Breaking the (block)chain

The race to regulate is on. As blockchain and cryptocurrencies begin to pique the interest of operators, key egaming jurisdictions are trying to get ahead of the game. Malta in particular is hastening its pace by throwing together a formal legal framework for the regulation of blockchain-powered technology, with a keen focus on how it can revolutionise the gambling industry.

Both Italy and the Isle of Man have also included virtual currencies in their updated Anti-Money Laundering (AML) regulations, enabling locally-licensed operators to accept and trade with the likes of Bitcoin and Ether.

Leading industry figures are estimating the technology will shoot to the mainstream by 2018, forcing the wider egaming industry to sit up, pay attention and start to consider how blockchain and virtual currencies can positively impact their business models. With it, blockchain technology brings the benefit of transparency through the use of smart contracts that allow all information to be available to anybody; a potential coup for the egaming industry that many crypto-pioneers are claiming could be a game changer.

The inevitable shift

Partner at DLA Piper and self-professed “IoT influencer”, Giulio Coraggio, believes the industry is in the process of an inevitable shift towards integrating cryptocurrencies, however, he doesn’t see “massive potential” for them. Blockchain technologies, on the other hand, can be extremely helpful whenever there is a need to process large amounts of data. “For instance, they might be used to run KYC checks and identify potentially fraudulent conducts aggregating data from different sources to perform automatic actions that are more accurate and timely than those currently performed,” Coraggio explains.

Alternatively, chairman of the Malta Gaming Authority (MGA) Joseph Cuschieri considers the push for virtual currencies to be a positive opportunity for operators and payment providers to innovate and reinvigorate a stagnant digital payments sphere by providing an alternative mechanism for players. “Having said this,” he adds, “it is important that such a disruptive innovation operates within a properly regulated environment.”

“As for blockchain, I believe that [gaming giants] do not fully understand the potentials for their business” – Giulio Coraggio, DLA Piper

It is with this in mind that the MGA is on target to release its initial crypto and blockchain regulations by January 2018. “As an innovative and forward looking regulator we need to embrace new concepts taking into account carefully the risks and opportunities involved so that such inherent risks can be mitigated accordingly within the context of a dedicated control framework which at the outset will be a prescriptive one,” Cuschieri comments.

The MGA’s movements are in-line with the Maltese government’s wider vision to make Malta a centre of excellence for blockchain technologies. The island unveiled the world’s first Bitcoin ATM in July, swiftly followed by Gibraltar, which is making similar advances towards integrating regulation for Distributed Ledger Technologies (DLTs), the niche category of internet technology that blockchain falls into. Interestingly however, the jurisdiction is limiting its regulatory reach to financial services, for now.

Gibraltar’s gambling commissioner Phill Brear has warned of the “misleading and untrue blockchain whitepaper claims, [which] rely on imaginary anecdotes of internet gambling far outside licensing and regulation”. Unlike others, he remains unconvinced by the “promotional and technical information that this methodology is more reliable, trustworthy, auditable or efficient than that remote gambling offered by existing established and recognised licence holders using established technology”.

The “dark market”

Brear says the commission has discussed the potential egaming link with both the government and wider industry stakeholders, but a decidedly cautious approach has been adopted. He insists virtual currencies (VC) cut across regulatory principles including transparency of customer identity and security of deposit value and follow a “dark market” means of transacting.

“It is clear to us, [however], that there will be a ‘phase 2’ of VC’s when more established, properly regulated providers enter the market as VC providers, and this may change our view,” he reveals. Undoubtedly though, it is still early-days for the wider blockchain industry, and as Coraggio rightly points out gaming giants have so far adopted a “wait and look” position, sharing Brear’s wariness and hoping their competitors take the plunge into the digital unknown first.

“They are concerned about regulatory restrictions and potential money laundering and in general fraudulent conducts. As for blockchain, I believe that they do not fully understand the potentials for their business,” Coraggio comments.

But senior advisor at WH Partners law firm in Malta, Dr Joseph Borg considers it “madness” for blockchain-forward firms to not take advantage of the huge base of egaming operations Malta offers. Borg resides over an NGO that advocates and promotes blockchain technology and cryptocurrencies, aiding the Maltese government’s efforts to attract the steadily expanding blockchain industry.

“At WH Partners we have a number of clients that are blockchain based and on their behalf I try to talk to the authorities as much as possible to make them aware of the current innovations that they have to adapt to, because that is crucial. The industry has to adapt but the government has to also, they need to find common ground in order to be able to work together,” Dr Borg laments.

He hails the opportunity for a flourishing technology-first relationship between blockchain and egaming and is keen to forge fresh ties between innovative start-ups and the regulatory powers that be. “I think blockchain start-ups are focusing a lot on the philosophy of blockchain; so doing things without intermediaries. [This] new technology could be beneficial for regulators because it provides them with much more insight into what’s going on and can shed light on a lot of issues like the protection of funds,” he adds.

Dr Borg claims that once blockchain moves into the mainstream, which he estimates to occur in 2018, the big operators will take on a fierce M&A approach to adopting the technology, choosing to purchase start-ups that already have a solid regulatory base and an in-depth know-how in the workings of DLT and virtual currencies.

“I think very few will start making movements immediately,” he says. But those that have already cropped up, particularly the blockchain-powered casino and lottery platforms, are very keen to move into regulated and transparent spaces from which they can operate. The remedy to this, Borg believes, is for these start-ups to adapt their technology to the general requirements of national legislation across Europe.

Regulation reputation

Interestingly, crypto regulatory consultant Siân Jones, who is responsible for assisting the Gibraltar Financial Services Commission (GFSC) in formulating the jurisdiction’s compliance framework for DLT, tells EGR Intel lawmakers should adapt their rules to perpetually advancing technologies. She says that instead of trying to regulate specific technologies, regulators should set ground rules for the businesses that run on them, tracking their activities and formulating regulation around their risk management measures.

For example, a key consideration for the GFSC is establishing whether a new business can maintain Gibraltar’s white label reputation. Despite the peninsular only focusing on fintech regulation, and Brear’s mistrust of blockchain in the egaming sphere, Jones does accept that there is a cross-over between the two industries.

“The industry has to adapt but the government has to also, they need to find common ground in order to be able to work together” – Dr Joseph Borg, WH Partners

She believes there to be a lot of merit in utilising virtual currencies in gambling transactions, and with the sudden influx of virtual payment processors, wallets and currency exchanges cropping up in the jurisdiction, the gap will inevitably close even further, as operators will look towards adopting new payment methods. In that case, Brear reveals the commission would give proper consideration to any request by a licensee to adopt a VC.

When the local government published a consultation paper on DLT, asking for a response from the wider business community, the egaming industry remained quiet. One keen egaming professional and Bitcoin miner stepped down from his position in the industry to pursue a more direct career path within crypto payments, as he believes operators are not taking advantage of the major impact DLT and virtual currencies could have on remote gambling.

On the flip side, it seems that Malta and the Isle of Man are pre-empting the success of these technologies and taking these first steps in what will inevitably be a long-road. “[Regulation] involves different facets to set up a proper control environment,” Cuschieri says. For example restrictions on PSPs, monitoring and supervision mechanisms, nature of transactions, game restrictions, taxation issues and reporting among other factors.

The legal and regulatory environment landscape for cryptocurrencies has continued to evolve at a rapid pace. Clarifications have continued to properly define the status of cryptocurrencies and its acceptance if at all by governments,” the MGA’s Cuschieri divulges. “We want to be prudent but at the same time we don’t want to overlook opportunities for innovation and development,” he adds.

Under wraps

The MGA published a whitepaper revealing that it was re-assessing its entire legal framework. Unsurprisingly, cryptocurrencies found their way into the report, with the authority stating that it had commissioned a study to “assist in the development of a commensurate framework inclusive of all necessary safeguards, with due regard to the 4th Anti-Money Laundering Directive which is also currently being revised to include further provisions specific to cryptocurrencies.” The authority pledges to imminently engage in a public consultation after publishing the results of the already completed study.

How likely is it then, that these movements will convince the major players that crypto is the way forward? “This depends on the regulatory environment we shall put in place,” Cuschieri explains. “The response is positive so far but the industry wants to know more about the controls which will be put in place.” Cuschieri is careful with information he gives away, as the concept is still in its infancy, and as a vanguard of egaming, he is no doubt sceptical of others initiating similar movements.

“This technology lets anyone who wants to be an operator operate a fair game. It’s very private, like any cryptocurrency” – Jez San, FunFair

Dr Borg says that in the same way Malta led the world in handing out the first online gambling licences, it too will be the first to delve into the world of blockchain and crypto on a large scale. “Unfortunately the ability to change is not something that is inherent in human beings so everyone is afraid of change. Only the ones that can think ahead will succeed, and I believe that only a few will take the risk,” he reveals.

Game changers

Borg touches on the matter of Initial Coin Offerings (ICOs), the process a start-up goes through to raise funds in an unregulated environment. Freshly unveiled blockchain casino platform FunFair, a venture headed by former PKR founder Jez San, raised over $25m in various virtual currencies, with major investments coming from institutional funds BlockTower Capital, Kryptonite1 and Pantera Capital. Surely, the success of FunFair’s ICO is a nod towards a wider belief that DLT will take off within the industry.

San previously told EGR there were huge markets that were currently difficult to access due to limited regulation or because they are monopolistic. “This technology,” he added, “lets anyone who wants to be an operator operate a fair game. It’s very private, like any cryptocurrency.” San also comments on the movements of some of the regulatory jurisdictions, stating that most places will be slow to move. “We’ll just have to play it by ear,” he adds. “The platform could be used by any operator. The system is a self-regulating technology inside of a smart contract, so the player is better protected than even playing at a regulated casino.”

Similarly, an Ethereum-based blockchain lottery product has been launched in part with mainstream lottery developer Twelve40. In a statement announcing the product, the supplier says; “As regulators become more familiar with the application of blockchain technology, Twelve40 will continue to enhance and develop this experience. However, in the short term an optimal hybrid solution has been created that offers both the traditional game controls alongside the blockchain lottery experience. The transition to blockchain technology will be an evolutionary process for naturally conservative regulators as the advantages become mainstream.”

The firm, along with Wild Crypto, aims to create a platform that is a hundred percent decentralised, and therefore entirely transparent. The partnership aims to “disrupt the industry with its innovative and visionary approach” of pairing traditional lottery and an instant win product with blockchain technology.

As the dust settles on the second half of 2017 the industry has limited time to prove its investment in blockchain before it blows up and seizes the mainstream. The financial services sector has proved its interest, particularly in the swift turnaround of Gibraltar’s DLT public consultation period. However, four months is almost a lifetime in egaming, and it’s almost anybody’s guess as to what the state of the industry might be by then.