North American Gaming Regulators Association Annual Conference June

North American Gaming Regulators Association Annual Conference – June 9 -12, 2014 Presented by: Lawrence G. Walters, Esq. WWW. G AME A TTORNEYS. COM

The Beginnings of Alternative Currency • Virtual currency has been attempted since the inception of the Internet • Beenz. com famously failed in 2001 • Bitcoin, in 2009, brought with it a resurgence of “altcoins”

History of Bitcoin • November 2009: Satoshi Nakamoto published “Bitcoin: A Peer-To-Peer Electronic Cash System” • January 2009: “Genesis Block” mined • Bitcoin meant to be: secure, nonregulated, decentralized anonymous • Cannot be created or destroyed

Bitcoin Today • Negative press and uncertainty: • Silk Road • Closure of Mt. Gox • Volatility of exchange rate • However: • Large, publicly traded hedge funds investing

Bitcoin Today, cont. • Bitcoin ATM unveiled on Capitol Hill • Major websites accepting Bitcoin:

Other Alternative Currency • Coin. Market. Cap. com keeps track of various altcoins Major players after Bitcoin: • Litecoin • Peer. Coin • Ripple • Dogecoin

Contemporary Regulatory Climate • IRS position: Bitcoin “property, ” not “currency” • Federal Judge found Bitcoin is form of “money” • U. S. Dept. of Justice: Bitcoins could be considered “legal means of exchange”

“The fact is that virtual currencies are unlikely to disappear entirely. As such, turning a blind eye and failing to put in place guardrails for virtual currency firms while consumers use that product is simply not a tenable strategy for regulators. ” -Benjamin Lawsky, New York’s Superintendent of Financial Service

Regulatory Climate, cont. • • New York planning “regulated” Bitcoin exchanges ATLAS ATS, a Bitcoin trading platform, has partnered with the National Stock Exchange

Regulatory Climate, cont. • New York may attempt to adapt existing laws for virtual currency • Lawsky most concerned with money laundering and secondarily, tax issues

Regulatory Climate, cont. • • • U. S. Treasury Dept. Fin. CEN: individual miners/users are not ‘Money Service Businesses; ’ Exchanges are MSB’s Accepting virtual currency may trigger AML and KYC obligations Steve Stockman (R-TX) unveiled “Virtual Currency Tax Reform Act” to change status of altcoins to currency

Recent Developments • Senator Joe Machin (D-W. Va) called for all-out ban on Bitcoin: “This virtual currency is currently unregulated and has allowed users to participate in illicit activity, while also being highly unstable and disruptive to our economy. ”

Recent Developments • Former Obama Adviser Larry Summers: “Serious mistake” to “write off” Bitcoin • Bloomberg terminal gets Bitcoin: investors believe this might stabilize price

Recent Developments • FEC allows political groups to accept Bitcoin donations • $100 contribution limit person per electoral cycle • Dish Network begins accepting Bitcoin

Recent Developments • e. Bay CEO John Donahoe: “I think there's no doubt digital currency is going to play an important role going forward, and at Pay. Pal, we're going to have to integrate digital currencies into our wallet. ” • Facebook users can now send and receive Bitcoin payments • Apple opens door to Bitcoin applications

Bitcoin & Gaming: The Explosion • Satoshi. Dice launched in 2012 • Estimates claim online gambling accounts for nearly half of all Bitcoin transactions • Online gamers betting billions of dollars on Bitcoin sites • Coin. Desk: Legal online gambling is next major Bitcoin market

Popularity of Bitcoin & Gaming • For the consumer: • • • Anonymity Winnings received immediately Uniformity of currency Operators generally take lower cuts Transparency of transaction

Popularity, cont. • For the operator: • Low transaction costs • Game integration • No charge backs • Widespread customer availability

Developments In Regulated Jurisdictions • Licensed sites accepting Bitcoin from known customers • • Winpoker Gaming regulators prohibiting/warning against the use of Bitcoin • Vera&John began accepting Bitcoin payments • Subsequently asked by Malta’s Lotteries and Gaming Authority to cease accepting Bitcoin until regulations are promulgated

Issues Facing Gaming Regulators • Altcoins are here to stay! • Need for regulator development of effective, coherent policies: • Reconciling anonymity of altcoins with Know Your Customer (KYC) obligations • Maintaining proper AML, accounting and financial reports • Enforcing compulsive gambling exclusions and underage prohibitions

Potential Approaches • Prohibition • Often initial reaction to unknown • Rarely works • May encourage underground operations • Customers may not understand objections, especially if they have existing relationship with company

Potential Approaches • Conservative Regulation • Insist altcoins only come from customer with KYC info • Require traditional payment history • Require customer cooperation with access to altcoin transaction tracing • Require immediate conversion to currency • Prohibit refunds or payouts in Bitcoin • Prohibit Bitcoin-integrated games • Insist Bitcoin only be used as payment method to result in credits to account

Potential Approaches • Moderate Regulation • Eliminate one or more of Conservative Regulation points • Rely primarily on licensees to provide accurate reporting • Include KYC / AML requirements and player/licensee cooperation for audits and verification

Potential Approaches • Minimal Regulation • Permit payment and payout in Bitcoin • Rely exclusively on licensees to keep accurate accountings • Permit integrated altcoin games • Require AML/KYC elements to avoid corruption, underage gambling & geoblocked or compulsive players

Potential Approaches • No Regulation • Not a viable or realistic option • Bitcoin transactions subject to abuse due to anonymity

Predictions • Altcoins will continue to grow in popularity • Players will increasingly demand altcoin payment alternatives • Federal and state authorities will become more active in regulating

Conclusions/Take-Aways • Getting ahead of the curve is key • Develop forward-thinking policies and practices • Update regulations as legal climate and technology evolves

Q&A