Kibo, the (self-proclaimed) world’s first decentralised lottery using blockchain technology, recently launched an “initial coin offering” to raise funds to develop its online platform. In light of this potentially revolutionary funding round, we discuss whether the use of blockchain technology might solve problems faced by online gambling sites, and what regulatory challenges may arise.

For an explanation (or reminder) of what blockchain technology is, and some of the main legal issues that it presents, see our introduction to blockchain article.

Hasn’t the Gambling Commission already accepted that Bitcoin can be used in gambling?

Crypto-currencies such as Bitcoin are just one of the many use cases for blockchain technology. In Great Britain, the Gambling Commission has considered whether gambling using crypto-currencies gives rise to any special issues. It has stated a clear view that digital currencies are “money or money’s worth” under the Gambling Act 2005 and that their use in gambling does therefore constitute real money gambling. It has also identified “concerns about how well licensees will be able to implement effective controls to manage risks associated with digital currencies”. Accordingly, while licence condition 5.1 of the Commission’s Licence conditions and codes of practice (LCCP) now explicitly recognises that “digital currencies” may be used, licensed operators working with Bitcoin and other virtual currencies may need to implement additional policies and procedures to reduce the risk of money laundering activity and/or breaches of LCCP social responsibility requirements.

Initiatives like Kibo highlight a much broader potential for blockchain technology to be used within the gambling industry – not in terms of the currency used for gambling, but rather in the underlying mechanisms for operating and recording gambling transactions. Those behind Kibo claim that blockchain and smart contracts offer a solution to “critical issues” in traditional arrangements that currently prevent participants being given a 100% guarantee of honesty and full transparency as to the award of winnings.

What issues does the online gambling industry face?

The perceived deficiencies identified by Kibo’s operators include, amongst other things, issues around the deduction of third party charges from winnings and the lack of availability of payment methods in some territories. However, chief among the issues that blockchain technology can potentially address are the issues of fairness and transparency:

  • Fairness of result/draw: In a traditional online gambling environment, players have no way of checking the fairness of any draw or result. They have to rely solely on trust and whatever checks and audits are in place under the regulatory regime applicable to the operator.
  • Transparency as to payouts: Similarly, players typically cannot verify for themselves that winnings in a lottery are distributed honestly.

Does blockchain have the answer?

Blockchain technology certainly appears to have many characteristics that address these issues. By virtue of its decentralised nature, blockchain is not controlled by a single user, making it almost impossible to alter the underlying data. Verifying transactions or trades over a network ensures that no single player holds an advantage at any stage of the gambling process. This provides greater resilience against fraud and prevents manipulation of records in the ‘chain’. Transactions on the blockchain are also transparent to others in the network, and are therefore verifiable.

This technology accordingly offers the concept of ‘provable fairness’, allowing all lottery entries, all bets and all payouts ever made within a blockchain network to be viewable and verifiable. Rather than lottery draws and casino game logic taking place effectively within the operator’s “black box”, game-play algorithms can be baked into a blockchain-based smart contract that all participants can access.

Importantly, smart contracts also appear to offer the ability for random-number generation (RNG) to take place in an entirely decentralised and verifiable way. Further, even where RNG is not fully decentralised, blockchain technology can allow players to review the RNG process by which a particular card was drawn or die rolled (including the associated data – the hashes and the ‘nonce’) in order to allow them to verify fairness for themselves.

Blockchain-enabled transparency can also extend to formation and distribution of the prize fund. This could potentially be relevant in the context of betting exchange activity, where every transaction or bet is conducted on a person-to-person basis. The need for an intermediary operator to access any participant’s money is obviated, as smart contracts can set the rules of the game, record the bets and automatically pay out the relevant winnings. Clearly, this would on the face of it benefit players, who could receive (accurately calculated) winnings almost instantly and without substantial (or any) deduction or third party fees. The code that underpins the smart contract – and hardwires the rules of the game – should also be available, further enhancing transparency.

Regulatory challenges

The use of decentralised blockchain technologies in a gambling context offers some tantalising potential benefits, but will also pose a number of regulatory challenges, both for operators and for regulators. For instance:

  • Locations of “remote gambling equipment”: Whether a country’s gambling regulator has jurisdiction over a particular remote gambling operator may be determined by various factors, including in some cases whether the operator has “remote gambling equipment” within the territory. Where blockchain is used, key functions such as RNG and transaction record storage will by definition take place in a decentralised way. This means they will operate across multiple pieces of IT equipment, potentially in multiple jurisdictions across the world. This puts the activity at risk of being caught by multiple regulator regimes. In Great Britain, for instance, equipment containing gambling transaction records or RNG functions would be regarded as “remote gambling equipment”. So to the extent any part of the relevant blockchain network sits within Great Britain, gambling activity conducted on it would appear to be caught by, and require licensing under, the Gambling Act 2005 – even if the gambling is not targeted at the British market.
  • Regulatory access to remote gambling equipment: If multiple computers within a blockchain network do in fact amount to “remote gambling equipment”, this may raise issues for licensees where they are required to permit regulators to inspect their remote gambling equipment.
  • Testing: Regulators and third party testing businesses will likely need to establish new protocols and standards for testing blockchain-based gambling activities.
  • Anonymity: While Kibo’s marketing materials trumpet the possibility of playing and winning anonymously, this is a feature that will not sit well within many gambling regulatory regimes. It is hard to see, apart from anything else, how anonymous participation would readily allow for effective anti-money laundering processes, age checks and self-exclusion facilities.
  • Void bets: Regulators such as the Gambling Commission can have powers to void unfair bets – for instance where cheating is established to have taken place in a race. Betting transactions enabled and processed through a blockchain-based smart contract could automatically pay out on the event’s initial outcome. Mechanisms would need to be put in place to allow for reconciliation if a bet is voided.

Regulatory advantages

Notwithstanding the potential challenges of adapting existing regulatory frameworks to embrace blockchain-enabled activity, regulators may also have some cause to welcome the technology. This is because:

  • It will give them access to the same information as the organisations they regulate.
  • Digitised transactions can be audited in real time, instead of, say, annually.
  • It will become easier to trace transactions.

Traditionally, the statistical fairness of an operator’s random number generator has needed to be tested and certified by an approved, trusted third party provider. Now, however, the blockchain technology itself can provide evidence of verifiable randomness, as the public ledger generates and records the random numbers, rather than the operator’s side server. In effect, the due diligence, compliance checks, testing and certification processes currently conducted by a regulator or trusted third party can all be transferred to the decentralised ledger.

What are the challenges to adoption?

Alongside regulatory concerns, there are inevitably other barriers to widespread adoption of this technology.

  • Technological limitations: As one might anticipate, blockchain requires significant processing power and has high initial capital set-up costs. Depending on the technical capacity available, the number of transactions or bets that can be conducted in a given period may be limited. Over time, and with technological advances, this is likely to change and become less of an obstacle.
  • Crypto-currencies: Whilst there may be compelling arguments for the use of crypto-currencies in this space, this comes with its own challenges. We have seen before (with Bitcoin and Silk Road) that currencies which are not controlled by a central authority, and which can effectively be traded almost anonymously by individuals, are liable to misuse.
  • Understanding and knowledge: This technology is nascent. Industry expertise is not yet widespread and public understanding lags further behind. Operators will need to take a lead role in educating players, particularly if blockchain is going to be what sets them apart from their competitors. Not only that, blockchains rely on the existence of a network – generating sufficient interest and publicity to drive the necessary levels of uptake may also present a challenge.

What will this mean for the adoption of blockchain?

Despite the challenges, this emerging technology is generating a huge amount of interest amongst the tech (and wider) communities. It is widely predicted to transform virtually every industry over the next five to ten years (and beyond), gambling included.

By its nature, the technology has the potential to empower players by improving the transparency and fairness of online gambling. Of the barriers to adoption, we envisage the regulatory issues being most problematic. However, we have already seen steps being taken in places like the Isle of Man, where laws adopted in 2016 have been specifically amended to allow gambling operators and casinos to accept crypto-currencies as an equivalent to fiat currency. If regulatory hurdles can be overcome, it seems reasonable to conclude that we will see increased adoption of a fully self-sustaining blockchain gaming ecosystem, where every aspect of the supply chain – from the games themselves to the players and operators – is recorded, monitored and audited on the same blockchain.