Tuesday, September 16, 2008

Some UIGEA fallout 

I still have no power. Good times.

But I just read this article pertaining to the Unlawful Internet Gambling Enforcement Act.


Bush Administration Moving to Block Second Life and Other Online "Games of Skill"

In 2006, Congress passed the "Unlawful Internet Gambling Enforcement Act." The bill was vaguely written and voted on months before the '06 election.

The bill's political purpose failed-- Republicans lost control of Congress, and the bill's primary House author, Rep. Jim Leach, was defeated in his reelection bid. Unfortunately, the law lives on.

This month, the regulations that will implement the 2006 act are nearing completion at the Federal Reserve and the U.S. Department of Treasury. The rules will significantly expand the reach of U.S. government oversight, bringing new scrutiny and enforcement activity to a wide range of online activities.

Broadly speaking, there are two areas of internet activity which the government intends to regulate. The first is online sports betting-- wagering on the outcome of sports events-- which is relatively easy to identify and control. Indeed, it is already very difficult to transfer funds to an online sports betting web site.

The second area targeted by the new regulations are "games of skill"-- such as online bridge or backgammon, some types of fantasy sports, predictive markets such as InTrade, and communities involving transactional activity like Second Life. This area is far more diverse and difficult to define, identify, and control. As the Federal Reserve itself noted in April testimony, “The activities that are permissible under the various Federal and State gambling laws are not well-settled and can be subject to varying interpretations,” and that both the new law and proposed regulations "did not specify what constitutes unlawful Internet gambling."

Because it is nearly impossible to ban actual web sites, which can be easily moved around the internet, the law targets the payment processing systems (bank credit cards, PayPal, etc) that make the internet economy work. The law makes banks evaluate your personal charges and block transactions which involve activity in these two areas. As Congressman Ron Paul testified in April,

"The regulations and underlying bill also force financial institutions to act as law enforcement officers. This is another pernicious trend that has accelerated in the aftermath of the Patriot Act, the deputization of private businesses to perform intrusive enforcement and surveillance functions that the federal government is unwilling to perform on its own."

To be clear, banks to not want this new burden. They bear liability under this new regime, and as a result will be very conservative when it comes to determining what types of web sites should be blocked under the regulations. Already, the U.S. Attorney's office has extracted tens of millions of dollars in fines through online gaming and related enforcement activities. For example, when eBay acquired PayPal in 2003, the company had to pay a $10 million fine to settle online gambling charges. And that was before the passage of the 2006 act substantially raised the stakes for the banking industry.

With the new rules under final consideration by the Bush Administration, the potential penalties will now expand to a broader category of internet activity, stifling innovation and economic growth online. The financial service providers will be even more risk-adverse and will implement blanket bans rather than take the risk of a case-by-case approach. The new federal rules will result in bans on processing for many activities such as low-stakes poker online, even though those activities are legal in most states.

Ground-breaking sites like Second Life will likely fall victim to this expanded reach. Second Life has a successful in-world economy that involves, in part, trading and developing real estate with other community members. The Second Life economic system has hundreds of thousands of users trading 5.3 billion "Linden dollars" which are freely convertible to U.S. dollars.

Liden Research has already moved to ban games of chance within Second Life, but the new regulations pose a threat to the fundamental economy of the site.

Given the new risks and burdens the proposed regulations places on the U.S. banking system, there is little difference between trading real estate in Second Life and other “games of skill” that the regulations target.

The new rules will clearly stifle innovation and the creation of new forms of online interaction. It will be impossible to distinguish new forms of collaborative economic activity from the wagering “games of skill” targeted by the law. For the payment processors, it won't be worth the legal risk to even try.

Further, these skill-based online activities will not only be banned for consenting U.S. adults, but for users accessing U.S. sites from anywhere in the world. Again, it does not matter if the “game of skill” is legal or not in the user's local jurisdiction. Federal law, as implemented by these new regulations, will make it illegal, and the feds are empowering your bank to analyze and block any offending transactions.

The new regulations also mean it will be more difficult for U.S. technology companies to operate on a global basis. It is a recipe for moving more technology companies offshore. Already one of the most innovative predictive futures markets covering U.S. elections, InTrade.com, operates in Ireland.

On Tuesday, September 16th, the House Financial Services Committee will hold an emergency mark-up of legislation that attempts to address this urgent matter. The bill is a compromise that will make online sports betting illegal, but delay the implementation of rules governing "games of skill." Instead, the bill would require formal rulemaking so that the impact of the new regulations on communities like Second Life can be fully understood.

Please consider taking action and Tell Congress to pass H.R. 6870 and oppose regulating internet games of skill.

All Content Copyright Iggy 2003-2007
Information on this site is intended for news and entertainment purposes only.

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