambling.
“But with pseudo-anonymous gambling, you know where the transactions came from, but you might not know who was behind them.” This is an added worry for European operators in particular as there are a slew of regulations coming into force in the next few years, one being the Fourth Anti-Money Laundering Directive (4th AMLD).
The 4th AMLD must be written into member states’ national law by June 2017, and bitcoin could become an even bigger hindrance for operators when this happens as they need to know who their customers are.
On the other hand, Garner points out: “It is the responsibility of the bitcoin exchanges to make sure they KYC customers, which then relieves the operator of aggressive KYC on their own customers.”
Price volatility easing
Although it was once the case that the value of bitcoin could, and did, plummet dramatically, its value has been more stable over the past year or so and has been steadily increasing, although not in a completely straight line.
Much like fiat currencies, the value of bitcoin has a tendency to change due to major world events — for example, it increased following the news Donald Trump was to be the next president of the US last year.
It’s worth pointing out that in Japan bitcoin is now legal tender and also that many people no longer convert bitcoin to other currencies anymore, so are less concerned about price fluctuations.
Ben Robinson, director of RB Capital, has been involved in a number of blockchain start ups and says it is important to remember that there are two types of bitcoin gambling operators: those that solely operate in bitcoin — such as Oshi Casino — and those that offer it as a payment method along with other options, such as NetBet.
For the latter, any fluctuations in the value of bitcoin will have an impact if they are converting player losses into fiat currency on a regular basis.
For these operators, offering bitcoin is more about expanding the range of payment options and appealing to that niche group of players. Still, they are in good company, with huge companies in other industries, travel giant Expedia being one example, also now offering the option to pay in bitcoin.
Plenty of positives
Now that some of the negatives are slowly being dealt with, igaming operators can focus on the positives, and there are some big positives when it comes to payments.
Speed and cost are major bonuses but crucially, for an industry that has historically struggled with high chargeback rates, so is the finality of transactions once they are completed
Garner says: “Because of the way blockchain works (the technology behind bitcoin), it is very transparent and once a transaction is completed, the bitcoin is in your possession and there is no chargeback possibility. For gamblers this is good, because once the transaction is done, it's done – and there's no real opportunity for operators to get their money back.”
Looking at the UK market alone, one of the main issues the Competition and Markets Authority is looking into as part of its probe into unfair terms and conditions in online gambling is that operators have “wide discretion to cancel bets or alter odds after bets have been accepted, because they made a mistake when the odds were first set”, this is a big plus for players.
It’s also a plus for operators – unlike with credit cards, there’s no possibility a gambler can complain they didn’t undertake a transaction and ask Visa or Mastercard for their money back, thus chargebacks become a thing of the past.
The other thing going in its favour for operators is the fact that there are no payment processing costs, according to Robinson. “As there are no payment processing fees or spot rate differences the operator is able to ensure the best odds and the punter is assured of a seamless process.”
Robinson adds that bitcoin can deal with the longstanding gripe of punters that while their deposited funds disappear from their accounts straight away, they sometimes have to wait days for winnings.
“Some well-known bitcoin casinos have an average payout time of under three minutes. As many of the bitcoin-only operations own most of their tech they can be more flexible and agile when dealing with VIPs and CRM in general,” he says.
“The most important feature (which builds trust) is a player’s ability to withdraw their winnings and receive them quickly to collect their winnings. Given there are no payment processing costs, an operator does not mind if there are 20 deposits and 15 withdrawals from a VIP daily.”
Cryptocurrency vs. traditional payment methods
Oshi casino’s Garner points out that a lot of developing countries rely on mobile payments and in some of these countries people have a strong distrust of their governments and related institutions, which can give bitcoin an edge.
For operators looking to gain traction in territories where low value transactions mean the payment methods used in higher-spending countries aren’t viable, bitcoin can provide new opportunities to take bets that would be considered microbets in other territories.
He says bitcoin can also lead to further innovation in online gambling, one idea being that “the operator takes the bet and agrees to validate the bitcoin transaction if the bet comes through for the punter. Because the transaction is not hooked against somebody's account, but instead against a bitcoin transaction, that bet could be resold in a marketplace and its value would go up or down depending on the market”.
But while many operators recognise bitcoin’s potential, some are more enthusiastic about the future potential of blockchain than bitcoin itself.
Blockchain was first created in 2008 by bitcoin creator Satoshi Nakamoto and put into practice the following year as a core component of bitcoin. It is akin to a non-corruptible database, which makes all the information contained within it public and validates every transaction. There is no way to hack the information as it is copied in a block across the chain and cannot be rewritten.
Each of the blocks in the chain contains a timestamp and a link to a previous block so transactions cannot be lost or taken out of context. This makes blockchain-based transactions very fast and potentially could solve igaming companies having to deal with multi-stage verification, which puts customers off and causes abandonment.
Bitcoin itself however is not immune to hacking and there have been cases of bitcoin wallets hacked, stolen from and there being no way of retrieving the lost value because of the impossibility in tracing the bitcoins.
The hacks or thefts can be caused by negligence from the customer or poor security on their system, but it has created reputational problems for the crypto-currency and hindered its progress.
Bitcoin looking to expand
There is also the fact that until last year, nobody knew who Nakamoto was, but Australian computer scientist Craig Wright has since publicly revealed himself to be the bitcoin and blockchain creator. He is now said to be working with igaming tycoon Calvin Ayre to patent some of the technology related to blockchain.
They may be too late, however, as already it is estimated there are more than 700 cryptocurrencies now exist, following in bitcoin’s wake, although many question whether any have the potential to be as successful as bitcoin.
Robinson says: “95+% of other cryptocurrencies are scam coins which use ‘pump and dump’ techniques to entice speculators with the allure of their coin being the next challenger to bitcoin.”
He adds that there are other cryptocurrencies that are better suited to smart contracts, such as Ethereum, but none provide the same level of security as bitcoin due to the number of nodes and miners who are effectively confirming transactions and preventing fraudulent activity.
For now, bitcoin remains the dominant cryptocurrency. However, it is quite some way from becoming a notable, let alone dominant, force in igaming.
But with new igaming regulations on the way, such as the 4th AML, that have the potential to make already burdensome payment verification procedures even more onerous, there may be an opportunity for bitcoin to gain a bigger slice of the pie.
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iGaming Dashboard – April 2017