In the second of a three-part series, Ron Segev, partner at Segev LLP, looks at how blockchain makes much of our existing igaming regulatory framework redundant.
Our blockchain clients tell us that the system provides transaction transparency and security that’s revolutionary and unrivalled. What they mean is that blockchain platforms support a framework where the public can view and review software code and, to some degree, transactions effected by or with the software.
As mentioned, blockchain also provides unparalleled security, cryptology features, and smart contracting that can guarantee incorruptible and immutable outcomes.
Technical Standards Regulations
So, how will this affect the need for remote gaming jurisdictions’ technical standards? Will there still be a need for government and third-party testing labs in an environment where the technology is publicly open to verification?
And will there still be a need for the transactions to be carried out by the blockchain or Ethereum platforms that are supported by secure, immutable, incorruptible smart contracts that are also transparent and verifiable on a real-time basis?
Because the Ethereum network adds a heavy security element to each transaction, risks are significantly decreased. Labs typically do a lot of work with igaming companies pre-compliance and after a system goes live.
This means that there are heavy time and money costs before an igaming platform or game even goes live. After going live, monitoring the system and the gaming protocols can be very costly, sometimes beyond the means of smaller companies.
With an Ethereum-based system, these problems largely disappear (assuming the game or platform was developed properly from the outset).
Perhaps this is the role that certification labs will increasingly be pursuing. With in-house blockchain application development teams, they could add value by making sure that smart contracts were properly produced and that highly sensitive, proprietary game technology or personal information properly remains out of the public realm.
UBO and key-person Issues
Remote gaming jurisdictions require background searches to be conducted on ultimate beneficial owners and key persons of gaming companies seeking to obtain gaming licenses.
The background checks are meant to make sure that no criminal element is involved with a licensed gaming operation. This is meant to protect the public interest and also preserve trust in the remote gaming jurisdiction’s regulatory and compliance framework.
Blockchain-based platforms have the ability to sell tokens attached to their platform, essentially allowing each token holder to own a piece of the company and vote on its operation. In this way, no one in particular owns or runs the company.
A company of this nature is called a distributed autonomous organization. One was formed several years ago and quickly raised about $150 million in token sales. Called The DAO (distributed autonomous organization), it is owned and run by thousands of people who can choose to be completely anonymous.
From a regulatory perspective, this raises great challenges. How does a regulator conduct background checks on the millions of anonymous ultimate beneficial owners of a gaming platform?
This means that people who have previously had issues with the law, or are criminally inclined, could own and operate gaming companies without anyone’s knowledge.
Certain legal provisions, such as bad actor clauses, which seek to prevent a company that operated in an unlawful jurisdiction in the past from operating in the jurisdiction in the future, would be useless.
Operating compliance standards
Remote gaming jurisdictions typically impose technical and other standards on their gaming and betting licensees.
These standards typically relate to server security and location, data collection, handling, security, and privacy standards, segregation and handling of player funds, and fair play and game integrity standards. Many of these standards are almost instantly satisfied by the nature of blockchain technology and the durability and immutability of smart contracts.
Smart contracts have the added benefit of being real-time, self-imposing regulating mechanisms. The way this would work would be to program self regulating smart contracts on a gaming platform to protect its users. ‘If this, then that’ can be programmed to have the following protocols:
• If the player funds that are on deposit with the gaming platform are reported by the bank (on a real-time basis) to be less than they should be (less than deposits minus net payouts), then
• the blockchain platform automatically informs the regulator of the discrepancy, and also informs the gaming company’s bank, and
• the company’s ability to withdraw funds is frozen, allowing the regulator time to investigate so no further harm is done to players
The Alderney Gambling Control Commission’s (AGCC) Dean Report examining Full Tilt Poker’s mishandling of player deposits occurred after many millions of player funds were inappropriately handled by the company.
If the AGCC had blockchain and smart contract technology at its disposal, it could have required Full Tilt to adopt the correct smart contract to ensure that if player funds were not all accounted for, then Full Tilt’s ability to continue mishandling player funds would immediately be terminated.
In this way, regulators can use blockchain and smart contract technologies to better protect the public interest.
Currently, regulators are reactive to issues that arise with a gaming company. Blockchain technology and smart contracts can allow regulators to establish proactive compliance protocols that are self-policing and self-enforcing.
Anti-money laundering and know your customer standards
Owning and using Bitcoin, Ether, Litecoin and other cryptocurrencies can be done on a completely anonymous basis. It is digital cash outside and independent of the banking system.
This anonymity runs contrary to standard anti-money laundering (AML) and know-your-customer (KYC) standards required by regulators of all gaming and betting companies.
New protocols will have to be developed to allow for complying with current KYC regulations and for proper monitoring of possible money laundering. These new technologies will be crucial to ensuring emerging blockchain gaming platforms are operating lawfully.
Ron Segev is a partner of Segev LLP, a business, technology and real estate law firm with a leading North American igaming practice group. Ron is a business lawyer specialised in igaming and other technology law. He assists his clients with all facets of their business: commercial, IP, corporate, finance, gaming law, regulation and compliance. Ron is also a general member of the International Masters of Gaming Law, and he loves his work. Email: [email protected]