Would tokenization really be good for gambling operators?

23 November, 2018

Taking a close look at banking options for online gambling makes it clear that cryptocurrency has a long way to go before it even comes close to replacing fiat currencies.

Even though cryptos like Bitcoin and Litecoin are being accepted at a growing number of online gambling properties, what is commonly referred to as 'bitcoin gambling' still makes up only a fraction of the total operator revenues earned every year.

Tokenization has been proposed as a possible solution. But would it really be good for gambling operators? No one really knows. There are lots of theories about how it would all work. There is plenty of speculation about the potential benefits tokenization would offer to both operators and players. But as with so much in the crypto space, theories and speculation really have no weight until ideas are actually tried.

There is enough potential in tokenization to at least give it a look. Hopefully, a few serious gambling operators will do just that. In the meantime, those of us here at Coinbet.com can at least muse over the potential of tokenization as a legitimate way to increase the profile of crypto in the gambling arena.

Past gambling cryptocurrency fails

To get us started in this discussion of tokenization, we reference a recent article from Calvin Ayre editor-in-chief Bill Beatty, who is a proponent of tokenization within the gambling industry. He makes some excellent points in defense of his position. He began his 7 November (2018) article reminding readers of the fact that every cryptocurrency developed specifically for gambling operations has either failed or is currently on life support.

That seems odd, doesn't it? An industry that generates billions in profits every year cannot seem to support a gambling coin. Why is that? Beatty seems to imply that no serious effort has been made to actually develop a gambling coin that would retain real value over the long term. He cites multiple initial coin offerings (ICOs) initiated with the idea of pumping and dumping.

Those behind the ICOs lined up investors to support their coins prior to their offerings. Once the coins went live, operators waited only so long before cashing out their newfound wealth, leaving investors with worthless tokens that would never have lasting value. According to Beatty, investors are now wise to the scheme. They are not willing to put money into gambling ICOs any longer.

The tokenization proposal

Beatty's proposal, and one shared by other experts in the crypto field, is one of implementing tokenization rather than a dedicated gambling coin. What is tokenization? In the field of computer science, it is simply swapping out one piece of data for another of equal value. This easily translates into cryptocurrency trading when you understand that crypto coins are really just digital tokens.

Tokenization in cryptocurrency is the practice of creating digital tokens to represent something with established value. Let's say our company did an internal audit and discovered we had total assets of USD $1 million. We want to be able to use the value of those assets to buy and sell, so we decide to create our own digital tokens known as MegaMoolah.com coins (MMC) to represent our assets.

If we created 1 million such coins, each one would be equivalent to $1 of value against our assets. We could trade our tokens with another company that has also created its own tokens. Both our companies can trade with still others that are tokenized. Our company would remain in control of the value of our tokens based on the value of our assets.

The only problem with this model is that, because our tokens do not represent an actual cryptocurrency, they have to be backed by something else if users are to have the ability to cash them in for fiat currency. Beatty's proposal for tokenization in the gambling arena calls for backing tokens by using Bitcoin Cash (BCH) as a reserve crypto.

How it would work

The practical implementation of tokenization would require that participating operators agree on a reserve currency to back up their tokens. So let's say you have 20 operators who all agree to use BCH as the reserve. Each of those operators would then create their own tokens for use in their casinos.

As a player, you would purchase those tokens with either fiat or a cryptocurrency - probably BCH - at the time of deposit. You might buy a group of tokens represented as chips valued anywhere from $1 to $25. Those are the chips you would use to gamble with at that particular casino. Should you decide to cash out some or all of your chips at any point, the casino would buy them back from you with either fiat currency or an equal amount of BCH.

Under Beatty's proposal, casino operators would have to maintain a certain amount of fiat currency in reserve to support all the tokens in circulation. This includes tokens that have left the casino space and have been traded elsewhere among players. In other words, the casino operator would have to cover all its tokens regardless of where they reside.

Reasons for tokenization

Introducing tokenization in the online gambling space is an interesting idea to say the least. But there are some legitimate questions. For starters, why tokenize if the tokens a casino operator creates are not an actual cryptocurrency with real value on the open market? After all, if our fictional MMC coins have to be backed by BCH or a fiat currency, they don't have any inherent value of their own.

While that is technically true, it is not true in practical terms. Remember that tokenization involves creating tokens that represent something else with value. If Acme Casino wanted to create its own tokens for players, those tokens would represent the value of Acme's assets backed by its reserve cash.

Still, you might argue, the tokens only represent fiat currency. So why not just continue gambling the old way? That is a legitimate question and one that has several different answers.

Removing banks from the equation

Tokenization takes the idea of decentralization one step further by eliminating banks completely. This is especially important in countries where gamblers are not allowed to deposit fiat currency with gambling operations. Those players could purchase tokens on the open market without ever dealing directly with the online casino in question. With tokens in hand, they could then make a casino deposit and begin gambling.

Likewise, gambling operators who ran into trouble with financial institutions within their own jurisdictions could complete their transactions using a secondary market in another jurisdiction. That would still allow them to back up their tokens with a fiat currency reserve so as to be able to cash out players as needed.

Trading among players

The other perceived benefit of tokenization is that it would encourage trading among players. As the thinking goes, tokenization reduces transactions to individual interactions between two players. They trade tokens among themselves without any interaction with banks, exchanges, or even operators. They alone are responsible for their trades.

This helps casino operators in that it gets their tokens out there among a larger number of players. Let's say you want to play Mega Moolah at Acme Casino. You buy Acme tokens for that very purpose. But then you discover there is a brand-new video slot you want to play that Acme doesn't offer. Generic Casino does have it, so you trade some of your Acme tokens for Generic tokens. Now you can play both video slots on separate sites.

Questions of practicality

Tokenizing the online gambling world seems like a very good idea. On a grand scale, the concept of tokenization envisions a world in which every individual and business entity is free to transact and trade on the value of individual assets, all without involving any banks or government entities. Tokenization theoretically makes everyone an equal player in any kind of commercial transaction. It also creates a situation in which there isn't a single asset that can't be liquidated.

Theory is one thing, practice is another. While tokenization seems like the perfect solution for online gambling via cryptocurrencies, there are some questions of practicality that get in the way. For example, how many online gamblers want to have a wallet stuffed with several legitimate crypto coins alongside dozens of casino tokens?

There is also the question of constantly exchanging tokens and fiat currencies on both sides of the transaction. Having to keep so much fiat currency in reserve limits operator cash flow. It also invites players to buy and sell tokens very quickly, tying up the operators banking system with endless transactions that all need to be accounted for.

At the end of the day, there is no way to know if tokenization would really work for the gambling industry. Common sense dictates it would. However, someone would actually have to put the theory to the test in a real-world scenario to know for sure. Until then, Beatty and other supporters of tokenization are left to speculate along with the rest of us.