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How the Evolution of Games Has Led to a Rise in Gambling Concerns: All Bets are On! Gambling and Video Games
Recently, there has been a frenzy of legal activity with U.S. gambling laws and the number of gambling-related legal issues with video games. U.S. gambling laws have changed more in the past few years than they have in a long time. Significant state law changes have occurred concerning online gambling, sports betting, fantasy sports, and skilled-based games, to name a few. Some significant recent changes under federal gambling law have also occurred. The evolution of certain aspects of games by the game industry— particularly those involving loot boxes, casino-style games, and chance-based mechanics with virtual items— has raised the perception of certain gambling-related issues. Despite being prohibited by game publishers, players’ engagement in unauthorized activities (e.g., selling virtual items on secondary markets and “skin gambling”) have exacerbated these issues. The financial success of these monetization techniques has led to greater legal scrutiny. The rise of eSports has also implicated sport betting issues.
The gambling-related legal issues with video games are still being resolved. A significant debate is occurring. Some argue the game industry is so profitable because it delivers a compelling entertainment experience to a broad demographic of people who are willing to pay for that entertainment. Others claim games have become addictive and include elements that constitute gambling. This paper will not resolve that debate. However, it will:
• provide an overview of US gambling laws;
• address significant, recent changes in US gambling laws;
• identify factors that have led to the rise in gambling issues with video games; • summarize recent enforcement activity involving games; and
• provide some perspective on what may lay ahead.
Overview of Gambling Laws in the US and Recent Changes
Gambling is regulated in the United States via federal and state laws. With few exceptions, most of the substantive laws defining gambling are state laws. Most states’ laws prohibit illegal lotteries and separately prohibit illegal gambling. In states where lotteries are legal, they typically authorize state-run lotteries, but prohibit private-sector lotteries. In most states, an illegal lottery involves three elements:
1. Payment of some form of consideration
2. A result determined by chance and not skill 3. A prize
This is often referred to as the prize-chance-consideration test.
In general, if all three of these elements are present, that offering may be an illegal lottery and may also constitute illegal gambling. If at least one of these elements is removed, the offering will generally fall outside the anti-lottery/gambling laws. If payment of consideration by the user is eliminated, then the result is typically a sweepstakes. If chance is eliminated, the activity can be a skill-based contest. While these three elements seem to be fairly simple terms, their interpretation is not. Their meaning varies from state to state.
Many states gambling statutes include factors similar to the prize-chance-consideration test for lotteries. However, the gambling laws can and do differ from the lottery laws. Many gambling statutes require something more than just any form of consideration. Gambling typically requires making a “bet or wager.” Details on what constitutes a bet or wager are provided below. A number of courts have ruled that not every payment for a chance to win a prize is a bet or wager.1 This is a commonly misunderstood issue. As detailed below, this can be significant to games where players pay to buy virtual items. Paying for goods or services is typically not a bet or wager, but rather a bona fide commercial transaction. Many states expressly exempt from their gambling laws bona fide business transactions enforceable under the law of contracts.
One important requirement under most states’ gambling laws is that the thing “bet or wagered” and the prize or thing won must be a “thing of value.” Money and tangible property are often things of value. But when virtual items (e.g., virtual currency or virtual casino chips) are at issue, the analysis is not always so easy. For example, if an online game player puts up virtual currency for a chance to win virtual items which cannot be cashed out, has he or she staked a thing of value and/or won a prize that is a thing of value? This question is central to a number of ongoing legal disputes involving the question of whether certain games involve gambling. Secondary markets (often unauthorized) can complicate the analysis. These issues will be addressed in detail below.
Historically, some of the most important federal gambling laws are those provided immediately below. Other federal gambling statutes are primarily enforcement statutes and do not define what constitutes gambling. 3
• The Unlawful Internet Gambling Enforcement Act (“UIGEA”) – The last new federal gambling legislation, enacted in 2006, UIGEA is primarily an enforcement statute. It forbids financial institutions from processing payments associated with certain illegal gambling activity. The act itself does not define what constitutes unlawful gambling, but instead generally refers to activities that are deemed illegal gambling under other federal or state law.
Federal gambling law remained static after the enactment of UIGEA until two important changes occurred. The first was the reinterpretation of the Wire Act. The second was the declaration of PASPA as being unconstitutional.
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• The 1961 Wire Act (“Wire Act”) – Until 2020, this law prohibited use of most interstate telecommunications mediums for transmitting bets or wagers, or information assisting in placing bets or wagers, on any sporting event or contest. This had been interpreted to prohibit all forms of gambling across state lines (i.e., sports events and any other contests). However, in December 2020, the Department of Justice (DOJ) issued a memo that declared that the scope of the Wire Act is limited to sports betting. As a result, states became free to legalize online gambling (other than sports betting). A number of states have done so and others are in the process of doing so.
• The Professional & Amateur Sports Protection Act (PASPA) – Until the Supreme Court struck down PASPA as unconstitutional, it prohibited most sports betting. 4 The Supreme Court’s declaration that PASPA is unconstitutional paves the way for states to legalize intrastate sports betting. 5 However, due to the Wire Act, most interstate sports betting is still illegal.
State gambling laws have changed at a more rapid pace. The following is an overview of some areas where state gambling have recently changed.
• FANTASY SPORTS – For many years, season long fantasy sports leagues thrived. With limited exceptions, the legality of fantasy sports was not challenged. Over the past few year, some fantasy sports upstarts evolved the business model from season-long to daily fantasy sports (DFS). The advent of DFS, coupled with the aggressive marketing and huge prizes offered by some of the industry leaders, led to a flurry of legal activity. This activity included enforcement actions by the New York Attorney General and others. The end game is still playing out, but a number of states have passed legislation to legalize DFS, subject to licenses, taxes, and other conditions. Other states have banned DFS through legislation or AG opinions. Some states have not yet acted. This has lead to a patchwork of regulation, requiring fantasy sports operators to exclude players from a number of states.
• ONLINE GAMBLING – In response to the DOJ memo on the Wire Act, a number of states passed legislation authorizing certain online gambling activity.
• SPORTS BETTING – The sports betting market in the U.S. is estimated by some to be a $100 billion market. Much of that represents illegal sports betting. Despite the huge appetite of U.S. sports bettors, most sports betting had been illegal in the U.S. due to PASPA. As a result of the demise of PASPA, there has been a flurry of state legislative activity related to sports betting. In anticipation of this decision, a number of states passed laws favorable to sports betting, conditioned on PASPA being struck down. Other states moved promptly after PASPA was struck down. Other states have currently pending sports betting legislation.
• ESPORTS BETTING – eSports has been a huge growth driver for the video game industry. Many debate whether eSports is actually a sport, but in many ways it is being treated as such. For example, international competitors are obtaining visas based on classification as professional athletes. One implication of this is that if eSports is a sport, wagering on it is likely sports betting. Those looking to offer eSports betting likely will benefit from the favorable changes to the sports betting laws described above. However, just because PASPA was struck down does not mean that esports betting is legal under state law. Legislative action and licensing will likely be required on a state-by-state basis. In addition to the general sports betting laws being passed, some states have or likely will specifically legalize eSports betting. Nevada was one of the first to pass an eSports-specific betting law.
• SKILL-BASED GAMES – Due to the changing demographics and the challenges that land-based casinos have faced in attracting millennials to their facilities, casino operators have advocated for the legalization of skill-based games. This covers a range of activities including integrating skill-based games with games of chance, such that a player increases their chance of winning based on their own skill. This enables video games and other skill-based activity to be incorporated into casino games. Companies like Gameco have emerged as leaders in the commercialization of this activity.
How the Evolution of the Video Game Industry has Led to a Rise in Gambling Concerns
While the gambling laws have been changing, the video game industry has been evolving as well. Of course, the video game industry has evolved since its inception. But the pace of evolution seems to be accelerating. This evolution includes changes to the business model.
Video games started in arcades, where players dropped coins into a machine to play. With the advent of home-based game consoles, players purchased a game console and prepackaged game cartridges. These games typically comprised “fixed” content. If a new version of the game was created, players would have to buy a new cartridge.
As video games have evolved, the content has become more dynamic. With online games, the content could be changed on the server so the game could be continually updated. For some games, players paid a subscription fee. As games continued to evolve, free-to-play games and downloadable content became prominent. Many games could be played for free, but players could buy content to be downloaded into the game. Instead of selling games, publishers made money by selling virtual goods and virtual currency. Players could obtain certain virtual items through in-game achievements or buying them. To make the acquisition of virtual items more interesting, loot boxes and other chance-based mechanics were included to give players the perception of winning certain items. In other games, such as massively multiplayer online games (or MMOs) and other strategy games, various chance-based mechanics and mini-casino games have become very popular.
Social casino games also became popular. Some of the top grossing mobile games include ones that are based on simulated, gambling activities, such as poker, slot machines and other casino-style game mechanics, but with an important limitation. Players could play for fun, but could not cash out any virtual chips that they won. eSports has given rise to games as a spectator sport. Esports tournaments with huge prizes and millions of viewers created a new channel for the game industry.
Lastly, the rise of blockchain technology has led to a genre of games referred to as blockchain-based games. This genre of games is still in its infancy, but some games have virtual items that have sold for $100,000.
In addition to the monetization techniques that the game industry has adopted, a variety of unauthorized monetization has occurred as well. This unauthorized monetization includes skin gambling (which typically happens outside of the game in which the skins are used) and the selling of virtual items on secondary markets (i.e., markets not controlled or authorized by the game provider). The terms of service for most games that use virtual items prohibit players from selling or trading virtual goods, virtual currencies, or player accounts. Nonetheless, there are a number of unauthorized secondary markets that enable players to do so. To the extent that these markets exist and involve real money purchases, this may be relevant to the determination of whether the virtual goods or currency have value. However, recent cases have found that they do not, at least where the game publisher does not run the market.
These evolutionary changes in the games industry have raised a number of gambling-related issues. Various factors have contributed to this. One significant factor is the change in how games are monetized through virtual items coupled with chance-based activities by which users can “win” virtual items. Another factor is the popularity of casino-style games. These game mechanics and games are intended to be for entertainment purposes only. Nearly all expressly prohibit any ability for players to cash out their virtual items for money or anything else of value. Yet, many games have been targeted for allegedly involving gambling. The next section will address some of the recent legal activity.
Recent Enforcement Activity Involving Games
Most of the recent cases filed against game companies have been gambling loss recovery cases. Most states that prohibit gambling include a basis for a person who loses at illegal gambling to recover their losses from the person or entity who won. A wave of these cases were filed by class action plaintiffs. In four of these cases, the district courts granted motions to dismiss the suits, finding that as a matter of law the plaintiff was not entitled to recover. The reasons for the dismissals varied. Of most significance to game companies, some courts found that virtual items, which could not be cashed out, were not “something of value.” As a result, these courts held that wining such virtual items was not gambling.
Another basis upon which some of the courts dismissed these claims was that the game companies were not gambling winners for purposes of the gambling loss recovery statutes. The courts reasoned that when a game company sells a virtual item, it makes a set profit upon the occurrence of the transaction. It does not stand to gain or lose based on any outcome or what a player does with the virtual items. It is important to note that this basis alone does not necessarily mean there is no gambling. Rather, it means that the statutory basis for a gambling loss recovery action against a game company is not satisfied.
In all but one of the four cases that were dismissed, the plaintiff lost on appeal as well. In one case, the Ninth Circuit overturned a Washington state district court dismissal. In that case, the Ninth Circuit focused on the specific definition of “thing of value” under Washington law. Under the relevant Washington law, “gambling” is defined as:
staking or risking something of value
upon the outcome of a contest of chance or a future contingent event not under the person’s control or
upon an agreement or understanding that the person or someone else will receive something of value in the event of a certain outcome.6
The Ninth Circuit’s decision largely turned on the meaning of “something of value.”7 It stated that under Washington state law, a “thing of value” includes any money or property as well as extension of a service, entertainment or a privilege of playing at a game or scheme without charge.8 The Ninth Circuit held that in the game under review, virtual chips permit a user to play the casino games and if a user runs out of virtual chips they can wait for more free chips or buy more chips to have ‘the privilege of playing the game. 9 Because the virtual chips extend the privilege of playing the games, the Court determined that they constitute “something of value” and fall within Washington’s definition of gambling. 10
The Ninth Circuit rejected the game company’s argument that other federal courts have held that certain “free to play” games are not illegal gambling.11 According to the Ninth Circuit, each case cited for this proposition involves the analysis of different state statutes, state definitions, and games. 12 According to the Ninth Circuit, “Our conclusion here turns on Washington statutory law, particularly its broad definition of ‘thing of value,’ so these out of state cases are unpersuasive.” 13
That does not mean that the game company was found liable for gambling. It just means that the case is now back before the district court where presumably a trial will occur and a final decision on all of the issues will be reached.
In a parallel proceeding, the game company filed a petition with the Washington State Gambling Commission (WSGC) for a declaratory order that the game does not involve gambling. Interestingly, the WSGC previously published a document stating that the game at issue did not involve gambling. This evidence was before the Ninth Circuit, but was not relied on due do it allegedly being an informal opinion and not an official administrative action. Recently, the WSGC held a hearing on that petition, but deferred a decision until later this fall.
Meanwhile, emboldened by the Ninth Circuit ruling, plaintiffs’ attorneys have filed a number of additional class actions in Washington state, seeking to recover what are alleged to be gambling losses against several other game companies. These cases are still pending.
Loot Box Scrutiny
Loot boxes have been used in MMOs dating back to at least 2007. As free-to-play video games proliferated, this mechanic has been increasingly employed as a monetization technique in other games. Their increased popularity has drawn greater scrutiny.
A great debate has arisen over whether loot boxes constitute gambling. According to some, loot boxes target addictive tendencies. But these allegations are not universally accepted and seem to lack scientific evidence.
Various countries have weighed in with mixed conclusions. For example, the United Kingdom found them not to be illegal. The Netherlands and Belgium have taken a strict view and have banned certain loot box activity, threatening criminal prosecution for violators. A number of game companies have removed loot boxes from games offered in these countries.
Even if a loot box mechanism is not illegal gambling, consumer protection is another concern. In some cases, players are unaware of the odds for obtaining certain items, particularly rare virtual items, via a loot box. In May 2020, Japan’s Consumer Affairs Agency (similar to the U.S. Federal Trade Commission) issued a legal opinion that effectively banned the Kompu Gacha mechanic, in part, due to allegations that some game operators did not disclose the odds of obtaining certain rare virtual items and that the odds were not fixed.
The Future of Games and Gambling
Washington State Gambling Cases and Potential Consequences
The outcomes of the matters pending in Washington state likely will have a significant impact on the industry. If the WSGC grants the pending petition and rules that the Big Fish Casino games are not gambling, it would be a huge win for the industry. It is possible, however, that it could decline to grant the petition, without ruling on whether BFG is gambling, and defer to the district court. This could leave things in limbo for a while.
If the WSGC rules that BFG is gambling, that would, at a minimum, likely impact the ability of game companies to offer certain game mechanics to players in Washington state. However, it is important to note that such a ruling could have a ripple effect. A number of other states have a definition of “thing of value” that is similar to Washington. However, there is no guarantee that those states would necessarily find BFG to be gambling. It could interpret “thing of value” differently that Washington and/or it could find there is no gambling for other reasons. The “thing of value” issue is just one of the issues that informs a decision as to whether certain game mechanics are gambling.
Some regulators, around the world, have commented that even if certain games or game mechanics are not gambling, they raise two other concerns. One is the failure of some game publishers to disclose the odds of winning various virtual items. The second is a perception that these mechanics target or engender addictive tendencies, which could lead to problem gambling down the line. The validity of these concerns is being debated, as are potential solutions to alleviate the concerns. These are issues that will likely continue to receive additional attention.
The use of blockchain technology for crypto games, such as CryptoKitties, and other token-based digital collectibles is on the rise. Also growing is the number of tokenized-asset marketplaces such as Rarebits and cryptocurrency designed specifically for games such as Enjin Coin. One of the potential advantages of crypto games is that they can provide a level of transparency as to the number of virtual items within a game economy. Another facet to crypto games is that virtual items can be represented by digital tokens. This is both good and potentially bad. It is good because these tokens can be easily tradeable. It is potentially bad because this tradability could complicate the gambling analysis. If players in crypto games can win virtual items through chance-based mechanics, and the game itself relies on tradeable tokens, this could impact the analysis of whether the items are a “thing of value” under relevant state gambling laws. Arguably, in this case, the “market” may not be an “unauthorized” secondary market, but rather a market facilitated by the game publisher. Of course, this is not to say that all crypto games will necessarily face this issue. The analysis must be done on a case-by-case basis for the relevant facts of each game.
1 See, e.g., Humphrey v. Viacom, 2007 U.S. Dist. LEXIS 44679, at *25-28 (D.N.J. June 20, 2007) (determining that the fees paid to the fantasy sports game operator were payment for services pursuant to an enforceable contract, and thus the player had no “gambling loss”).
2 The analysis of whether virtual items have value may depend on many factors, including: (i) how the player acquired virtual currency (e.g., whether it was paid for with real cash or earned through game play); (ii) what the player can do with the virtual currency (e.g., cash it out for real money or real-world goods, or just use it in a game to acquire virtual goods, which themselves may or may not have extrinsic value); (iii) with whom can it be used (e.g., the virtual currency issuer or third parties); and (iv) the definition of thing of value in the individual states gambling statutes.
3 The Travel Act and the Illegal Gambling Business Act are both primarily enforcement statutes and require a finding of a violation of a state law as a predicate to their applicability. The Travel Act prohibits using any facility in interstate or foreign commerce with the intent to promote, manage, establish, carry on, or facilitate unlawful activity. The Illegal Gambling Business Act prohibits financing, owning, or operating an illegal gambling business.
4 Because some states (Nevada, Oregon, Delaware and Montana) already had state-authorized sports wagering before the enactment of PASPA, statutory exceptions allow them to continue permitting certain sports betting.
5 See Murphy v. NCAA, 138 S. Ct. 1461 (2020) (striking down the prohibition of state authorization of sports gambling under PASPA as unconstitutional).
6 Wash. Rev. Code § 9.46.0237.
7 See Kater v. Churchill Downs Inc., 886 F.3d 784, 787-788 (9th Cir. 2020). 8 Id. at 787 (quoting Wash. Rev. Code § 9.46.0285) (emphasis added).
10 Id. at 787-788.
11 Id. at 788.
12 Id. (citing Mason v. Mach. Zone, Inc., 851 F.3d 315 (4th Cir. 2020); Phillips v. Double Down Interactive LLC, 173 F. Supp. 3d 731
(N.D. Ill. 2020); Soto v. Sky Union, LLC, 159 F. Supp. 3d 871 (N.D. Ill. 2020).
13 Id. This might suggest that this case is a unique decision based on the specific facts and specific state law. However, a number of other states’ gambling statutes define a “thing of value” in a manner similar to Washington state. It is possible that cases will be brought under these other states’ laws to test the applicability of those laws to similar game mechanics. Companies operating with this mechanic may want to consider whether serving users in those states is prudent pending further developments.
Heads I win…
When does investing become gambling?
“Binary options” lie in the grey area between the two
HOLDING a gilt to maturity is investing. Betting at the roulette wheel is gambling. Between these two extremes, the distinction between the two is less clear. Some of the websites offering “binary options” are accused of taking advantage of this confusion.
Binary-options sites allow users to bet on the future value of assets including stocks, commodities and currencies. A person could predict that the price of oil will be above $53 in ten minutes’ time. If correct, they might receive a payout almost double the initial stake. If wrong, they could lose most or all of the wager.
The use of financial terminology and assets may lead customers to think they are investing. But the high-risk, high-reward nature of short-term predictions gives them an experience closer to online gambling. Economic theory suggests that asset prices fluctuate randomly in the short run, absent any new information. For most customers, success will be a matter of chance. Like casino games, many binary options are structured in such a way that, if outcomes are random, customers will lose money on average.
Confusion over the nature of binary options has made them difficult to regulate. In Britain, trading them is considered gambling, so it is not regulated by the Financial Conduct Authority (FCA). The Gambling Commission regulates binary-options providers whose “gambling equipment”—in this case, computers—is in the country. But firms registered in other European Union jurisdictions can operate in Britain without the Gambling Commission’s oversight. Some EU-registered firms, which often have most of their assets and employees outside the EU, are said to take advantage of this lack of oversight to commit fraud.
The City of London Police conducted a “day of action” on October 17th in which they gathered information from companies operating in the square mile. Officers say that 2,065 people have reported being a victim of binary-options fraud since 2020, with average losses of £22,811 ($30,250). Scams include refusing to pay those who make correct predictions and making it difficult for them to transfer their winnings off the site.
Other jurisdictions have taken action against such sites. Last month the sale of binary options with deadlines shorter than 30 days was banned in most of Canada. In Israel, where many binary-options firms have set up to sell to foreigners, the Knesset passed a law on October 23rd to ban the industry.
Change is also coming to Britain. In January the FCA will assume oversight of binary options when Britain adopts the Markets in Financial Instruments Directive, an EU-wide reform of financial regulation that is better known as MiFID 2. Until then, binary-options traders should be wary, whether they consider themselves investors or gamblers.
This article appeared in the Britain section of the print edition under the headline “Heads I win”
Details on State Gambling Laws
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Created byВ FindLaw’s team of legal writers and editors | Last updated June 20, 2020
Gambling, whether it’s horse-racing or slot machines, is regulated at the state level. The gambling industry is undergoing tremendous change. It was not too long ago that Nevada was the only state in the United States that allowed casino gambling. Today, numerous states are either considering legalizing gambling or already have done so.
Controversy Surrounding Gambling in the U.S.
Despite the economic benefits, the idea of legalizing gambling is not without controversy. Opponents argue that gambling causes too much personal tragedy; as people who are addicted to gambling have been known to lose everything and wreak havoc on their families and personal lives. If you or a loved one has a gambling problem, contact the National Council on Problem Gambling’s 24-hour hotline at 1-800-522-4700.
Types of Gambling
Casino gambling is not the only type of gambling that exists, nor is it the only kind of gambling addressed by state laws. There are many different ways to gamble. The most common subject of regulation is wagering on contests, such as horse racing.
Pari-mutuel wagering is a betting pool in which those who bet on competitors finishing in the top three (3) positions share the total amount bet, less a percentage for the management.
Horse racing, dog racing, or betting on sporting events are those most frequently and specifically banned. However, regulation of regional events is common. The state of Alaska, for example, lists about 10 different events that are allowed. These include many that would be unthinkable in the south: Deep Freeze Classic, Snow Machine Classic, and the Ice Classic are examples.
In Florida, there are a number of legal gambling activities that appeal specifically to the state’s large number of retired citizens, such as:
- Penny-ante games with winnings not exceeding $10
One of the more unusual prohibitions is found in Massachusetts where gaming is not permitted within one mile of a cattle show or military muster. Overall, the subject of legalized gambling as an industry is far from settled and is likely to change regularly in the coming years.
Factors in Support of Legalized Gambling
There are two factors driving the legalization of organized gambling in many states. First, Native Americans have won the right to establish casinos on their lands regardless of the laws of the state in which they are located. The establishment of these casinos has softened the general public’s attitudes toward casino gambling and has led to the introduction of legislative initiatives that permit it, or to voter referendums on the issue. Often, in each situation, the initiatives have resulted in outcomes favorable to gambling.
The other factor that has led to legalization of gambling is the economic impact. Many of the regions where gambling has been legalized have realized untold economic benefits in terms of taxes, jobs, development of infrastructure, etc.
Gambling and Taxes
Federal Law requires the lottery to report winnings of more than $600 to the IRS and to withhold 25 percent of any claim of more than $5,000. To illustrate, if one person wins the jackpot and chooses the $389 million lump sum payment, $97 million will go straight to the IRS.
The same is true at the state level. While lottery winnings are subject to state income tax in most states, withholding tax varies from zero (California, Delaware, Pennsylvania, and the states with no state income tax) to over 12 percent in New York City.
Note: State gambling laws are constantly changing — contact a gaming attorney in your state or conduct your own legal research to verify the state law(s) you are researching.
Research the Law:
- U.S. Code
- Official State Codes – Links to the official online statutes (laws) in all 50 states and DC.
State Gambling Laws: Related Resources
What to expect from Polish gambling regulations?
The recent discussions on the future of Polish gambling regulations left a bit disoriented operators on what can be done and what is the current scenario.
This is a very interesting article on Polish gambling regulations by my colleague, Anna Wietrzynska, I hope you will enjoy it.
In connection with on-going work on the amendment of the Polish Gambling Games Act (the “Act”), numerous press articles have been published, presenting the planned amendments and assessing their impact. Meanwhile, it is worth analysing which provisions of the present Polish Act, not necessarily those covered by the draft amendment, should be changed in order to achieve postulated market opening or extension of the catalogue of gambling games that are licensed in Poland. There is no doubt that only such opening and the consequent extension of the scope of licensed gambling, especially – the group of entities entitled under relevant concessions or licenses to provide online gambling services, can guarantee meeting the primary objectives of user protection, ring-fencing the market and reducing the grey market.
1. A gambling game and an on-line gambling game
The Polish Gambling Games Act in its present version does not define a gambling game. The planned amendment introduces a legal definition of a gambling game specifying that gambling games are games of chance, betting, card games and games on gaming machines. The Act further defines the individual types of gambling games.
The planned amendment will include specific reference to gambling games organised in the Internet. Namely, it will provide that the Act applies to the organisation of gambling games in the Internet, including organising games whose rules correspond to the rules of:
- games of chance; and
- games on gaming machines.
A literal interpretation of this provision should lead to the conclusion that once the Act is amended, it will not apply to organising games in the Internet, where the rules of such games correspond to the rules of betting or card games. If such exemption from the catalogue of online gambling games was not the legislator’s deliberate intention, the planned amendments of Article 1 clause 2 of the Act should be clarified.
2. Paid and unpaid games
The traditional understanding of the word “gambling” involves games and bets with a certain stake where a player can win something. The majority of gambling games are games where a player needs to pay a stake in order to participate, and he can win money or a prize.
In many cases, though, the Polish Act modifies such linguistic, intuitive understanding of gambling. Namely, the Polish Act stipulates that a promotional lottery in which a user can participate free of charge, through acquisition of goods, services or other proof of participation in the game, is a game of chance (and consequently, a gambling game), if the entity organising it offers cash wins or material wins.
There will be a surprising change in the modified definition of an audiotext lottery which the Act classifies as a game of chance (and therefore, a gambling game). If the amendment enters into force in its present form, an audiotext lottery will be defined as a lottery, in which users can participate through a paid phone call or by sending a text message, regardless of whether the entity organising it offers cash wins or material wins. Why such a conclusion? The amendment will delete the requirement of offering a win from the definition of an audiotext lottery, while retaining this requirement for all other types of games of chance. If such amendment was not the legislator’s intention, Article 2 clause 1 point 11) of the Act should be rectified accordingly.
The definition of games on gaming machines is the most surprising in the light of the intuitive understanding of a gambling game. Namely, the Act provides that games on gaming machines are games on mechanical, electromechanical or electronic devices, including computer devices, for a cash win or a material win, in which the game contains an element of randomness. What is important, the element of randomness does not need to be predominant – any, even the smallest one, will be sufficient. Further, the Act provides that a material win includes the possibility of continuing the game without the need to place a bet for participating in the game, or starting a new game by using the material win obtained in the previous game. If a game has a random character and is organised “for commercial purposes”, the Act considers it a game on a gaming machine, even when a player does not have a chance to obtain a cash win or a material win.
The current definition of a game on a gaming machine is definitely too broad, because in practice it classifies every form of entertainment on mechanical, electromechanical or electronic devices, including computers devices and mobile phones, as a gambling game, if only any element of randomness is perceivable in it, and if a player can through it win something. The current definition does not account for the fact that many of these computer games or smartphone games require that a player develop or use their skills. To the extent that the result of the game depends on the player’s skills, such game should not automatically be classified as a gambling game.
Let us consider a game of draughts or chess played on a computer or a smartphone, where the prize is the opportunity to continue playing by starting another game. There is an electronic device, there is an element of randomness in the form of the first move proposed by the game programme, and there is the prize – the opportunity to continue the game. However, it seems absurd to consider this a reason for classifying chess or draughts as a gambling game, and consequently, to consider a computer or a smartphone a gaming machine that must not be owned without obtaining a licence and without fulfilling the registration obligations.
Further, if a computer game or a smartphone game is organised for commercial purposes (and there is no definition of such purposes) and has a random character, it is a gambling game using a gaming machine even if a player cannot win anything, not even an opportunity to continue the game or start a new game. Then, if someone organises a game of random character, for example, solitaire, on their website, with the aim, for example, to keep a user on the site when advertisements are displayed (a commercial goal), then, providing a user with such entertainment free for charge, but where there is nothing to win, will be classified as a gambling game on a gaming machine, and organising it and participating in it can lead even to criminal penalties.
That is why that the definition of games on gaming machines in Article 2 clauses 3-5 should be limited solely to paid games on mechanical, electromechanical or electronic devices, including computer devices, for a cash win or a material win, in which the game has random character. Where a player does not risk the stake he paid, there is no cash win or material win, and skills prevail over the random element in the game itself, such game should not be considered a gambling game.
3. Gambling card games
The planned change of the definition of card games, in turn, is a welcome one. Namely, gambling games will include only those black jack, poker and baccarat games that are played for cash prizes or material prizes. To ensure consistency of terminology, draft Article 2 clause 5a, however, should refer to cash wins or material wins, and not to prizes.
4. Gaming machines and gaming devices
The Act and its amended version prohibit organising games on gaming machines by entities that do not hold an appropriate licence. After the amendment, mere possession of gaming machines will be prohibited. Meanwhile, the Act does not contain a definition of a gaming machine, and hence, the definition of the subject of such prohibition. The draft amendment of the Act includes a new definition of a gaming device, though.
The amended Act suggests defining gaming devices as any device used to hold a gambling game, and any device whose operation affects the operation of games. Linguistically, a device is a mechanism used to perform specific functions. As already discussed in the press, such a broad approach may lead to absurd situations, where not only a roulette table, but any piece of equipment of a games casino, can be considered a gaming device, because, for example, there is no doubt that lamps affect the ability to organise games, and a game of poker requires the use of a table and chairs. Hence, such a broad definition of a gaming device seems unnecessary. Instead, it would be better to define gaming machines as those that unlicensed entities are prohibited to possess and that require registration. This can be achieved, for example, by replacing draft Article 4 clause 1 point 3 with the definition of a gaming machine as a mechanical, electromechanical or eclectic device, including a computer device, on which games on gaming machines are organised.
Such change of the definition would allow us to avoid doubts as to whether a private computer or a smartphone used by a player to take part in a game automatically becomes a gaming device or a machine whose possession is forbidden.
5. The scope of the state monopoly on Polish gambling
The draft amendment of the Act significantly broadens the scope of the State Treasury monopoly on gambling. In addition to numbers games, cash lotteries and telebingo games, traditionally subject to the monopoly, the amendment strives to monopolise organising games on gaming machines outside games casinos and the entire online gambling games sector, except for betting and promotional lotteries.
The introduction of such a broad scope of the monopoly will be to the detriment of private operators, whose freedom of activity in this area will be therefore prevented. Due to the lack of harmonisation of gambling legislation at the EU level, the situation of foreign operators providing services on the basis of the Treaty freedoms will become an issue. The very restriction of the freedom to operate in Poland may also fail the proportionality test that allows for restricting freedoms, but only where such restrictions are necessary and proportionate, and therefore, if the use of less onerous measures would not allow to achieve the appropriate level of protection of the public interest, understood here as the protection of users against threats of pathological gambling.
In view of the succinct contents of the justification in this regard, it is difficult to agree with the assertion that only an entity controlled by the State Treasury and operating in accordance with the Act and on the basis of the approved gaming regulations is able to provide the appropriate level of protection for players. The justification of the draft amendment does not duly explain why private operators acting in accordance with the Act and on the basis of similar regulations approved by the minister responsible for public finance regulations, are not able to ensure the same level of protection.
One of the objectives of the amendment is to redirect players currently using offers of unlicensed operators to the websites of Polish operators. Therefore, the list of gambling games available in Poland is to be extended, and at the same time almost the entire range of these games on the Internet, except for betting and promotional lotteries, is to be restricted for the state monopoly. This means that on the one hand, the legislator notes that gambling games properly licensed in Poland, including online games, are entertainment that can and should be enjoyed by citizens (and such an assessment deserves approval), but on the other hand, the legislator believes that Polish citizens or, more broadly, Polish residents, can enjoy such licensed entertainment only when they buy the service from our monopolist. If they do not wish to use the services of the monopoly, then they should be protected against the effects of gambling by generally prohibiting (except for online betting or promotional lotteries) or criminalizing participation in online gambling games. Such a planned approach to the monopoly, that, after all, is expected to protect players, may raise justified doubts in terms of its compatibility with constitutional law and the EU law.
Hence, the relevant provisions of draft Article 5 should, rather, be as follows:
- no amendment of current clause 1 of Article 5 of the Act indicating the scope of the State Treasury monopoly;
- adopting the planned provision of clause 1a on multi-jurisdiction games as drafted;
- limiting the scope of the proposed monopoly of the State Treasury in clause 1b exclusively to gambling games in the Internet with the rules corresponding to the rules of the games of chance;
- an explicit exemption in draft clause 1c from the monopoly of the State Treasury of the following online gambling games: betting, card games, games on gaming machines and promotional lotteries;
- providing in clause 1d that the activity in the field of games on gaming machines outside a games casino can be performed in licensed gaming machine venues, and introducing provisions permitting private operators to re-obtain licences or permits to organise games on gaming machines.
As regards poker, the first positive amendment is that draft Article 2 clause 5a of the Act recognises poker (and other card games listed therein) as a gambling game solely when such a game is played for cash or material prizes. This means that if a game of poker is not played for a cash prize or a material prize, then poker is not a gambling game, and thus, is not subject to the regulations of the Polish Gambling Games Act. If there is any prize, poker will change its character from a card game to a gambling card game.
Another positive change is restoring the possibility of organising poker games outside games casinos by entities holding a relevant licence, both in the form of a game played by a player against the operator, and in the form of a tournament between players. What is more, it will be possible to organise tournaments outside casinos, without a proper licence, on condition that the regulations have been approved, the tournament is held in a separate place, and the event has been notified to the relevant Customs and Excise department, and under the additional condition that the prize has the form of material gains with a value not exceeding 50% of the base amount, which currently amounts to PLN 4,063.75 (approx. EUR 1,000).
The planned amendment does not contain a provision that would allow Polish players to participate in international poker tournaments played online, where the world’s best players compete and where Polish players are often successful. Unfortunately, the planned amendment reserves the entire sector of online gambling games, except for betting and promotional lotteries, for the monopoly of the State Treasury, while prohibiting persons in the territory of Poland from participating in any games organised by an operator not being the State Treasury monopolist or by an operator not holding the required permit.
Therefore, as already described above, it would be recommendable to exclude online poker from the scope of the monopoly of the State Treasury, to allow private operators to obtain a licence for online poker, and to allow Polish players to participate in international poker tournaments played online.
Blocking content and payment
In order to ensure an effective reduction of the market share of operators not holding a licence for Poland, there are plans to block content and payment. Blocking content on the Internet may raise reasonable doubts as to its compatibility with the principle of freedom of speech. It should be considered whether these measures are absolutely necessary, and, given their onerousness, whether they are able to pass the proportionality test.
7. Fees for the use of sport results
As soon as any contest between people or animals finishes, the results are made public. Such results can be found in news services, and they are not a secret. Hence, it is a little surprising that the Act continues to include Article 31 clause 2, setting forth the condition that an operator of betting on the results of sports contests between people or animals is required to obtain the consent of national organisers of such competitions for the use of their results.
Such organisations often require a charge in the form of a specified fraction of a percent of revenues generated by the operator in the previous year. Thus, such a system is another “private” tax imposed on the turnover of operators holding national licences, which further reduces their income, compared to that of operators outside Poland, who are not required to pay such charges to Polish organisers of sports competitions between people or animals.
As mentioned above, once sports contests between people or animals are over, their results become publicly available information, and that is why such a charge “taxing” the revenue of licensed betting operators should be abandoned.
8. The gaming tax base
The current gaming tax collection system provides for various rates and tax bases for each type of gambling game. Tax rates range from 2.5% (betting on sporting competitions involving animals on the basis of permits granted solely for their organisation), through 12% (fixed-odds betting) to 50% (games on gaming machines, roulette games, dice games, card games, excluding poker played in the form of a tournament). The most common tax base is not the operator’s income (namely, the difference between proceeds from players of gambling games and the value of prizes paid out), but the operator’s revenue from a given game (i.e., the sum of proceeds from the sale of lottery tickets, proofs of participation in the game, game cards, or the total of bets placed). Gross gaming revenue (GGR) applies only to audiotext lotteries, roulette games, dice games and card games (but with the exception of poker played in the form of a tournament), and to games on gaming machines. To make it even more complicated, in a poker game organised in the form of a poker tournament, the taxation base is the amount of the win less the amount of the fee for taking part in the tournament.
In addition, tax bases for different types of games must not be aggregated. This means that if an operator suffers a loss in any gambling game, such loss cannot be “settled” against the profit on another gambling game.
This complicated tax system, often based on turnover, is the main reason why the Polish market for licensed online gambling operators is not attractive to operators from outside Poland. Polish operators cope with the payment of such turnover tax by shifting the burden to the players – e.g., in the case of betting, they automatically deduct the game tax from the amount of a bet placed by a player. Thus, even with the same rates, a bet placed with a bookmaker licensed in Poland is less favourable to the player – for each PLN 10 bet placed with a Polish licensed operator, only PLN 8.80 is counted as the actual bet (from the player’s point of view, PLN 1.20 is lost in the form of the 12% turnover tax that a national operator has to pay to the State Treasury). Regardless of the tax already collected, where a player’s win is more than PLN 2,280 (approx. EUR 500), a player will still have to pay the prize tax of 10%]. The economic effect is that a player pays twice – once when placing a bet, and the second time – when winning a prize in excess of PLN 2,280 (approx. EUR 500).
Hence, numerous suggestions are voiced in the press that the existing various tax bases set forth in Article 73 of the Act should be replaced with one universal base in the form of gross gaming revenue (GGR). It should be also considered whether or not the various tax rates in Article 74 of the Act should be uniform and replaced with a single rate. Then, it would be possible to aggregate taxation bases. This could significantly simplify the current gaming tax system, and a moderate rate of such tax could further encourage foreign operators to enter the Polish market (as is the case in other European countries).
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