The elephant in the room

The elephant in the room

American online gambling and the jurisdiction question, by Martin Owens.

Published 9th April 2014

If there is a rush of US state governments pushing to expand licensed Internet gambling beyond racehorses, that rush hasn’t happened yet. Slowly, even painfully, three states – Delaware, Nevada, and New Jersey – have put in place licensing programmes to offer online poker and other games to their respective residents. But other states still hesitate. Why hasn’t state licensing become general?

State obstacles
The first reason is inertia. Politicians, like the rest of us, don’t make hard or controversial decisions until they have to. Gamblers and gambling businesses occupy the curious position of being ‘The Last Sinners’. Today, every sort of appetite or impulse is being hawked as an inalienable human right, and the more disreputable a thing used to be, the harder its advocates push now.

Gambling, on the other hand, remains immoral; not merely a minor criminal offence, but a sin, particularly in the United States. And sinners, as everyone knows, have no rights that the rest of us are bound to respect. Political support for gambling, therefore, tends to be a ‘chancy’ business.

Secondly, the state legislatures and bureaucracies aren’t moving because they don’t know how. Indeed, very few state legislators have even taken the trouble to educate themselves about the realities of online and interactive gaming. That’s partly because of the controversy, and partly because state lawmakers already have busy schedules. But equally important seems to be an instinctive aversion to recognising Internet and interactive gambling as a global market.

The old order
For the most significant difference between online gambling and the bricks-and-mortar variety is neither the medium nor the formats. It is the question of jurisdiction; that is, control.Until very recently, all the participants in a given gambling game or transaction had to physically be in the same place at the same time. For this reason, when the United States was founded, gambling was a local problem.

Since the Tenth Amendment to the US Constitution reserves all powers not specified to the federal government, to the states and people, gambling, a minor crime and social nuisance, fell under the plenary police power, exercised by the states only. Naturally, state and local law controlled all gambling that happened within their physical borders.

But the advent of modern telecommunications, particularly the Internet and then social media, meant that online gambling was necessarily a global market. Entrepreneurs could exercise what is called ‘jurisdictional arbitrage’. Simply put, ordinary citizens now have greater scope than ever before to choose which set of rules they will operate under.

If the local bookstore doesn’t carry what you want, you can go to Amazon. If your government won’t allow discussions of democracy or human rights, you can take to the web or Twitter. And if your local government won’t let you bet on the Broncos to win the Super Bowl, you can go online for that too. The unparalleled freedoms represented by the digital revolution mean a commensurate decrease in local control. And the local controllers don’t like it. It is for this reason that the country that gave the world Playboy and Las Vegas is solemnly concerned with Internet pornography, and the looming menace that gambling online poses (as opposed to gambling in a place that we licence and tax).

Chiefs and Indians
The impulse to retain local control for as much and as long as possible is quite understandable. Unfortunately, it cuts against the logistical realities that make online gaming possible. What makes Internet gambling profitable, in many respects, is that it skips over the sunk costs that state-by-state licensing must mean. For example, we can take the game of baccarat. There may be a viable market for baccarat in, let us say, the states of Connecticut, Rhode Island, Vermont, and New Hampshire. But not if the business offering baccarat has to get licensed, investigated, background checked, etc, and then bear the cost of building bricksand- mortar sites, in each of these states.

The cost in time, money, and sheer administrative effort would be prohibitive. Similarly, with poker, seemingly much more acceptable to the official mind, we have the problem of what is called ‘liquidity’. Even if an enterprise is state-licensed, there have to be enough players around for a customer to find a game any time he likes. If not, Mr Customer is off somewhere else.

In online gambling, the customer is king, and knows it. After all, nobody is required to gamble. Since current estimates show that only about three percent of the population of a given state will be consistent online poker players, it is obvious that for a pool of potential players limited to the population of Rhode Island or North Dakota, there must be large gaps in coverage hours and hours where no one is around to play. In a global poker enterprise, night owls from Sydney, Australia can connect with early risers in North Carolina, and so forth. But if the market is confined to one or two time zones, as must be the case with most US states, well, most people are working all day.

So you might get some lunchtime players, the main action after dinner, tapering off at midnight. This is not a big deal in large states like California, whose population of 38 million practically guarantees liquidity. But what about Delaware, where the total population is about 900,000? Indeed, in some of the smaller state markets, individual state gambling regimes will require almost as many regulators, supervisors, and auditors as there are actual players. As the old American phrase has it, “there are too many chiefs and not enough Indians”. Especially when the enterprise is supposed to turn a profit.

And it is precisely at this point that America’s pathetic excuse for controlling legal authority, the Unlawful Internet Gambling Enforcement Act (UIGEA), becomes most problematic. For while it creates “safe harbors” for state-licensed Internet gambling, it specifies that such gambling can only be offered to residents of that state, generated within that state – the multiple licensing problem, again.

At the same time, however, it leaves undisturbed the power of the states to contract among each other, as they already do under the Interstate Horse Racing Act (IHRA) to divvy up the money and jurisdiction involved in inter-state transmission of horse bets using OTB and simulcast systems. And some of the more farseeing legislators, such as those in Nevada, have authorised such compacts in relation to expanded Internet gambling. Just now, this means poker, table games, and slots; another law, the Professional and Amateur Sports Protection Act (PASPA) has essentially confined sportsbetting to Nevada since 1992.

But unless the natural timidity and inertia of the status quo can be overcome – to say nothing of vigorous opposition by existing, vested gambling interests who have already invested heavily in the bricks-and-mortar model – the assorted “safe harbors” may turn out to be mere mud puddles. Without inter-state compacts, most of the state jurisdictions do not constitute viable Internet gambling markets.

Obsolescent law
Perhaps most significant of all, it is becoming more and more apparent that the rationale for confining online gambling strictly within the physical borders of the licensing authority is making less and less sense in a digital world. Consider the example of ‘Paulie’, who lives in New Jersey. He signs up for an Internet poker account, playing with one of the licensed businesses. Not only can he only play within the physical borders of the state of New Jersey, the system has been rigged so that reception fades if he even gets close to the borders. But why?

Suppose Paulie could access his New Jersey account from anywhere. If he took his cell phone along on a fishing trip to upstate New York, which does not licence online poker, what harm would that do? The account is in Paulie’s name alone. He could lose it for allowing anyone else to gamble. If he should play a few hands of poker while waiting for a bite on the lake, does that violate New York law? After all, the gambling is not being offered to any New York residents, just to Paulie. Much more important, the gambling is not taking place within New York. The poker room server is physically located in New Jersey, and that is where the poker games are actually played, resolved, and paid out.

There are two reasons for tightly regulating and forbidding gambling. The first is the alleged harm that gambling wreaks on the vulnerable and unsuspecting (although by that standard, Wall Street and the housing market have done more damage since 2008 then all the casinos in the world could do in a thousand years).

The second is loss of potential revenue. But as we have seen, that can be easily handled by inter-state agreements. Indeed, if such schemes as the point of consumption tax are to work, interjurisdictional agreements are an absolute necessity, because both the gambler and the gambling are now mobile as never before.

The future?
One further factor underscores the need for rapid adjustment in our thinking about gambling jurisdiction. Gambling, too, is evolving in the stream of emerging technologies. Games that were once dedicated machines and tables in a particular place are now software programmes, operating across multiple platforms and worldwide distances.

Moreover, reducing all games to electronic subroutines means that it is easier than ever to ‘mix and match’ various features and aspects of various games. Further, developments like ‘freemium’ and social gaming for status, even imperil the old formulas that defined gambling: consideration, chance, and prize. Alternative monetisation in particular bids fair to remove the element of consideration altogether in many instances, thus bringing the game in question completely out of the reach of state or even national gambling laws.

Online and interactive gambling, like the Internet itself, cannot and will not be limited to the ambit of strictly local control, nor the shibboleths of the past, whatever the moral pretext. It is no longer possible to lock the future away behind the old walls. Because under the stream of technological change, the walls are melting.