Betting on Cyberspace


David G. Post                                                                                                                Back to DPost home page
American Lawyer, "Plugging In," June 1997

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Although claims of the pervasiveness of sexually-oriented material on the Internet are usually vastly overstated, it is no secret that such material has been an important driving force in the development of the Internet, and that a not insubstantial portion of overall Internet usage is due to those looking for that kind of stuff. Nothing particularly unusual there; the development of many new technologies in the past -- movies and videocassettes are examples -- was driven, in their initial stages, by strong demand for sexually-oriented products. And the early stages of these technologies are often marked by pitched battles -- witness the battles in the first half of this century over movie censorship and, more recently, passage of the Communications Decency Act for Internet 'indecency' -- between the entrepreneurs rushing in to fill an immense pent-up consumer demand on the one hand, and the forces of law and the regulatory apparatus -- those primarily responsible for keeping that demand pent-up -- on the other.

But if Phase I of Internet commerce was about sex, Phase II will, I am reasonably certain, be about gambling. Gambling -- or "gaming," as we are now encouraged to call it -- is already a trillion dollar industry worldwide, and it shares several important characteristics with sex (at least as a commercial matter): with respect to both, consumer demand seems insatiable, and the means to satisfy that demand are, to at least a significant degree, suppressed by a comprehensive regulatory apparatus driven, at least partially, by moral concerns. Whenever a crack in that regulatory apparatus opens up, there's simply too much money to be made to expect entrepreneurs to sit on the sidelines for long. As evidence, I give you Foxwoods casino -- reportedly now the most successful gambling operation in the world -- and the other casinos that has opened up since the Indian Regulatory Gaming Act was passed in 1992, requiring States to negotiate with Indian tribes about casino operations on tribal property.

And the Internet certainly might be a regulatory crack of substantial proportions. U.S. law currently prohibits anyone "engaged in the business of betting or wagering knowingly us[ing] a wire communication facility for the transmission . . . of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or context," 18 USC §1084(a), and many States have similar prohibitions against long-distance gambling operations. But what is to stop someone from opening up the electronic version of Foxwoods Casino on a World Wide Web server located in some jurisdiction friendlier to gambling operations than, say, Biloxi, Mississippi or Minneapolis, Minnesota, but that is easily, cheaply, and *invisibly* accessible to residents of those cities?
 

hat, indeed. After all, a gambling operation in, say, Mexico does not violate Mississippi, Minnesota, or US law, for this law is not effective "extraterritorially" (i.e. outside the sovereign's borders). This becomes an interesting dilemma on the boundary-less Internet, where "extra-territorial" operations are just as accessible as those within any particular jurisdiction.

I am hardly the first to note the Internet's potential in this regard. As I write this, I am looking at a list (available on request) of over a dozen off-shore sites on the World Wide Web where customers, using real money, can place bets and receive gambling winnings. Small time stuff thus far, to be sure, but one doesn't need a crystal ball to see a possible tidal wave about to engulf the Net.

Many of those charged with ferreting out violators of these legal prohibitions certainly see the Net's potential. The National Association of [State] Attorneys General has called on the Federal government to vigorously step up its enforcement efforts in regard to Net gambling, and the Attorney General of Minnesota last year distributed a "Warning to All Internet Users and Providers" asserting that Minnesota would prosecute anyone offering Minnesota residents the opportunity to place bets on sporting events or participate in simulated casino games over the Internet. (Making good on his threats, he filed a civil injunctive action against one Internet gambling operation, Granite Gate Resorts, Inc., currently being heard in Minnesota state court).

And, predictably, just as sex on the Net led to the Communications Decency Act, Senator John Kyl (R-Ariz.) has recently introduced the "Internet Gambling Prohibition Act of 1997." This would "solve" the jurisdictional loophole by making it a federal crime not merely to operate an Internet gambling site (probably illegal already under 18 USC §1084), but also for any user to *access* a gambling operation over the Internet.

Now, what makes this particularly interesting is that gambling is more interesting than sex -- at least, from a financial and regulatory point of view. The zeal to regulate gambling has as much to do, one might reasonably suppose, with revenue as with morality. One doesn't have to be too cynical to think that the gambling regulators are not only concerned with protecting the health and welfare of their citizens, but alos the State fisc, which in many cases profits hansomely from a legally-enforced and State-run monopoly (e.g., Off Track Betting, lotteries, etc.).

And because of that, I predict that we will see a very different regulatory outcome regarding gambling. Someone in one of these State Attorney General offices in the not-too-distant future will stop and ask herself: what's really holding back the development of gambling on the Web? Think about it -- how much of your hard earned money are you going to put at risk at an operation that says, in effect, "click here and we'll spin an electronic roulette ball and tell you where it stopped in virtual space (using some program that we've written) and, by the way, if you think you've been defrauded that's too bad because you can't sue us or reach any of our assets, all of which are safely parked offshore"? Presumably, not much. There is an element of trust that is missing from this transaction, an element that is currently supplied by the regulatory apparatus itself; when I'm at Foxwoods, I know (or at least I assume) that someone has checked the roulette wheel and the slot machines and the decks of cards to make sure that everything is fair -- or at least predictably and reliably unfair, enough to give me a chance to hit the jackpot.
 

And this, in turn, will cause some clever regulator out there to realize that she has something to sell, that the State is well-positioned here to take a piece of the action as a trusted certifying authority, re-assuring consumers that activities are conducted honestly.

Net gambling presents, in other words, an entrepreneurial opportunity for the State itself.

As a matter of political and economic theory, regulatory activities are justified on the ground that they allow individuals to solve a problem of "collective action." We are all better off if we appoint an agent -- the State and its officers -- to coordinate individual activity by means of enforcement of collectively determined rules. The Net is interesting precisely because the State's advantage in playing that role has been weakened -- the agent is becoming ineffectual, because in a world without territorial boundaries its powers to enforce those collectively determined rules on participants is greatly weakened. The need for collective action, however, remains; people will be better off if they can find someone to perform this task. Gambling is a good example of this an example -- even the *gamblers* will see that they have a problem caused by the inability of anyone to enforce rules of conduct, and will be looking for someone to solve this problem. The State can step in, entrepreneurially servicing this demand for the services that it traditionally performs.

Of course, some will decline the opportunity -- like Sen. Kyl. But my guess is the pressure will be too great for many to withstand -- because others will fill this need if the regulators refuse to do so. There is no necessary reason that the *State* has to supply this certification -- why couldn't Microsoft? Citibank? (Check out the newly-formed "Interactive Gaming Council" at www.isa.net, a consortium formed by the Interactive Service Organization of gambling interests that appears to be moving to a form of private sector self-regulation as a means to solve the consumer trust problem). Facing this kind of competition from private regulators, I'm willing to bet (!) that the "Warning to Internet Users" may soon give way to "Welcome Internet Gamblers."