Lessons to learn from China's crackdown on gambling payments

3 October, 2020

Government officials in China are not all that fond of gambling. Over the years, we have seen several waves of crackdowns intended to stop online gambling in particular. The most recent crackdown has been aimed at payment processors, with the goal of preventing Chinese nationals from gambling on sites located outside the country.

Earlier this month, 76 people in Guangdong province were arrested by the Public Security Bureau for helping to facilitate gambling payments using the Tether (USDT) token. Government officials have charged those arrested with processing and funneling funds to and from 120 online gambling sites. They were allegedly moving payments to and from exchanges as well.

The news itself is not all that surprising given China's long-term stance on gambling. And yet, there are still lessons to be learned here. China's crackdown on online gambling and cryptocurrency payments is just the latest in a long line of actions meant to curb individual freedom and maintain state control over all things economic.

Lesson #1: Stablecoins work for gambling

Chinese officials allege that those arrested were engaged in an elaborate scheme to give people access to online gambling via secret payments. Rather than relying on fiat, the system was fueled by Tether. The first thing to understand here is that Tether is a stablecoin tied to the U.S. dollar. Its relationship to the dollar allows for the minting of new coins coinciding with the U.S. Mint's production of new bills and coins.

The lesson to be learned here is that Tether was chosen for this particular venture due to its stability. The scheme has allegedly worked successfully for some 15 months, proving that stablecoins work for gambling purposes. The idea of stablecoins not being worthy of gambling tokens is put to rest once and for all.

Remember that stablecoins are attractive to a lot of people because they are significantly less volatile than pure cryptocurrencies. Where Bitcoin's price can be up and down within hours, Tether remains relative price-stable thanks to its backing by U.S. dollars.

Lesson #2: People will find a way to gamble

The second lesson does not necessarily have to be learned; deniers just have to admit it is true. What is that lesson? That people will always find a way to gamble. Gambling is not a historically new phenomenon. Nor did it get its start in 18th century European casinos. People have been gambling since the beginning of time.

Even in a country as restrictive as China, people who want to gamble will find a way to do so. In this case, gamblers took their business online, using websites in various locations abroad. They covered their tracks by using a cryptocurrency rather than fiat.

It is true that 76 people have been arrested and face possible prosecution. It is true that the scheme they were running has been shut down. But do not believe for a minute that Chinese citizens will suddenly stop looking for ways to play casino games online. They are going to keep doing it because they want to.

Lesson #3: Entrepreneurs will help them gamble

Next up is the reality that there will always be entrepreneurs ready and willing to help those who want to gamble. That is the way business works. Wherever there is demand for a product or service, there is someone willing to meet that demand. Cracking down on payment processors is yet another in a long list of short-term solutions that will only enjoy limited success. Workarounds will be found.

Entrepreneurs in China are no different from those in any other part of the world. To make this particular scheme work, they recruited some 3,000 participants who acted as runners. These runners would open up accounts on an online platform, then fund their accounts with a deposit.

The accounts would be used to purchase what appeared to be legitimate products. In reality, no products were actually exchanging hands. The money was being used to purchase Tether that would be funneled to online casino accounts. The gamblers behind those accounts would repay their runners by sending them USDT.

Lesson #4: Others are waiting in the wings

Despite the recent crackdown, Chinese officials understand that there are others waiting in the wings. Whenever they take out one operation, there is another already up and running. Even now, there are other platforms continuing to provide an avenue for online gambling via offshore operators.

In order to avoid detection, some of the payment processors are going to great lengths to make it appear as though actual products are being purchased and shipped. For example, some are generating fake transaction records while others are sending empty boxes to give the appearance that shipments have been made.

Still others are putting a lot of work into developing what appear to be legitimate ecommerce websites selling real goods. Everything looks absolutely legitimate to the casual observer. Only those who are familiar with the payment system know what is really behind the facade.

Many of the payment schemes are quite elaborate and well thought out. Those behind them demonstrate an exceptional amount of creativity and a determined willingness to help people gamble. They are happy to get involved because there is a lot of money to be earned in commissions.

Lesson #5: Online gambling is impossible to stop

The final lesson here is perhaps the one that is most uncomfortable for governments like China's ruling Communist Party. It is the reality that online gambling is impossible to stop. The online world is a completely different world not governed by borders. It is not governed by any single government entity, either.

You could make the case that the internet is to data sharing what cryptocurrency is to the financial markets. Just like Bitcoin, Litecoin and so many other cryptos, the internet is largely governed by those who use it. Governments may try to impose restrictions here and there, but people will always find a way to transfer whatever data they want to transfer via computer networks.

The fact that this post even had to be written is a demonstration of the power of the internet. On the one hand, you have offshore casino operators running websites that can be accessed from all over the world. On the other hand, you have a Chinese government that tries as hard as it can to prevent its citizens from accessing the outside world via the internet.

Regulations absolutely do run interference between operators and gamblers. But that interference is a minor inconvenience at best. Operator and gambler still find one another in the vast space that is the internet. They will continue to do so unless the Chinese government severs the physical cables and disconnects the satellites that allow its citizens to get online.

That is not likely to happen due to the realities of the internet. China depends on it for its economy. If they were to cut off the internet, they would be cutting off their own nose to spite their face. So the endgame - at least as far as gambling is concerned - is to try to prevent it by cracking down on payment processors, gambling operators, and people who gamble.

Cryptocurrency: Great but not perfect

There is another side story here that bears discussing before closing this post. It centers around Tether and a recently launched investigation by the New York (U.S.) attorney general. The Attorney General's office is currently looking into allegations of fraud relating to Tether and the Bitfinex exchange.1

For years there have been concerns that Tether is on thin ice due to its penchant for releasing billions of dollars in new tokens to stay in line with U.S. fiat. At one time there were legitimate questions as to whether or not the platform had enough liquidity to pay off buyers who decided to cash in large volumes of tokens.

Now there are concerns of fraud thanks to an $850 million loan Tether made to Bitfinex. The Attorney General's office suspects that the loan was made to secretly hide losses at the exchange.

The point of this is to say that while cryptocurrency is great, it is not perfect. Whether you are talking a straight crypto or a stablecoin like Tether, all digital currencies have their own inherent weaknesses. Thus, it is never a good idea to put all of your financial eggs in one basket.

Cryptocurrency is a fantastic tool for powering online gambling. The right platform can cover everything from payments to operator accounting and the games themselves. Cryptocurrency platforms make it easier to prove that games are fair. In short, there is a lot to love about cryptocurrency as a gambling tool.

At the same time, there are always concerns of fraud thanks to the fact that cryptocurrency is largely unregulated. One would hope that the crypto industry would police itself but doing so seems to go against the whole idea of decentralization. This creates a conundrum in which you never really know how much you can trust a new ICO, a new exchange, etc.

In closing, China's crackdown on gambling payment processors has drawn the curtain on the realities of online gaming in that part of the world. The rest of us could learn some lessons from our observations.

1) Coingeek. Bitfinex, NYAG called to video conference with New York court