As online gambling and cryptocurrency converge to create an entirely new gambling landscape, a lack of regulatory clarity is somewhat hindering progress. Gambling operators the world over are struggling to know what the future of cryptocurrency within their industry will look like because government regulators have been slow to offer guidance. That has just changed on the Isle of Man.

The Isle of Man Financial Services Authority (IOMFSA) published its official guidance in mid-October 2020. The guidance is not as highly detailed as it will eventually be, but at least it gives gambling operators a good idea of where regulators stand. They can now work with the cryptocurrency sector to develop the technologies that will drive online gambling in the future.

Make no mistake about it, this is a good development. The Isle of Man has traditionally been friendly to gambling of all types. A fair number of operators have set up shop there specifically for that reason. Now that they know where regulators stand on cryptocurrency and blockchain for businesses, they feel like they can move forward.

Activity rather than form

There is a lot to love about the IOMFSA's guidance. At the top of the list is the neutral approach they have taken toward blockchain and cryptocurrency as technologies. You could say that the IOMFSA is technologically agnostic to some degree. They do not recognize the technologies as good or bad, nor do they see them as entities unto themselves.

To quote a report from the CalvinAyre.com website, then IOMFSA will "look to the substance of the activity being undertaken rather than the form" when developing future regulations. The official guidance paper explains how this approach would be made manifest, citing two points:

1. Crypto assets and tokens with characteristics similar to other securities and electronic money platforms will be regulated similar to those entities.

2. Activities involving crypto assets or tokens that fall outside of securities regulation will not require licensing. However, involved businesses will have to register with the IOMFSA and comply with standard anti-money laundering and anti-terrorism requirements.

Essentially, if a crypto or blockchain project has characteristics of a traditional security, it will be treated as such by regulators. Any other crypto or blockchain activities outside of that purview will be treated like any other business. Business owners will be required to get the appropriate licenses and abide by the same rules other businesses in that sector must abide by.

Cryptocurrency and online gambling

If our understanding of the guidance is correct, future blockchain regulation should have very little impact on the online gambling industry in the Isle of Man. The IOMFSA's neutral approach allows gambling operators to treat cryptocurrency deposits the same as fiat deposits. There will be no difference in the eyes of the law.

That means operators will still have to follow know-your-customer (KYC) policies. They will still have to verify customer identities before allowing deposits. They will also have to include cryptocurrency activities in their regular anti-money laundering reports. But beyond that, there will not be any special requirements related to crypto payments.

The way it should be

We cannot underestimate just how important the Isle of Man's guidance is. Their approach to cryptocurrency and blockchain represents the way it should be worldwide. At its root, cryptocurrency is a monetary and payment system. Indeed, this is the very reason Satoshi Nakamoto created Bitcoin.

Bitcoin was never intended to take over the world as a full replacement for fiat. It was intended to be an alternative monetary system allowing individuals and businesses to complete transactions among themselves in a safe, secure, and equitable environment.

As for its blockchain, Bitcoin is limited. But thanks to Ethereum and a couple of others, the blockchain concept is not limited to payments. Entire software platforms can be built on it. This bodes well for an online gambling industry that appears to be moving in that direction. Building an online casino entirely on blockchain offers a number of benefits:

• Secure payments – Cryptocurrencies have security built in. Thanks to encryption and pseudonymity, gamblers may be more secure depositing cryptocurrency than paying with a credit or debit card.

• Accurate accounting – Building an online casino's books on blockchain affords more accurate accounting. Remember that blockchain transactions create an immutable record that remains unaltered forever. Accounting should be more accurate as a result.

• Provable fairness – One of the main drivers of blockchain in the gambling industry is proving fairness. Building games on blockchain makes it fairly easy to prove fairness without the need for third-party testers. Gamblers themselves can verify fairness by examining the blockchain ledger with special software.

There are other benefits as well. At the expense of discussing them all in detail, trust us when we say that building on blockchain will be a good thing for online gambling in the future. The industry is already starting to move that way. It seems only a matter of time before blockchain rules the day.

Getting ahead of digital currencies

The Isle of Man did the online gambling industry another big favor by getting ahead of digital currencies. By that we mean they've established an outline for future regulations well before the introduction of central bank digital currencies (CBDCs) and the private digital currencies we all know are coming from the tech industry.

Digital currencies replacing minted bills and coins is now an inevitability. It is going to happen. The only question is one of timing. In issuing their guidance, the Isle of Man has made clear that they have no intention of treating digital currencies as a separate entity in need of special regulation.

Furthermore, by concentrating on function rather than form, they are giving the go-ahead for gambling operators, and others, to accept digital currency payments just as they would fiat. This is going to become especially important once countries start issuing their own CBDCs.

In the absence of such a neutral approach, there could be huge discrepancies in how a nation treats something like Facebook's Libra compared to its own CBDC. And by the way, that's likely coming as well. It is hard to imagine that very many countries would want open competition between their CBDCs and a private entity like Libra.

At any rate, gambling operators on the Isle of Man now know where regulators stand on digital currencies. It should make it easier for them to embrace new tokens – be they private or central bank issued – in the future.

Future blockchain development

Future blockchain development in Europe comes into play here as well. Could it be that the Isle of Man has set itself up to be a hub of development by taking a neutral approach? It is possible. If you were a blockchain developer and had to choose between a neutral approach and one in which regulators took sides, which would you prefer?

A country like China is not doing itself any favors by cracking down on blockchain development. Why would developers want to pursue bigger and better innovations if they know the government is looking over their shoulders? By the same token, a country appearing to be pro-blockchain may not still follow that approach in the future.

Consider blockchain development in the US. Regulations there are all over the place. Furthermore, there are multiple agencies capable of regulating blockchain in some way and their jurisdictions often overlap. Throw in the frequency with which politicians and bureaucrats change and you have a recipe for confusion. What applies to blockchain today could be completely different tomorrow.

The Isle of Man's approach answers the extremes on both ends of the blockchain spectrum. Regulating activities rather than form completely eliminates the need for developers to align future technologies with the whims of regulators. The technology itself is a nonissue. What Isle of Man regulators care about is how the technology is used.

This could very well make the Isle of Man a European hotbed for future blockchain development. And if that happens, regulators can take credit for scoring a big win by taking a neutral approach.

More operators on the Isle of Man

The guidance out of the Isle of Man is still too new to make any solid predictions of future impacts. But the smart money says more operators will be looking at the Isle of Man down the road. As cryptocurrency and blockchain play a larger role in online casino operations, business owners are going to want to set up in a place where they do not feel threatened. The Isle of Man is one such place.

In the meantime, operators in other jurisdictions are keeping an eye on what their regulators do. There now seems to be a consensus among national governments that cryptocurrency and blockchain are here to stay. That leaves regulators in a position of trying to figure out how to write the rules in such a way as to not dampen enthusiasm or kill innovation.

Governments do not have a stellar track record of finding that fine balance. Perhaps they will this time. Hopefully, more governments than not will look to the Isle of Man as an example. The IOMFSA's neutral approach is the best way to go for everyone involved.