Tuesday, March 4, 2008 - The Progress & Freedom Foundation Blog

Net gambling & online speech / commerce enforcement challenges in general

I have long been intrigued with the effort to regulate online gaming activities because it represents the most sophisticated effort by our government yet to eradicate a specific class of online speech or commerce. (My TLF colleague Tom Bell has done seminal work in this field). In her weekly "The Regulators" column, The Washington Post's outstanding regulatory columnist Cindy Skrzycki writes about the enforcement challenges at work here:

It's not easy making rules for a U.S. law intended to deter illegal Internet gambling by choking off the flow of funds to offshore sites. That's because no one seems to agree on what the law covers. Officials at the Treasury Department and the Federal Reserve found that out after sifting through more than 200 comments from banks, gamblers, church groups and members of Congress on recommendations for the Unlawful Internet Gambling Enforcement Act of 2006. The basic sentiment was that their Oct. 4 proposal, which depends on financial institution enforcement, won't work.

The outcome will affect 23 million online gamblers, some 2,500 Internet sites and the growth of an industry with an estimated $15 billion in annual global revenue. The law bars financial institutions from processing payments involving Internet gambling -- with the notable exceptions of Indian gaming, state gaming and horse racing. "If the federal agencies themselves cannot agree on the law, what hope is there that banks can resolve these confounding legal issues?" the American Bankers Association said in commenting on a conflict between the Treasury and Justice departments on the legality of betting on horses. The Washington trade group said the suggested rules are more likely to catch its members in a compliance trap than stop profits from illegal gambling from escaping offshore.

The enforcement challenges here come about for the same reasons I identified in my unpublished book on "The End of Censorship." Namely, scale, volume, and convergence issues make efforts to bottle up certain types of speech or commerce on the Internet extremely difficult. The advantage regulators have going for them when it comes to Internet gaming, however, is that money is changing hands. And when money changes hands, financial intermediaries are relied upon to clear those transactions. And that provides a chokepoint that regulators put their thumbs on in an effort to control "illegal" activities.

Still, it isn't easy. Frank Fahrenkopf Jr., president and chief executive of the American Gaming Association, tells Skrzycki that many privately owned offshore sites continue to let Americans wager, win and lose. "Money is fungible, and it gets to where it wants to go," Fahrenkopf said. "I don't know of prohibition of anything that ever worked."

Moreover, the endless loopholes that some gaming sectors seek and win only complicated matters. Traditional casinos, state lotteries and horse racing are all exempted. Skrzycki quotes a business law professor on this point:

"What is legal now?" Joseph Kelly, a professor of business law at the State University of New York College at Buffalo and an expert in online gambling, said in an interview. "God only knows."

And speaking of God--or at least morality--there are all sorts of thorny moral issues in play here that I haven't even discussed. (More on that here). But, increasingly, when it comes to issues of online speech and e-commerce control, I don't even bother getting into those morality issues. I just focus on the enforcement challenges at hand and try to point out that there are probably better ways to deal with the "problems" at hand than through unworkable regulatory schemes.

posted by Adam Thierer @ 9:37 AM | E-commerce , Free Speech , Gambling , Internet Governance