I. Introduction
As a business model, the gambling trade is viable and potentially lucrative: offer a few people the chance to win big, but on average, make your customers lose. Traditional brick-and-mortar casinos can offer gamblers the security of knowing the games are not fixed, and that the gamblers' losses are due either to their lack of skill, the odds against them, or a combination of both. Such assurance comes from oversight entities, which regulate the objective nature of the games and have broad enforcement powers. Besides the table games, such entities are empowered to test electronic games—for example, to test the random number generators in video poker or slot machines to determine they are truly random. However, the market for online gambling, estimated between $600 million and $4.2 billion, which is expected to surpass $10 billion within the next few years, lacks such oversight.
This Note discusses the problems inherent in online gambling as a function of their medium of delivery to the gambler. First, I will briefly explore some public policy reasons that lawmakers advance to justify eliminating gambling on the Internet. Regulation of cyber-gambling as an alternative to its outright banning is not examined in detail in this Note. Second, I will discuss current legislative developments to address these issues. Finally, I will speculate about how these developments will affect the future of Internet gambling.
II. Reasons to Ban Internet Gambling
A. Cheating
Perhaps the most obvious need for eliminating gambling on the Internet stems from the potential for cheating. This consumer-protective argument is often advanced, but as I postulate, it is also a pretext. There are two basic methods for cheating at online gambling: humans cheating humans, and computers cheating humans. The problem in collecting empirical evidence about the rates at which each occurs is readily apparent: successful cheaters are not caught. Although little is known about the prevalence of such cheating, the first method undoubtedly occurs quite frequently; the latter might not occur at all.
The inherent potential for human players of casino-type card games to cheat each other while playing over the Internet are so astounding, one might wonder why an individual would play by himself at all. Consider Texas Hold'em, a popular card game, and widely considered the "Cadillac of Poker" for its high stakes. Games are generally limited to ten players at a table, excluding the dealer. If a table is full, and the maximum number of collaborators—nine—is working together (either in a physical offline room, or communicating by phone or online messaging), they have access to eighteen of the fifty-two potential cards that have been initially dealt. This is a huge advantage in deciding whether to fold or bet, and pursuing such a strategy will result in maximization of wins and minimization of losses. Undoubtedly, there are a great number of people utilizing this technique.
It is more difficult to determine whether electronic cheating exists. I use the term "electronic cheating" to refer to instances where the program lacks true randomness. The simplest example is an online slot machine. It would be simple to program such an application that has zero probability of hitting the highest jackpot. Since hitting the jackpot is a rare occurrence anyway, most players would not expect to hit it, and would never know that it was an impossibility. The exception, of course, is a player who played all day, every day; eventually, he surely would get suspicious. Because e-casinos have no incentive or duty to publish their algorithms for determining randomness or payout rates (indeed, this would be detrimental to their business and would aid hackers in cheating them), no one is the wiser. Suffice it to say that in a business where customers hope to win but expect to lose, structuring a system where loss is ensured would probably arouse few suspicions.
If cheating is so easy and so prevalent, why would one gamble on the Internet at all? One explanation is that everyone is cheating, in which case any advantage one had would cancel out. Intrinsically and from personal observation, this cannot be the case. An alternative explanation is that even if cheating is so easy, it has not proliferated the online gambling industry. Declarations by online casinos do not carry much weight—it is in their own best interests to assure gamblers of their security. However, casinos do have an interest in keeping gamblers coming back. This would seem to indicate that established online gambling providers would not cheat their clients. But as previously discussed, since clients are expecting to lose, cheating is unlikely to be detected, and therefore, unlikely to deter repeat business. Even if we assume established e-casinos that have built a reputation for online gambling safety will not cheat, opportunistic "fly-by-night" e-casino entrepreneurs should seek to enter the marketplace because startup costs are so low (requiring programming experience and some relatively inexpensive computing equipment), and potential customers may have no way to differentiate among the Internet gambling sites. Another hypothesis advanced is that many e-gamblers are in it just for fun, and do not care if they lose a little money. This may very well be the case, but it seems inherent in gambling that the participants would rather win than lose. A final theory put forward is that online gamblers are addicted and have little control over their habit.
I believe these arguments are a pretext for banning or regulating online gambling. Since the obviousness of cheating is so great, consumers must necessarily consider that it occurs before choosing to gamble on the Internet. My argument is that people can simply choose not to gamble or can choose which sites to gamble on. In that respect, consumers are in the best position to protect themselves, and the theory of caveat emptor applies. In a recent case, the court appears to be leaning this way. When two gamblers sued the companies that issued the credit cards the gamblers used to bet over the Internet, the court refused to apply RICO (commonly invoked for illegal gambling), stating that the plaintiffs who made a conscious choice to gamble on the Internet "simply [were] not victims." The only consumer unable to protect himself is the addicted e-gambler.
B. Social Stigma Regarding Gambling
Many moral and religious concerns have been voiced against gambling as a social evil or sin. Whether or not gambling is viewed as an addiction, in general, it can be considered a social activity in live table games. Internet gambling lacks this socialization aspect. Instead, it fosters isolation by making it easy for gambling addicts to play without leaving their homes. In that respect, opponents of Internet gambling argue, allowing it to continue damages our society.
C. States' Rights
This final justification is what I believe to be the core reason for regulating or banning online gambling. States have long been able to regulate gambling within their borders, which is why we have gambling havens like Las Vegas and Atlantic City. To lure casinos there, states offer incentives. The justification for allowing this legal vice: tax revenue.
Because online gambling is technically illegal in the United States, online casinos operate offshore, typically in the Caribbean. Because money flows directly from gamblers' bank accounts to the online casinos, they avoid paying those greedy middlemen, the state governments. Instead of presenting the argument this way, it is often phrased in the context of federalism—since states are allowed to control what happens within the confines of their borders, an international corporation with a virtual presence within the state circumvents the state's sovereignty. Online casinos present a unique problem in this context because even if a state were allowed to legalize online gambling, there is nothing to prevent people in other states from accessing the website. There are interstate issues present with ISPs because signals are often routed through several states. To avoid a problem with the Commerce Clause of the Constitution vis à vis a state passing laws restricting foreign commerce, federal legislation is in order.
III. Legal Developments in the Elimination of Online Gambling
There are two current pieces of legislation pending in Congress that address the elimination of Internet gambling: H.R. 2143 and H.R. 21. A related bill, H.R. 1223, which would create a commission on Internet gambling licensing and regulation, will not be discussed here.
A. H.R. 2143
The Unlawful Internet Gambling Funding Prohibition Act passed the House of Representatives in June 2003 and is now awaiting action in the Senate Committee on Banking, Housing, and Urban Affairs (S. 7716). The bill requires financial institutions to take steps to identify and block gambling-related transactions that are transmitted through their payment systems. H.R. 2143 does not change which Internet gambling activities are legal or illegal; rather, it uses existing substantive law.
B. H.R. 21
This measure, proposed in January of 2003, prohibits the use of certain bank instruments, including credit cards and wire services, in online gambling. No action has been taken on this bill since May 2003, when the House Committee on the Judiciary reported favorably upon it. The bill creates a new crime—accepting the instrument transfer—and is enforceable by injunction against financial institutions or ISPs to block the illegal transfers going through their systems. Criminal penalties include up to five years' imprisonment and/or fines. The bill also establishes civil penalties.
IV. The Future of Online Gambling
It is important to note the extent to which the proposed measures address the previously discussed problems with online gambling. Obviously, if it is illegal, there are no concerns with cheating. Eliminating Internet gambling also addresses the social stigma issues. Banning online gambling deals with federalism concerns in an overinclusive way: by forbidding it completely, states cannot make an allowance for e-gambling within their own borders, even though they can allow casinos. However, the ultimate effect the proposed legislation will have is dependent on the government's ability to enforce the laws.
Because no current enforcement mechanism exists to stop online gambling, it is difficult, if not impossible, to predict the outcome that the new laws will have if enacted. The anonymity of the Internet is a complicated barrier to overcome. Indeed, the recent decision in which the District of Columbia Court of Appeals ruled that the RIAA could not force ISPs to disclose their users who illegally downloaded music suggests that the government will face similar problems trying to get ISPs to disclose users who illegally gamble on the Internet. Foreseeing this, it seems, the proposed legislation targets the companies themselves, and not individual gamblers. However, this is dependent in large part on cooperation from foreign nations, who have the adverse incentive to keep sites open if the companies headquartered there pay income tax.
As was shown with illegal music sites, they can go up as fast as they can be shut down by their ISPs. If this is the case, no single company will be allowed to build a good reputation, which could ultimately lead to solely fly-by-night operations as previously discussed.
An alternative to prohibiting online gambling that has been suggested is regulation. If the industry is regulated, cheating could be monitored, access by children and problem gamblers could be restricted and some tax revenue could be generated, thus ameliorating some of the major problems. This approach is still met with opposition because it does not address the moral or religious concerns about the inherent evils of gambling.
Because of this uncertainty, the future of gambling on the Internet in the United States is unclear. Whether the elimination measures will succeed or whether they will give way to a regulatory scheme is indistinct: one might say that it's a crapshoot.
