Sin on the ‘Net

Today the Reason Foundation publishes my policy brief on keys to successful state regulation of Internet gambling.

Thanks to a Department of Justice’s December 2011 memo on the parameters of the Wire Act, states can now license real-money intrastate online casino games. Earlier this year, Nevada became the first state to permit online wagering, and in August granted the first online operating license to South Point Poker LLC, which was to have launched trials last month. Since the Reason report went to press, South Point disclosed that its software is still undergoing independent testing but  hopes to have its site up by the end of the year.

Elsewhere, Delaware has enacted legislation to authorize online gambling under the auspcies of the state lottery commission and Illinois has begun selling lottery tickets online.

It goes without saying that U.S. citizens should be free to gamble online, just as they legally can in casinos throughout the country. The degree of regulation is subject to debate, but unfortunately remains a necessary element in policy. Yet lessons about taxation and regulation can be learned from experiences in Europe, as well as from regulation of brick-and-mortar casinos in the U.S. With a better understanding of usage trends, consumer game choices and operator cost models, legislators who want to offer constituents the freedom to play online can craft an environment that supports a robust online gaming climate, as opposed to one that drives legitimate operators away.

Regulation should derive from an enlightened approach that respects the responsibility and intelligence of its citizens. Internet gambling can be a safe, secure pastime.  Overall, the government’s only goal should be to protect users from theft or fraud. Gambling should not approached as an activity that needs to be controlled or discouraged under the rationale that it is a “sin” (to moralists) or “destructive behavior” (to social utilitarians), and then, hypocritically,  politically tolerated so it can be excessively taxed on those rationales.

Although it is likely states will differ in the particulars of how they structure the license and tax arrangements, a successful climate for legalized Internet gambling is likely to derive from the following fundamental principles. Lawmakers should heed the following guidelines:

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Yesterday brought a spate of news reports, many of them inaccurate or oversimplified, about a settlement the U.S. Attorney’s office in Manhattan reached with two major international Internet poker sites—PokerStars and  Full Tilt Poker.

The buried lead–and very good news for online poker players–is that Internet poker site PokerStars is back in business. Manhattan U.S. Attorney Preet Bharara ended his case against the site and it is now free to re-enter the U.S. market when states begin permitting Internet gambling, which could start as early as this year in states such as Nevada and Delaware.

The three-way settlement itself  is rather complicated. Full Tilt Poker will have to forfeit all of its assets, at this point mostly property, to the U.S. government. PokerStars will then acquire those forfeited Full Tilt Poker assets from the feds in return for its own forfeiture of $547 million. PokerStars also agreed to make available $184 million in funds in deposits held by non-U.S. Full Tilt players, money players believed was lost.

The U.S. government seized these funds on April 15, 2011 when it shut down Full Tilt, PokerStars and a third site, Absolute Poker, on charges of money laundering. The date has become known as Black Friday in the poker community. Specifically, the three sites were charged with violation of the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA), which prohibited U.S. banks from transferring funds to off-shore Internet poker and gambling sites. To combat the measure, sites such as PokerStars and Full Tilt began using payment processors that allegedly lied to U.S. banks about their ties to gambling sites. Although this would be fraud under the letter of the law, the U.S. government never claimed payment processors stole money from players or banks and no evidence suggests they did.

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Delaware looks ready to become the second state after Nevada to authorize Internet poker as a gambling bill was approved this week by the state senate 14-6 with one senator abstaining.

In the wake of the Department of Justice’s Dec. 23, 2011 memo that for all intents and purposes said there were no federal statutes prohibiting intrastate online wagering on anything save sports, several states. Including Iowa, New Jersey and California, have started moving on legislation that would permit Internet poker, other casino games, and online purchasing of lottery tickets for residents and visitors inside their borders.

Poker players across the country would welcome the chance to play online once more. The Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 did not make Internet poker illegal outright, but by prohibiting U.S. banks from conducting transactions with off-shore gaming sites, made it extremely difficult for U.S. players to open or maintain accounts with legitimate sites such as Bovada, Bodog and PartyPoker.

With legislation moving along, most gaming industry analysts see Internet poker becoming a reality in at least one or two states by the end of this year.

While the topic of online gambling is still controversial, poker is just one more place where the Internet has had an impact. Before the World Wide Web, you either had to live in Nevada or New Jersey (even in states that had casino gambling, not every casino had a card room) to play regularly. For most who did play, poker was a friendly diversion within a family or social circle.

In broadening poker’s appeal, the Internet also changed the nature of the game. These changes fully manifested themselves when Chris Moneymaker won the main event of World Series of Poker (WSOP) in 2003. Moneymaker was the first world champion to have qualified for the tournament at on line site. The WSOP was the first major live tournament he played. The bulk of his experience and expertise was acquired through online play.

In honor of developments in Delaware and elsewhere, and keeping in mind that the main event of the 2012 World Series of Poker begins July 7, and because it’s Friday afternoon, let’s look at four ways the Internet has changed poker significantly from the game your parents knew. For our purposes here, we will keep things in the context of Texas Hold ‘Em, today’s most popular poker game.

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Cross-posted at Reason.org

The big news in online gambling circles these past two weeks has been the busting of BLR Technologies, a software supplier for a number of online gambling sites, after a leading gaming mathematician determined the variance against winning at its craps game was statistically off the charts.

While most online gambling sites host honest games, there’s bound to be some bad apples. What’s often overlooked is that there is a market-enforced structure that militates against suspect play or outright cheating. That was clearly at work here.

The finding already has led at least one online casino, 5Dimes, to remove the BLR software from its site. That the news circulated the online gambling community as quickly as it did, and led to immediate action from a major online casino group, testifies to the knowledge and power of online gamblers. Of course, the image of informed players backed by mathematical and statistical experts contrasts with the views of government policymakers, who tend to treat online gamblers as gullible knuckleheads who need to be protected from unscrupulous gambling predators, predominantly through bans. This misconception is worth keeping in mind as a Congressional panel convenes this week to revisit federal laws against online gambling.

In the BLR case, Michael Shackleford, whose Wizard of Odds website takes an in-depth mathematical approach to all manner of gaming probabilities, strategies and odds, personally tested the software after a reader complained that he had won only 25 percent of 3,200 “pass” or “don’t pass” bets made.

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