Internet Gaming: Law vs. Reality

Internet gambling is an excellent case study of how difficult it is to effectively regulate many aspects of the Internet.

by Lloyd Levine / July 22, 2013

As more and more of our lives migrate online, congress, state legislatures and local governments are grappling with how to address the issues and challenges this presents. The problem is that by the nature and structure of the Internet itself, content and commerce on the Internet are virtually impossible regulate.

The federal government is better positioned than a state or local government, and even they have a very difficult time. Internet servers and mirror sites located all over the world allow people to operate businesses from whatever jurisdiction they choose. If tightly controlled countries like China and Iran can’t completely stop their citizens from accessing websites they deem objectionable, it is virtually impossible in a free, democratic society like the United States.

Internet gambling is an excellent case study of how difficult it is to effectively regulate many aspects of the Internet.

Just as Internet poker was gaining in popularity in the early 2000s, congress passed the Unlawful Internet Gaming Enforcement Act (UIGEA), which it thought would put an end to Internet gambling. But a 2010 study by the respected Internet gaming research along with data firm H2 Gambling Capital found that Internet poker was booming despite the law. The study found there were between 10 million and 11 million people playing Internet poker for money in the United States.

Leaving aside personal feelings about gambling and whether Internet gambling should be legal, it is virtually impossible to enforce a law that 11 million people are violating in the privacy of their own homes. Between 2006 (when UIGEA passed) and 2011, billions of hands of poker were played, and billions of dollars changed hands. And for every hand of poker played, the companies operating the games took a percentage. But none of that money went to U.S. companies, and no governmental entity in the United States earned any tax revenue from it. Instead of ending Internet gambling in the U.S., UIGEA simply forced it offshore.

Companies that were operating in the U.S. market withdrew, and were replaced by companies that were less interested in respecting the law. Places like Gibraltar, The Isle of Man and Alderney became the homes to multi-million dollar businesses. Their governments and regulators created a friendly regulatory structure and welcomed the businesses. Many of these countries had a very small GDP. Revenue from the new gambling enterprises provided a huge boost in tax revenue, and they had no incentive to enforce U.S. law.

In 2011, after years of trying, the United States’ Department of Justice was able to seize the domain names and shut down the U.S. operations of the world’s two biggest Internet poker companies. But their enforcement actions did not arise from great police and detective work, nor did it come from tightly written, effective statutes. It came from an informant who the FBI was able to arrest because of a spat between the informant and his employers.

According to a survey by Poker Voters of America (disclosure: they are a former client), there were at least 532 Internet poker sites in operation in 2006. The closure of two of those sites, through complete luck, hardly constitutes the triumph of government’s ability to regulate the Internet.

And if proof is needed, less than 24 hours later, it was easy to find many sites ready and willing to accept wagers from U.S.-based players.

The biggest action that slowed down Internet poker in the U.S. was the decision by ESPN to stop accepting advertising from Internet poker companies -- a decision that came in the wake of the Department of Justice’s actions, but was completely voluntary.

Fast forward to 2013. Federal law remains unchanged; it is still illegal (at least on paper) to gamble for money over the Internet. Despite that, anyone with a computer and a credit card can be playing Internet poker within a few minutes. For that matter, if blackjack is your game, you can find that too. The same is true with slots, craps, bingo and roulette. You can even play backgammon for money if you want.

Gambling has a long history and seems to be about as certain in society as death and taxes. Neither the Internet nor gambling is going away. And when the two are combined, it is a matter of "where" the games will take place, not "if" they will take place. The only question is, will they take place on computer servers owned by foreign companies located in foreign territories? Or will they take place on servers located in the United States that are owned and operated by companies based here.

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(Editor's note: Then Assemblymember Lloyd Levine was the first state legislator in the country to introduce legislation to legalize Internet gaming at the state level. Since that time, he has served as a consultant in the Internet gaming industry, been featured panelist, speaker and moderator and many Internet gaming conferences, and is a frequent contributor to gaming publications around the world. In part two of this series, Levine will look at the current efforts by various state legislatures to legalize intrastate, Internet poker.)