In 2006, President George W. Bush signed the Unlawful Internet Gambling Enforcement Act (UIGEA), making online casinos, sports betting sites and other online gambling venues illegal under the Federal Wire Act. Tennessee Republican Senator Bill Frist added it to an unrelated port security bill at the last minute, and its enactment had immediate effects on publicly traded online casinos. Stock prices plummeted, wiping out $7 billion in wealth. Many online casinos pulled completely out of the United States.
In 2011, the federal government decided the Federal Wire Act actually did not outlaw anything except sports betting. Starting with Delaware in the summer of 2012, individual U.S. states started to legalize online gambling. Nevada and New Jersey followed suit in early 2013. For states wiped out by the recession, the chance to regulate and tax online gambling was too good to pass up. However, some argue because the nature of the Internet makes it fall under the category of “interstate commerce,” only the federal government can regulate online gambling.
Federal Opposition to Online Gambling
In April 2011, the U.S. Department of Justice shut down the top three online gambling sites accessible to players in the U.S. Eleven people were indicted on money laundering, illegal gambling and bank fraud charges. Additionally, player accounts were frozen, leaving thousands of regular Americans with no access to funds totaling over $100 million.
The Justice Department hoped to accomplish four goals by enforcing the UIGEA:
- Curb the easy temptation that Internet gambling brought for compulsive gamblers.
- Wipe out underage online gambling.
- Prevent money laundering. The federal government also thought the speed of online transactions made the online gambling industry especially susceptible to money laundering.
- Stop fraud. Because no entity supervised the industry, they surmised that e-casinos could easily rig bets or steal winnings outright.
Unfortunately, the federal government has eliminated transparent and publicly regulated companies from the market, replacing them with privately held companies that have a higher likelihood of being unscrupulous.
Some companies have worked around U.S. online gambling prohibitions by taking money off of the table. Infiniti Poker requires U.S. customers to play using Bitcoins, an online currency that like other currencies changes value according to demand. A decentralized peer-to-peer network handles Bitcoin transactions. For example, Americans can play online poker with Infiniti using Bitcoins and then take their currency to the network to cash out. Instead of waiting up to 12 weeks for transactions to clear, as is required with some banks, Bitcoin players can cash out in hours.
The Short-Term and Long-Term Prospects for States
The first states that legalize online gambling will have a major say in how interstate compacts work. Currently, states use interstate compacts to manage multi-state lotteries like Powerball. Online poker, in particular, needs a large pool of cash to function. Interstate compacts will be necessary to aggregate funds. Analysts expect Delaware and Nevada to form the first compacts. Compacts may extend across the Atlantic into Europe.
Competition between contractors in the beginning stages of online gambling will deliver price advantages to early adopters as they work to negotiate contracts for their states. Delaware expects to be online by summer, and the state expects to generate $3.75 million in revenue for the first year.
California’s Silicon Valley entrepreneurs and companies like Zynga stand to make a fortune from online gambling interfaces. A California senator recently introduced a bill to legalize online gambling in the state. If the bill passes, California will have a potential source of tax and “rake” revenue to address its budget woes.
Delaware is also one of only four states, in addition to Oregon, Montana and Nevada, that allows some form of sports betting. New Jersey is suing in federal court for the right of every state to offer sports betting if they choose, so you can expect more online sports betting sites in the future.
About the Author: Dave Mancini is an employee for a major Silicon Valley firm by day. He also moonlights as an avid — and legal — gambler. He recommends checking out the reviews on this website.