Recent policy changes at the UK's financial regulator, the Financial Conduct Authority (FCA), raise the profile of cryptocurrency as an alternative monetary system by subjecting certain types of crypto businesses to anti-money-laundering (AML) laws.1
The online gambling industry will undoubtedly be impacted as a result. What will it mean, if anything, to crypto gambling?
Online gambling operators have been warming to cryptocurrency deposits for quite some time now. They have come to realize that crypto represents a way for people to spend their money on casino properties without having to involve banks and credit cards. Bitcoin, Bitcoin Cash, Litecoin, and Ethereum and are among the most commonly used cryptocurrencies for gambling purposes.
Unfortunately, there have also been legitimate fears of money-laundering for as long as casino gambling has existed. Moving the industry online has not allayed those fears. The FCA and other enforcement agencies are concerned that online gambling can more easily facilitate money-laundering, especially when cryptocurrency is involved. So, what is the solution? As far as the FCA is concerned, it is to apply AML laws to the crypto space.
What the policy changes require
In the short term, the FCA's new policies will not result in any earth-shattering changes. Rather, they will simply mean that businesses that would otherwise be required to file AML reports for standard currency transactions will also have to begin doing so for cryptocurrency. Other businesses not required to file AML reports for fiat may still have to do so for cryptocurrency if their business models meet FCA criteria.
The FCA will use these reports to better understand cryptocurrency operations and the extent to which they exist as a stable part of the economy. It is expected that further guidance and regulation will come out of the reporting over time. In other words, the more the FCA learns about cryptocurrency, the more we can expect them to regulate it.
Those who rely on cryptocurrency as a payment solution are likely to be the first ones affected by any future guidance and regulation. One would expect cryptocurrency exchanges to be impacted as well. Over time - perhaps 5 to 10 years down the road - cryptocurrency could be operating side-by-side with fiat and regulated just as aggressively.
CalvinAyre.com's Erik Gibbs suggests that requiring businesses to file crypto reports could allow the FCA access to data on upwards of 4,500 cryptocurrency entities annually. He believes the reporting will help to make the cryptocurrency industry more robust and legitimate. Whether or not he is right remains to be seen.
What it could mean for gambling
Details of the FCA's policy changes are a bit sketchy for now. However, it is certainly not beyond the realm of possibility that online gambling sites will have to begin filing AML reports in the near future. After all, law enforcement officials have long said that gambling is a hotbed of money-laundering. Requiring casinos to report makes sense in light of the broader goals the FCA is apparently trying to achieve.
Reporting would force any online operators not currently toeing the line to start doing so. The reporting also gives the FCA an opportunity to better understand the impact of online gambling on the rest of the economy. Further guidance and regulation would hopefully take into account the economic impacts of over-regulation.
In the end, official regulatory action by the FCA would legitimize cryptocurrency as an alternative payment system. And in so doing, that would likely spur the entire online gambling industry to openly embrace crypto. Where only a limited number of online casinos accept crypto payments at the time of this writing, cryptocurrency could become the standard at some point in the future.
In turn, this would have a ripple effect on the crypto economy. One thing cryptocurrency has lacked all along is hard utility. That hard utility becomes a reality if cryptocurrency becomes the standard for online gambling deposits and withdrawals. That may be something the FCA is banking on, given the fact that they are especially interested in cryptocurrency as an alternative payment system.
Cryptocurrency's rising legitimacy
As fascinating as all of this is, there is an underlying fact that should not be ignored. Since Bitcoin was first launched way back when, the world's financial experts - both public and private sector - have struggled to give it legitimacy as a monetary system. Bitcoin and its competitors have been viewed as nothing more than speculative assets. The fact that the FCA is looking at a more robust regulatory regime says a few things.
First, the FCA is essentially admitting that cryptocurrency is here to stay. That is a big admission. Moreover, admitting the reality of cryptocurrency also forces regulators to admit that Bitcoin et al will eventually compete with fiat one way or another. Thus, the time to start developing rules and regulations is now.
AML laws are a good place to start. By requesting regular reports, the FCA hopes to get a more detailed picture of how extensive cryptocurrency transactions really are. For all they know, cryptocurrency could be nothing more than an unregulated asset no different than stocks and bonds. It is more likely a lot more than that, but there is no way to know until the FCA can see the data.
Those of us who follow cryptocurrency suspect that FCA policymakers will be surprised by what they learn. There is an entire crypto industry out there, an industry collectively worth billions. Some crypto users are strictly investors. They buy low, wait for prices to rise, and sell high.
Others use cryptocurrency as a fiat replacement. They buy goods and services with their coin; they pay their bills with it; some even get paid with it. These types of users are very comfortable with the prospect of replacing fiat with the digital alternative.
The criminal element
It goes without saying that the FCA is not all that worried about investors and consumers. Rather, it is the criminal element that has their attention. But stop and think about that for just one second. If criminals are willing to use cryptocurrency platforms to do their business, doesn't that already make cryptocurrency legitimate? Maybe not legitimate in the eyes of the law, but certainly legitimate by every economic definition you could apply.
Criminals launder their money in order to make detection harder. They do so by lots of different ways. For example, it is generally accepted that Las Vegas and its entire gambling industry was built on money-laundering in the 1950s. Study organized crime anywhere in the world and you'll find criminals laundering money through construction projects, small businesses, banking institutions, etc.
They use cryptocurrency in the 21st century because it works. Government authorities know this, which is why the FCA has implemented its policy changes. They know cryptocurrency is a valid way to run money through the financial system without leaving an obvious paper trail. They aim to stop it.
A better gambling industry
If this all works out the way the FCA intends, we could end up with a better gambling industry for it. Regulation and oversight tend to clean up corrupt industries that, left to their own devices, would put very few rules in place to prevent organizations from abusing the system. The UK's gambling industry is an excellent case in point.
The problem in the cryptocurrency realm is that there are few controlling entities to regulate. Cryptocurrency is neither established nor maintained by a government agency or central bank. In most cases, cryptocurrencies are actually software solutions. They are data-driven projects built on a blockchain platform that has practical applications ranging from payments to inventory control.
It is difficult to regulate a single cryptocurrency. It is even more difficult to regulate all of them. So instead, regulators seek to regulate those business entities that deal in cryptocurrency. We are talking exchanges, payment systems, online gambling sites, and the like.
A better gambling industry will hopefully evolve from the FCA's new policies. As regulators better understand how people use cryptocurrency as a payment solution, they will also have a better understanding of how the crypto and gambling industries interact. The end result should be more robust crypto payment systems for gambling operators.
Some final thoughts
The FCA's new policy requires businesses that file AML reports to include an explanation of how they are working to prevent cryptocurrency money-laundering and other illegal practices. This forces companies to either take more aggressive action against money-laundering or file false reports.
Requiring online gambling operators to take a more aggressive stance against money laundering only makes the industry better. Online gambling is intended to be an entertainment venue for people who enjoy everything from slot machines to table games. It was neither developed nor intended to be a bastion of criminal activity. If the FCA can help root out most of that criminal activity, legitimate gamblers and online operators will be better off.
Companies now required to file AML paperwork for cryptocurrency transactions should expect to hear from the FCA in the coming months. By this time next year, the FCA should have a good amount of data to start working with. Where they take it is anyone's guess. The smart money says new guidance and regulations are forthcoming.