The Question Remains: How Should I-Gaming Be Regulated?

11 July 2003

Leaders of the online gaming industry, almost from its inception in the mid-1990s, have clamored for regulation. "Regulation" has been the industry's answer to opponents, such as those in the U.S. Congress, who want to try to prohibit this form of gaming.

"The challenge is going to be, from the regulators' side, how to regulate in such a way that you still make it possible for your operators and your software providers to be competitive."

- Andre Wilsenach
Alderney Gambling Control Commission

Now that several jurisdictions are aggressively regulating online gaming, and in a year in which some prominent licensees of highly regulated jurisdictions have closed their Internet casinos, the industry is focusing attention on the nature and future of such regulation.

A session at last month's Global Interactive Gaming Summit & Expo in Montreal, the online industry's major annual trade show, was titled: "Regulation: How Much is Too Much?" The watchwords for the panelists--two site operators, a software developer and a regulator--were "balance" and "flexibility" in setting and administering regulations.

Speakers pointed out that operators of online gaming sites, unlike their land-based counterparts, have a choice of where they want to be regulated, if at all.

"It's a relatively mobile business," said Alistair Assheton, managing director of VIP Management Services, a Curacao company that operates online sports books and casinos. "It's a fairly simple process to pick up the servers for a casino," he said, while noting that moving a sports book is a little more involved because of the need to staff a call center.

"We can as operators make decisions based on the regulation and taxation framework of the jurisdiction," Assheton said. "Regulators need to be aware of this, from the operator's perspective."

Andre Wilsenach, chief executive of the Alderney Gambling Control Commission, is well aware of the mobility that site operators enjoy. But most regulators of online gaming come from a background in land-based gaming, he said, and "have to come to grips" with the differences.

"They have to realize that you're not working with an operator who has sunk millions into the ground in terms of infrastructure," Wilsenach said, "and therefore you can impose on him whatever regulations you wish and he has to comply with it because he sits with that investment in the earth. You sit with an industry that by flipping a switch can move overnight to another jurisdiction, if he's (the operator) not able to compete with the restrictions (imposed by the regulator)."

"Online gaming should not be subject to stricter or harsher regulations (than land-based gaming) because it's new or because it's different."

- Lewis Rose

Of course, the competitors faced by licensees of highly regulated venues may be doing business under fewer restrictions or none at all.

"The industry is largely unregulated," Wilsenach said. "We have to accept that operators in well-regulated jurisdictions have to compete with those 400 companies and 1,800 sites operating in unregulated jurisdictions. The challenge is going to be, from the regulators' side, how to regulate in such a way that you still make it possible for your operators and your software providers to be competitive."

Lewis Rose, chief executive of CryptoLogic Inc., a Toronto company that is one of the industry's early software developers and licensors, said there are significant additional costs to doing business in a regulated environment. "We understand that and we have the scars to prove it," he said.

While emphasizing that CryptoLogic believes in regulation, Rose said, "Online gaming should not be subject to stricter or harsher regulations (than land-based gaming) because it's new or because it's different . . . . Instead of approving every single detail, we believe that regulators ought to act on issues as they're raised. In other words, regulate by exception."

Rose went on to say that "Regulations should reflect the uniqueness of the Internet." As an example, he said, "It's one thing to establish regulations for the initial testing of the software. It's another thing to be flexible enough to accommodate change requests. This is an industry that's constantly changing and will require updates in terms of new games or improved mechanisms. Change requests should not require the testing of the entire system again. There ought to be simplified but logical ways of testing new games."

He also urged regulators to approve streamlined procedures for registering players: "Player registration ought not to be too onerous to discourage play, such as waiting for a PIN before being allowed to deposit and play."

Rose referred to the closing of Internet casinos this year by MGM Mirage, Kerzner Interactive, Tattersall's and Crown Casino as "the results of over-regulation."

Peter Bridge, managing director of Lasseters Corp., said over-regulation can take the form of excessive costs for the operator, such as high tax rates.

"Lasseters was the first in Australia to get an Internet gaming license," Bridge said. "We were also the first to hand one back. We got a license in Queensland, where they had a tax of 50 percent."

Such a tax rate was unacceptable, he said, and the company negotiated with the government of the Northern Territory, where Lasseters is physically based, for a tax rate of 4 percent.

Like Rose, Bridge said that over-regulation can include registration procedures that are excessive. For example, he said, the Australian state of Tasmania stipulated that if new online players failed to provide proof of their identity within seven days, any bets they made would be forfeited to the government.

Much of the discussion focused on testing requirements, and how the testing process can slow things down for a site that tries to innovate with new games. Bridge advocated a policy of what he called "dispensations." If an existing, licensed operator proposes a new game, he said, "the regulators should say, 'Okay, but you've got 21 days to get tests done and if they fail, you pull the game from your site.'"

Rose said such a policy would be fair, because "the operator has already been through probity." He noted that testing can be a drain on a company’s human resources. Tests not only involve the money to pay an outside testing service, he said, but consume considerable time for key personnel.

"Testing is a tough issue," Wilsenach agreed. "Testing companies want to make money by testing a lot," he said, adding that "Too much is often made of testing."

Reciprocity among licensing jurisdictions is a need cited by both Wilsenach and Rose. Wilsenach noted that operators catering to markets in different time zones might find it convenient to have multiple regulators, so that the regulators would be in time zones that match or are at least close to the company's major markets. Ideally, he said, common standards will be developed among jurisdictions.

"As a (software) provider," Rose said, "we will have operators in more than one jurisdiction. It would be helpful if there was the acceptance of another jurisdiction's testing, reciprocity." And, he added, operators sometimes switch jurisdictions.

As an example of how such a system could work, Rose explained that CryptoLogic is seeking a listing on the London Stock Exchange. As a basis for its London application, the company is able to submit certain forms that were accepted and approved by U.S. authorities when CryptoLogic obtained its U.S. listing.

Assheton, of VIP, said there's no longer much growth in the number of gaming Web sites, but there is growth in the number of jurisdictions that are licensing gaming sites. "So necessarily, we're going to see competition among the jurisdictions," he said. "They’ll try to differentiate themselves."

Last year, for the first time, Assheton said, operators in Curacao sat down to discuss common issues. They formed the Curacao Internet Gaming Association. But Assheton doesn't believe that licensing jurisdictions are ready yet to meet together.

He predicted, however, that there will be a "convergence" of the less regulated and more regulated jurisdictions. And he said that the political stability of jurisdictions is important. In an apparent reference to the U.S., he said jurisdictions need the "ability to stand up to other jurisdictions, to threats posed by others."

Alderney is one of the Channel Islands, which are self-governing dependencies of the British Crown. Like the Isle of Man, Alderney has a reputation as strict regulator of Internet gaming. Neither jurisdiction permits its licensees to accept bets from the U.S.

But Wilsenach made an interesting distinction about Alderney's rules in this regard. If a country tries to prevent its residents from betting online, the motive for such a policy makes a difference to Alderney, he indicated.

"The Internet was designed to cross borders," Wilsenach said. "Now some are trying to restrict that. . . . Is it a matter of protecting domestic business or a general social policy against online gaming?"

In response to a question, Wilsenach said that if a country is opposed to online gaming as a matter of social policy, such as the case with the United States, Alderney will respect that and forbid its licensees to take wagers from that country. But if the reason for the policy is "nationalistic," such as the case with Holland in its fight to protect its own online lottery, Alderney will permit its licensees to take wagers from that country.

Related Links
Global Interactive Gaming Summit & Expo (GIGSE) 2003