Blockchain-based sports betting is rapidly growing into a multi-billion dollar global industry. Global online sports gambling is predicted to reach $180 billion by 2030, so it’s no coincidence that blockchain-based startups have entered and disrupted the space.
Even the founder and former CEO of FanDuel launched a new blockchain-based sports betting platform that was recently licensed in Ireland, a country with a deep-rooted sports betting tradition and a leading innovator in the industry. .
The United States legalized sports gambling in 2018. Still, the Federal Wire Act of 1961 (also known as the Telegraph Act) and the Unlawful Internet Gaming Enforcement Act of 2006 remain in effect, even though they have done little to curb online sports betting. However, with blockchain-based sports gambling booming globally, this law could prevent it from entering the U.S. market.
Sports betting platforms that accept cryptocurrencies are different from blockchain-based sports betting platforms. When a sportsbook accepts cryptocurrencies, customers can fund their accounts using assets such as Bitcoin or Ether. These operators instantly convert crypto deposits to fiat and convert fiat back to crypto for withdrawals.
In the United States, this process is not practical due to tax implications.
In the case of a blockchain-based sportsbook, all deposits, wagers, payments, and withdrawals occur on the blockchain (an “on-chain sportsbook”). This means that when a customer bets on a game, that bet is sent to a smart contract and recorded on the appropriate blockchain, such as Ethereum (an “on-chain bet”). When the game ends, the results and other match data are queried by the smart contract in order to settle bets and distribute winnings.
wire method
A potential U.S. on-chain sportsbook cannot rely on the same narrative that the current U.S. sports gambling industry uses to protect its ability to offer sports gambling over the Internet. The Communications Act prohibits companies from using interstate communications technology to process sports betting. The law states that “any person engaged in the business of betting or gaming who knowingly uses wire communication facilities for the transmission of betting or wagering in interstate or foreign commerce” may be fined or imprisoned. states that it may be sent to
Although the Communications Act was enacted 30 years before the invention of the Internet, courts have held that the Act applies to Internet communications. That’s why legal online sportsbooks spend significant resources ensuring that they only accept bets from the states in which they are licensed.
In order for on-chain sportsbooks to operate legally under the Wire Act, they must not accept bets from bettors outside of the state in which they are licensed. This requires more than just geofencing your front-end website. If the sportsbook were truly on-chain, it would be creating its own smart contracts and deploying them on the blockchain.
Still, smart contracts can be accessed directly from your cryptocurrency wallet without the need for a sportsbook front-end website. By implementing smart contracts, sportsbooks recognize that bettors in other states can operate smart contracts and place bets using interstate wires (the Internet).
One example illustrates the legal risks of creating and deploying smart contracts that violate federal law. The Department of Justice recently arrested the blockchain developer behind Tornado Cash as an OFAC-accredited person or region, even though the developer had geofenced his website from such users. accused of creating and deploying smart contracts that allowed the use of popular cryptocurrency mixers.
The Internet is also designed to seek the most efficient means of delivering “data packets” (stakes) regardless of state borders. As a result, electronic communications between a bettor and a state-licensed sportsbook may at some point be able to communicate across state lines, even if neither the bettor nor the computer server does.
Uigea
The online sports gambling industry contends that the UIGEA makes abundantly clear Congress’ intent to accommodate intrastate online gaming by defining “intermediate routing.” The UIGEA prohibits companies engaged in gambling and gambling from knowingly accepting payments in connection with another person’s participation in illegal internet gambling, but states:[t]Intermediate routing of electronic data does not determine where bets or bets are placed, received or otherwise placed. ”
In other words, intermediate routing is the term used for transmissions that travel between points within the same state but are routed intermediately outside of that state. If both points are in a state where online sports gambling is legal, it’s probably not illegal internet gambling.
On-chain sportsbooks should not rely on UIGEA’s defenses. On-chain bets are not ephemerally routed by the internet in the same way as data packets. Smart contracts on public blockchains such as Ethereum exist on nodes distributed around the world. On-chain bets placed on an on-chain sportsbook not only transit through the blockchain temporarily, but are also stored on every node of the blockchain, which is hosted on computer servers around the world.
Even before the game, on-chain stakes must be recorded on the blockchain. When the game ends, the mining node smartly executes his contract and settles the stake. There is no guarantee that the node that recorded the initial on-chain bet and the node that settles the bet are in the same state that the on-chain sportsbook is licensed.
There may be a way for on-chain sportsbooks to operate legally in the United States. For example, Soulbound NFTs could potentially be used as proof of state residency to prevent interstate gambling, or limit on-chain wagering within a state through the use of a layer 2 blockchain running on top of a public blockchain. It may be possible.
Alternatively, on-chain sportsbooks could work with state gaming commissions and compliance departments to create their own private/permissioned blockchains. Perhaps the first iteration of a legal on-chain sportsbook in the United States is a P2P sports betting exchange.
The scale of the global blockchain-based sports betting industry is too large for U.S. sportsbooks and state governments to ignore. If nothing is done, the Wire Act will continue to hamper the U.S. sports betting industry as untapped revenue and taxes flow into the illegal market.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author information
Samir Patel is an innovation and technology attorney at Holland & Knight.
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