SEARCH HERE

Tuesday, August 20, 2013

World Wide Web of Underground Virtual Currencies: Implications for Gaming

By Peter J. Kulick and Michael D. Lipton

This article first appeared in Casino Enterprise Management, August 2013. To read the full article, please click here.

An effect of the challenging economic conditions of the past five years is fluctuation in the value of worldwide currencies. For those of us living near the U.S.-Canada border, there is still some level of mild shock that the Canadian and U.S. dollars have nearly the same value, with the Canadian dollar even exceeding the value of the U.S. dollar. More recently, the euro has experienced a sharp decline in value vis-à-vis the U.S. dollar.

With the Internet growing exponentially as a medium of commerce, it was simply a matter of time before the introduction of virtual currencies. The use of virtual currencies has exploded in recent years. Retailers, like Amazon, have introduced captive virtual currencies that can be used to directly purchase goods from their websites. Similarly, widely used virtual currencies have also developed. Notably, “Bitcoin,” which was developed by the elusive Satoshi Nakamoto, has been at the forefront of virtual currencies.

In the gaming context, virtual currencies have arisen in at least two distinct categories. First, many social games have introduced virtual currency features, such as Zynga poker chips or World of Warcraft gold. Players earn the virtual currency by carrying out tasks during the course of the gaming play.

Second, virtual currencies have begun to be used as the consideration and/or reward for wagers placed through i-gaming sites. Examples of the latter categories include SatoshiDICE and Bitbook.biz.

The use of virtual currencies presents several legal implications, ranging from the permissibility of such activities to financial regulations to tax issues.

In the context of virtual currencies, sponsors of i-gaming sites could assert that the virtual currencies do not arise to gambling because the use of a virtual currency either lacks consideration or a prize. However, the fallacy of such an assertion is that the argument would necessarily have to be premised on the basis that virtual currencies have no value. Bitcoin is illustrative that virtual currencies indeed carry value. For instance, news reports have detailed that individuals would only accept Bitcoins in exchange for the sale of valuable assets, such as real estate. Furthermore, markets have developed whereby holders of virtual currencies can exchange the virtual currencies for legal tender (i.e., U.S. dollars or euros). Thus, virtual currencies likely have value.

The operation of gambling games using virtual currencies could very well run afoul of a multitude of U.S. federal laws. The Unlawful Internal Gaming Enforcement Act (UIGEA) is one of the primary federal laws that U.S. prosecutors have relied upon to prosecute i-gaming operators. UIGEA ostensibly prohibits i-gaming in the United States.

Additionally, on March 18, the U.S Financial Crimes Enforcement Network (FinCEN) released interpretative guidance with respect to the creation, distribution, exchange and transmission of virtual currencies under the U.S. Bank Secrecy Act (BSA). Subject to certain limitations and exceptions, the BSA requires money services businesses to satisfy the FinCEN registration, reporting and recordkeeping regulations. The FinCEN guidance addresses whether a user, exchanger or administrator constitutes money services businesses for purposes of the BSA.

The presence of virtual currencies has exploded in recent years. Virtual currencies have begun to become accepted alternative currencies. These currencies have become increasingly popular both in social games and with i-gaming sites. The use of virtual currencies raises a threshold question with regard to whether such use in itself can pull an activity outside of the scope of the legal definition of gambling. Virtual currencies likely carry value, as evidenced by the ability to convert the virtual currencies into legal tender (such as U.S. dollars) or trade the virtual currencies for other valuable property (such as real estate). Additionally, in the U.S., the use of virtual currencies can have tax consequences, as well as present financial regulation considerations.