September 14, 2018

Gambling Commission reveals potential concerns around blockchain and cryptocurrencies

At an industry lawyer’s meeting in Birmingham earlier this week, the Gambling Commission confirmed that it has established an internal working group focusing on the challenges presented to existing regulation by developments in the use of blockchain technologies, including cryptocurrencies.  There are four main areas of interest:

1. Funding via Initial Coin Offerings (ICOs) with particular focus on concerns around:

(a) Insufficient due diligence –  the Commission’s position is that it will need the same assurances that would be needed if the business had been funded with cash.

(b) A lack of awareness of gambling regulatory requirements when carrying out an ICO.

(c) Risks which are not fully identified, understood or fully mitigated, including:

(i) The increased scope for anonymity introduced through the use of cryptocurrencies resulting in correspondingly greater issues around identifying and verifying customers using utility coins to gamble.

(ii)A lack of effective control over the currency or the token (e.g. currency fluctuations) raising issues with regards to AML/social responsibility triggers, particularly where valuations vary significantly within short periods of time

2. Issues related to existing operators running an ICO as a method of fundraising introducing similar risks to an existing Commission licensed business.

3. Proposals relating to the use of blockchain technology to deliver gambling products.  The use of blockchain technologies challenges the conventional server-based model of delivering online gambling services, on which the legal framework is based.  The Commission expressed that it would have real concerns if the entire gambling infrastructure was established solely within the blockchain, and rather than on established/ server based infrastructure.

4. Further exploration of cryptocurrency as a payment method.  The Commission’s view is that it has yet to see any real/ tangible benefits to consumers over and above the use of fiat currency.  The “benefits” which have been presented to the Commission include:

(a) Customers not having to pay deposit/withdrawal fees – the Commission believes that many existing operators do not seek to impose these fees as a result of the highly competitive environment in the UK.  Smart contracts providing a more reliable way to intermediate between operator/player – the Commission cited frequent examples of coding errors in smart contracts creating risks to consumers.

(b) “Provably fair” – i.e. no need to rely on third party testing for assurance. The Commission cited concerns as to how this can be achieved and explained to a customer that it has been achieved given it is “technical” in nature and poorly understood.

The Commission is clear that, although it will support innovation (particularly where it can demonstrably benefit the customer experience),  it will not lower the standard of regulation in order to accommodate new products/developments.

The Commission will issue guidance in the coming weeks and months but emphasised that this will not be a “blueprint” for compliance (principles based regulation is going nowhere). The Commission is open to hearing about the benefits that the technology can bring. However, it urged businesses not to submit applications that do not demonstrate how they can achieve compliance.

With the proliferation of new cryptocurrency and/or blockchain led gambling businesses announcing their strategies to the market (often through ICO white papers), it is good to see the Commission grasping the nettle and seeking to set out some key hurdles which such businesses will need to overcome if they seek a UK licence. If it wasn’t obvious already, businesses conducting ICOs need to take gambling regulatory advice before any fundraising.