A far cry from the golden era of casino gambling, modern gaming primarily takes place on the internet. As digital transformation continues to drive gambling and gaming markets, some nations – notably, Canada – are leading the charge toward legalizing online casinos.
Influenced by Canada’s progressive take on gambling, other countries around the world have begun to liberalize their laws regulating online wagering. Many jurisdictions, including the United States, are now engaging in what has become an increasingly long and drawn-out battle over what rights and regulations should be applied to their gambling industry.
Canadian Gambling Policy Influences US Gaming Law
The Mohawk Territory of Kahnawake, a First Nations indigenous community near Montreal, set up a gaming commission in 1996. The Kahnawake Gaming Commission issued licenses for online poker and casino sites in Canada. This initial foray into regulated gaming expanded rapidly. By the end of 2020, a number of provinces were finalizing the legalization of online gaming.
While there is no reason to assume US gambling law will follow the lead of our northern neighbors, there is some precedent to suggest that Canadian gaming policy might influence American gambling. Michigan, for example, has a history of being heavily influenced by gaming activities occurring right across the border in Ontario.
A new age is dawning for Michigan’s online gambling industry. Just last year, Governor Gretchen Whitmer signed bills to legalize online gambling. Today, Michigan allows for online poker, sports betting, casino-style games, and fantasy sports contests. The fact that some US states are leading the charge on progressive gambling policy foreshadows further developments in this space. This is true irrespective of legal challenges and other issues arising with problems often associated with online gambling.
Practical Challenges to Liberalizing Gaming
Online gaming is constantly changing, as are the state and federal laws that govern it. In fact, America’s statutes contain some of the most complicated and involved online casino laws in the world, and while gambling law may seem like it would be a simple set of laws and policies, there are countless potential legal issues that can arise from making and taking bets, facilitating payments to casinos, and advertising on websites.
While gaming establishments have been able to develop solutions to the many transactional and enterprise-based legal issues that arise in their industry, the greatest challenge facing online gambling is convincing Congress to pass a supportive bill.
Congress Remains Skeptical of Online Gaming Trends
Legislators and regulators have expressed doubts over fairness in the online gaming realm. They have noted concern that game publishers may not accurately or honestly disclose the odds of winning various games. Policymakers are also leery that many of the mechanics and algorithms in these games target addictive tendencies. These concerns are compounded by the existing consumer protection and privacy concerns that accompany any online enterprise that deals with private financial information.
Both sides of the argument have been exhaustively debated, but as of now, a clear resolution on the federal level is unlikely. As such, the states have led the charge toward gaming liberalization since shifts in federal law opened the door to increased legalization nearly 20 years ago. Currently, there is no federal law that prohibits placing online wagers, so long as the website on which the wagering takes place and its underlying business structures are not located in the US. These activities, however, may be prohibited by state or local law, and much online betting remains subject to the federal Wire Act.
Federal law permits only offshore gambling that is strictly online (never over the phone or through other media) and restricts the activities to casino- and poker-style games. American banks are also forbidden from processing transactions from online gambling. Because of this illegality, sites have been reluctant to accept bets from players based in the United States.
States Experiment with Online Gaming Legalization
In 2002, the Fifth Circuit United States Court of Appeals ruled that the gambling prohibitions contained in the Federal Wire Act only apply to sports betting, and in 2011 the Department of Justice aligned its law enforcement approach with this stance. This opened a path for individual states to consider alternative forms of betting, such as online lottery sales, digital poker, and virtual casinos.
While sports betting had been expressly prohibited under the previous interpretation of the Federal Wire Act, the change in policy removed barriers to legalized, regulated sports wagering. In 2019, the Department of Justice revised its opinion on the Wire Act following a monumental Supreme Court decision that excluded sports betting from the federal ban. Since this time, a number of states have both opened the door for legalized sports betting and authorized online gaming activity.
Trends in Gambling Legalization Across US States
Each state governs its own relationship with online gambling. They have the power to decide under what conditions operators may be licensed – if at all. Attitudes and approaches towards the regulation of online gambling vary from state to state, but some trends are beginning to emerge.
For example, New Jersey and Pennsylvania have developed popular policies that embrace a tiered approach. Many other states have created their own gambling regulations, including New Hampshire, Rhode Island, Delaware, Washington, D.C., West Virginia, Tennessee, Illinois, Indiana, Iowa, Michigan, Colorado, Montana, Nevada, and Oregon. Each state varies as to whether they offer online sports betting, online casinos, online poker, or some combination of these activities. Some states have also taken special actions to protect consumers against potential fraud or abuse at the hands of online casinos. Michigan’s Lawful Internet Gaming Act requires internet gaming operators to design and implement fraud prevention technologies and imposes other limitations and restrictions on certain virtual activities.
The Realities of Online Gambling
The United States has been creeping toward increasingly liberal gambling regulation, spurring online wagering companies to base themselves in states that allow online gambling rather than offshore. Even so, internet casinos face a spider web of local and statewide regulations all designed to keep online gambling safe and ensure the legality of their operations.
Many companies, for instance, are requiring players to open an account and then verify their physical location using their IP address as well as other GPS or location-based data. Using this verification process, online casinos can determine whether a player is eligible to compete for real money based on the laws of his or her jurisdiction. In states that do not allow skill-based real money gaming, companies can use virtual currencies in place of real money.
Games of Chance vs. Games of Skill
In addition to verifying that their customers are in compliance with local online gambling laws, online casinos make efforts to clearly identify whether each activity that they offer qualifies as a “game of chance” or a “game of skill.” This is a critical legal distinction, and failing to identify the difference can make or break an online gambling business. The broad definitions are that:
- Games of skill are determined by the player’s mental or physical expertise.
- Games of chance rely on a randomized factor of any type.
Each jurisdiction defines “skill” differently, but rewards for games of skill are not regulated as gambling winnings. In general, to be considered gambling, all three of the following elements must be present:
- The activity involves an award of a prize
- Competing requires paid-in consideration (i.e. players must pay to enter)
- The outcome is determined by chance.
Games of skill online are not considered gambling in certain states where it is legal. However, failing to classify a game of chance properly could violate local law, and gaming regulations vary substantially state-by-state. Online gaming companies are responsible for knowing these distinctions and ensuring all games are fully compliant.
While online real-money games that include a large luck component remain illegal in most US states, they can be open to Canadian players by leasing space from the Kahnawake commission. Several offshore casinos have obtained these leases and are currently operating online. Their games include demonstrably chance-influenced games such as bingo, slots, and roulette. Associating with Native American tribes that operate as semi-autonomous nations within the US could provide a gateway for online casino operators to set up shop in this country as well. There are, of course, significant legal issues that must be ironed out, and we urge you to consult an attorney who is well-versed in real-money and skill-based games.
Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.