The word 'regulation' is anathema to many of the movers and shakers in the cryptocurrency space. This is not necessarily a bad thing, given the tendency government has to foul things up. Yet at the same time, there is no denying that allowing digital currencies and decentralized finance to continue evolving in a Wild West environment only invites criminal activity. Thus, national governments are beginning to ramp up their efforts to root out money laundering in the cryptocurrency arena.
Increased anti-money laundering (AML) regulations undoubtedly have some spooked. Our focus is on the gambling industry, so we are especially interested in how gambling operators perceive any forthcoming regulations. In this post, we attempt to answer the question of whether or not new AML rules will harm the sector. In short, we don't think they will.
A point to remember as we move forward is that money laundering has been a problem for as long as there has been money. Money laundering has been an issue in the gambling space since the early days of gambling as a business venture. None of what the government is trying to stamp out is new. Regulations are not aimed at shutting down cryptocurrency per se. They are aimed at preventing criminals from using it to do what they do.
The global push for regulation
What makes now such an important time to gambling operators is the sudden global push for AML regulation. In Switzerland, parliament recently passed an amended version of its Blockchain Act that more closely regulates cryptocurrency businesses by:
- establishing rules for how digital assets can be traded
- establishing a legal process for reclaiming assets from bankrupted companies
- defining new legal requirements for operating exchanges.
That last point is where money-laundering comes in. Rule changes make it more difficult for exchanges to launder ill-gotten funds through several new mandates, some of which have to do with reporting.
Meanwhile, in the U.S., multiple government agencies are working together to go after organized crime in the digital currency space. America's taxing authority, the IRS, has gone as far as to establish a bounty to encourage hackers to break into Monero and the Lightning Network.
Finally, the EU is putting heavy pressure on member states to sign the Fifth Anti-Money Laundering Directive. That directive further tightens the rules under which businesses can utilize digital currencies for commercial transactions. It allows government regulators to look more closely at exchanges, businesses, and customers alike.
Gambling industry voncerns
Even though current regulatory trends do not appear as though they will harm the gambling industry, there are still legitimate concerns among operators. For example, if they will eventually be forced to submit their records for government scrutiny, they could inadvertently reveal the identities of players who have chosen to use cryptocurrency purposely to maintain anonymity.
Revealing such information would be no different than giving regulators access to standard bank records. Nonetheless, cryptocurrency users do not want their information out there. Are they likely to stop gambling because of it? Some probably will; most will not.
Another legitimate concern is that regulation could cause trouble for operators where the criminal element is concerned. If an operator is forced to choose between making the government happy and keeping the criminal element at bay, which choice is better? It will probably not come to that, but these are the types of things operators worry about.
Problems for crypto platforms
Increased AML regulation is likely to harm crypto platforms more than gambling operators. Monero is a classic example. Monero has long promoted itself as the only truly secure blockchain platform with genuine anonymity built in. We now know that this is not the case.
The Calvin Ayre website reported in early September 2020 that CipherTrace has figured out how to identify transactions on the Monero blockchain. They apparently have given that information to the U.S. Department of Homeland Security. Calvin Ayre's report says it took CipherTrace experts a year to crack Monero.
Now that it has happened, it is a safe bet that criminals using Monero to launder funds will be looking elsewhere. It's not hard to envision this being the beginning of the end for Monero. Whether or not the platform survives, it illustrates quite well why AML regulations are not likely to harm the gambling sector to a large degree.
Limited business applications
Smaller cryptocurrency projects, like Monero, have very few business applications. They exist only for the purpose of buying and selling tokens. The bigger projects are a different matter. Projects like Bitcoin SV and Ethereum have well-known business applications that have already proven themselves. These are not the kinds of platforms criminals flock to. Why? There is too much action.
Take Bitcoin, for example. It is the clear leader among cryptocurrencies for payment purposes. It boasts the largest market capitalization, the highest price, and the largest volumes. One would think that criminal activity would run rampant on the network. But that sort of thinking belies an ignorance of how criminals work.
Moving millions of dollars through the Bitcoin network presents too much risk. There are too many players with their hands in BTC. There are too many Bitcoin whales moving large sums of coin in and out. All that action draws attention. And if there is one thing that criminals hate, it is attention.
Your typical online casino gravitates right to BTC on the first decision to accept cryptocurrency payments. Even though AML regulations would apply to exchanges that list BTC, Bitcoin itself would remain largely unaffected. The only thing the Bitcoin community has to worry about is an organization like CipherTrace getting into its ledger.
That would be serious, do not misunderstand, but probably not enough to bring Bitcoin down. Any criminal activity would be rooted out and the platform would continue on. People who normally use BTC to place online casino bets would continue doing so. Exchanges would continue listing BTC for sale.
The point of AML regulation
Regulators looking to sink their teeth into cryptocurrency are not doing anything they haven't done with fiat. Most of what they do relates to how financial operations report their activity to the authorities. By forcing businesses to account for their funding, they also force businesses to pay attention to where their revenues are coming from.
In the cryptocurrency space, accurately reporting inflow and outflow makes it easier for investigators to determine if a particular digital currency is being used to launder money. Large volumes of coin being transferred by a single entity, with no noticeable return, would be a red flag. Likewise, a large volume of transactions attributed to the same senders and receivers could be an indication that laundering is going on.
In theory, it might not even be necessary to reveal the identities of traders except when legitimate concerns of money laundering exist. In other words, investigators have no need to know the identity of casual crypto users whose transactions do not raise red flags. So even though they could potentially identify every user, that does not mean they will.
Online gambling will continue
One last point to consider is the state of online gambling in relation to deposits and withdrawals. Despite cryptocurrency being an option at a lot of online casinos, there are many more that do not accept crypto payments. Online gambling survived just fine before people started depositing BTC and LTC. If the entire crypto world collapsed overnight, casino sites would be up and running tomorrow morning.
Crypto and blockchain have a lot to offer the gambling industry. It is easy to envision a day when the entire online market is driven by blockchain. But as wonderful as blockchain is, it is not necessary to run a gambling site. It is not necessary for accepting deposits and paying out withdrawals.
For most online casinos, blockchain is little more than another payment alternative. They still have credit cards, debit cards, bank transfers, and every other form of payment even if crypto were to fall apart. In the case of something like ETH or BSV, it is possible to separate the various components so that payments are on one blockchain and the rest of the operation is on the other.
How would this help? Let's say an online operator built his entire business on BSV. As long as payments were kept separate from everything else, the publicly traded token could be completely worthless without affecting the operational blockchain. The casino could still operate and no longer accept BSV as a payment option.
Wait and see is best
It is clear that national governments are ramping up their efforts to root money laundering out of the cryptocurrency space. It was only a matter of time before we got to this point. Now that it is here, it is definitely worth keeping an eye on things. But if you are a gambling operator, this is no time to panic. A wait-and-see approach is your best bet.
In all likelihood, new AML regulations are coming. But equally likely is that any such regulations will not do great harm to the gambling sector. If anything, they will clean up crypto and make it even more attractive as a tool for building the gambling sites of the future.