Lewis Silkin’s Wendy Saunders: Gambling in Crypto: The Next Revolution?

If the first technological revolution in gambling occurred in the 1990s with an explosion in virtual gambling, might crypto bring about the next gambling revolution? 

Before racing off to create new gambling products in crypto or accepting payments in crypto, it is worth considering how that might be captured under the existing legislative and regulatory framework and what some of the challenges and opportunities might be.

Risk Assessments and Customer Due Diligence

It is well known that criminals may use gambling and gaming websites to launder crypto representing the proceeds of crime.  Gambling operators that decide to accept crypto as a means of payment for gambling will need to update their risk assessments to take account of the new risks to their business being used for money laundering and terrorist financing.

By way of recap, casinos are regulated businesses for the purposes of anti-money laundering (AML) legislation.  Other gambling operators are subject to the general laws designed to guard against money laundering. However, all licensees in accordance with their license conditions (except those with gaming machine technical and gambling software licenses) have to:

• assess the risks of their business being used for money laundering and terrorist financing
• have appropriate policies, controls and procedures (PCPs) to prevent money laundering and terrorist financing
• ensure that PCPs are implemented effectively and remain effective.

In addition to carrying out risk assessments, most remote licensees must obtain and verify information in order to establish the identity of a customer before that customer is permitted to gamble. The information must include but is not restricted to, the customer’s name, address, and date of birth.  Gambling operators could face challenges in identifying the owners of e-wallets used to gamble with crypto.  The Gambling Commission in its Guidance for remote and non-remote casinos on the prevention of money laundering and combating the financing of terrorism (GC Guidance) specifically refers to the higher risk particularly applicable to remote casinos posed by e-wallets including those accepting crypto.

The GC Guidance also addresses ongoing monitoring requirements, including scrutiny of transactions and checking the source of funds where necessary to ensure that transactions are consistent with the casino’s knowledge of the customer, the customer’s business, and risk profile.  There are well-known potential difficulties in identifying the source of funds where crypto is used, as criminals may use anonymization services such as tumblers or mixers to prevent identification of the source of funds.  Casinos will need to consider carefully how to satisfy their AML obligations when accepting crypto as a means of payment. 

Lastly, a decision to accept crypto as a means of payment for gambling may need to be notified to the Gambling Commission, particularly where that could have a significant impact on the nature or structure of a licensee’s business.

Due Diligence on the Crypto Itself

The Gambling Commission reminds operators in its GC Guidance and Advice to operators (excluding casino operators) (GC Advice) of their obligations and duties under the Proceeds of Crime Act 2002 (POCA).  POCA creates several criminal offenses that apply to everyone and criminalizes any involvement in the proceeds of any crime if the person knows or suspects that the property is criminal property.  In short, the criminal property is a property that constitutes a person’s benefit from criminal conduct or represents such a benefit.  Gambling operators need to make sure that they do not accept a bet, stake, or funds on account which represent the proceeds of crime.

A specific condition addressing this point can be found in the licensing condition concerning the acceptance of payments, whereby specified licensees may only accept payment involving a payment service via an authorized payment service provider.  Providing payment services without being authorized is a criminal offense, and compliance with this licensing condition prevents a licensee from receiving criminal property by accepting payments via an intermediary that is not appropriately authorized.

So, what does this mean in the context of crypto?  The Financial Conduct Authority (FCA) published guidance in its Policy Statement 19/22 on which types of crypto assets were likely to be regulated and those that were likely to fall outside the scope of regulation.  Broadly speaking, the FCA identified three categories of crypto assets: security tokens, e-money tokens, and unregulated tokens. 

Which category a specific crypto asset falls into must be assessed on a case-by-case basis.  If a token is regulated, carrying out certain activities in relation to those tokens without appropriate authorization may constitute a criminal offense and any crypto resulting from such a criminal offense would constitute criminal property. Indeed, even if a crypto asset were unregulated if it were issued by a firm by way of business that was acting as a crypto asset exchange provider without being appropriately registered under AML legislation that crypto asset would also represent the proceeds of crime.  All of this means a gambling operator may wish to carry out careful due diligence prior to accepting any new crypto asset.

Additional Registration Needed under the MLRs 2017?

With effect from January 2020, following the UK’s implementation of the Fifth EU Money Laundering Directive, additional types of firms were brought within the scope of MLRs 2017 including crypto asset exchange providers and custodian wallet providers. 

Cryptoasset exchange providers include firms that by way of business:

• exchange, or arrange or make arrangements with a view to the exchange of, cryptoassets for money or money for cryptoassets;
• exchange, or arrange or make arrangements with a view to the exchange of, one cryptoasset for another, or
• operate a machine which utilises automated processes to exchange cryptoassets for money or money for cryptoassets
  • including where the firm provides any of the above services as creator or issuer of any of the cryptoassets involved.

Custodian wallet providers include firms that by way of business provide services to safeguard or safeguard and administer:

• cryptoassets on behalf of its customers; or
• private cryptographic keys on behalf of its customers in order to hold, store and transfer cryptoassets, when providing such services.

Gambling operators, prior to offering new products or services involving crypto, should consider whether those new products or services might require them to seek prior additional registration with the FCA as a crypto asset exchange provider or a custodian wallet provider.  It is interesting to note that in July 2021 the FCA published a memorandum of understanding that it has entered into with the Gambling Commission.

Pricing, Payout, Management of Stakes Held in Crypto

Even if a gambling operator has carried out appropriate due diligence to check that it is not inadvertently accepting the proceeds of crime by accepting crypto and that it either has or does not need additional registration with the FCA under AML legislation, the potential challenges do not end there.  Crypto is in general highly volatile.  What issues might this give rise to and how could this be managed?

 Licensees are subject to conditions concerning the protection of customer funds, including segregation of funds and disclosure concerning the protection of funds in the event of insolvency.  However, there are no provisions covering issues arising from the volatility that may attach to customer funds.  These will need to be addressed within the gambling contract between operator and customer. 

Such contracts will be subject to the Consumer Rights Act 2015 (CRA), or for contracts entered into prior to 1 October 2015 the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR).  However, the assessment of fairness under the CRA and UTCCR does not, in general, apply to the appropriateness or adequacy of the price or remuneration.  When drafting or revising terms concerning price, gambling operators will need to have regard to the Gambling Commission’s second licensing objective, “ensuring that gambling is conducted in a fair and open way”, and the licensing conditions on fair and transparent terms and practices.  In the context of volatile crypto, greater precision and detail may need to be included for example concerning the timing and method of calculation of payout, and respective liability for any delays in processing, etc. so as to avoid what could turn out to be costly contractual disputes.

Conclusion

So to wrap up, the key takeaways for gambling firms creating products or accepting payments in crypto to consider are:

• reviewing AML risk assessments and PCPs to check they adequately cover the risks associated with crypto
• whether it is necessary to undertake due diligence on a per cryptoasset basis to check they do not represent criminal property
• whether any new products or business model would require the firm to be registered with the FCA as a cryptoasset exchange provider or custodian wallet provider
• reviewing terms and conditions to check whether they are sufficiently transparent on pricing and appropriately allocate any liability that may arise from the volatility that is inherent in many cryptoassets.

The article is contributed by Wendy Saunders, legal director at law firm Lewis Silkin.