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IN-DEPTH 11 November 2016
The skin betting controversy explained
Anyone who has taken even a passing interest in gambling over the past three or four months would have been going some not to notice the veritable explosion in coverage dedicated in the gambling, video-gaming and mainstream press to the activity of skin betting.
By Tom Lewis

Towards the end of June, video game developer Valve, the company behind critically acclaimed titles including Half-Life 2 and Portal, found itself named in a lawsuit alleging that it “knowingly allowed, supported and/or sponsored illegal gambling” in its game Counterstrike: Global Offensive (CS:GO), while the failure of two Youtube personalities, named Tmartn and ProSyndicate, to disclose their ownership of a CS:GO gambling site they promoted to upwards of ten million subscribers has added to the recent swirl of controversy surrounding the practice.

To the uninitiated, skins and the trading thereof is an at first slightly baffling concept.

Mark McGuinness, eSports Betting Consultant for eSportsbet.com, explains: “Skin trading is an economy built around the buying and selling of decorative virtual in-game items or, as they are more commonly referred to, skins, that can be acquired in the video game, traded and sold for real money on certain platforms.”

Skins are virtual items in games such as CS:GO, that alter the appearance of in-game equipment, decorating items such as guns and knives without boosting their power or basic functionality. CS:GO players can acquire skins in a variety of ways. Through what is referred to as the “crate and key” system, crates, which drop in-game, can be opened with keys purchased for $2.50 on the Steam marketplace, which is owned and operated by Valve. Upon opening, weapon skins will spin in a manner not dissimilar to that of a slot machine, before dispensing a random design to the player. These skins, many of which are worth pennies but some of which are worth hundreds of dollars, are then linked to the individual Steam accounts of players.
Much of the recent controversy has stemmed from Valve allowing third party skin betting sites – such as CSGO Lounge and CS:GO Diamonds – access to the Steam API, or Application Programming Interface. People using the gambling sites, the vast majority of which feature no form of age verification, can link their Steam accounts and skins to these third party sites; this has formed the crux of the lawsuit launched in June, accusing Valve of complicity in illegal gambling. A variety of games feature on the individual sites, including sportsbooks, lotteries and roulette, on which players can bet their skins like chips in a casino. Winning players can then gamble the skins they receive, use them in-game, or trade them on Valve’s Steam marketplace, where Valve levies a transaction fee of 15%.

Fans like to feel involved and invested, and skin betting is a way to do that. While not every recreational CS:GO players is going to be aiming for a professional tournament, they can wager their skins on those tournaments as a way to participateJeff Ifrah
But let us row back for a moment. How has skin betting rocketed in popularity the point that more than three million people, according to research conducted by Eilers & Krejcik Gaming and quoted by Bloomberg, sought to engage in it in 2015?

“It is the same with any sport with a large viewership” says Jeff Ifrah, Attorney and Founding Member at Ifrah Law, speaking on the surge in popularity of skin gambling since the CS:GO skin economy was launched by Valve in 2013. “Fans like to feel involved and invested, and skin betting is a way to do that. While not every recreational CS:GO players is going to be aiming for a professional tournament, they can wager their skins on those tournaments as a way to participate. As for the casino-style wagering, the fun is in the chance! With such low stakes and low barrier to entry, it is easy for players to try and enjoy skin betting.”

Bryce Blum, Founding Partner at IME Law, concurred that the popularity of CS:GO has driven the popularity of skin gambling up to this point, and added: “There is also a unique aspect to skins, when you compare it to typical real-money betting. If I have a hundred dollar bill, save for inflation that is just as valuable to me now as it will be a year from now.

“With a skin, that’s not the case. If you have a skin that’s worth roughly $100 on the open market, and you use that skin in-game for a year, eventually you’ll get bored with it and want a new skin for that weapon. All of a sudden you have this very valuable commodity that’s more valuable to someone else who has never had that skin before.”

Gambling legislation, just as it was with cryptocurrencies and bitcoin, is being outpaced by new forms of ‘betting’ on skinsMark McGuinness
The burning question as to whether skin betting technically constitutes online gambling is a complicated one, and one for which a defined legal answer appears some way off. As Mark McGuiness points out, there is the problem in that “as it stands, perhaps current gaming and gambling legislation, just as it was with cryptocurrencies and bitcoin, is being outpaced by new forms of ‘betting’ on skins, and therefore a fuller scoping is required to understand if it fits into the current gambling framework or needs to be excluded and a new digital betting or entertainment framework enacted”.

Jeff Ifrah was in agreement that US law has some catching up to do here. “There are a number of legal wrinkles that will need to be ironed out before we can declare skin betting to be online gambling, let alone legal or illegal online gambling. The first is whether or not skins are a ‘thing of value.’ While that area of law is well-developed in relation to traditional forms of gambling, it has only in the last few years been applied to online gaming. Courts seem to be saying that virtual items like skins are not things of value as we traditionally understanding them, which means that skin betting would not be illegal online gambling.”

According to Bryce Blum “There is a strong legal argument that skins are not a ‘thing of value’ under US law. One of the few legal cases in the same, loosely defined ballpark is 2015’s Mason v Machine Zone, wherein a Maryland federal judge tossed out the notion that in-game currency gambled in the Game of War: Fire Age app was anything more than a “whimsical” undertaking. Blum continues: “For the most part, case law in the US suggests that a thing of value has to be cash or chips. However, for my money, when looking at it from a plain English perspective when asked whether skins are a thing of value, my answer is yes, they are. The law has to catch up with what’s going on in the real world – as is often the case with the law.”

Indeed, it is fair to say that while skin betting may not fit any existing legal definition of gambling in the US, in a colloquial sense the wagering of skins fits the bill. As Blum acknowledges, “when you look at these sites, they don’t say when you win a bet that you’ve won ’30 skins’, they say ‘you’ve won this amount of money worth of skins’. This isn’t like a baseball card, for example, you can find out the value, but there is nowhere you can go online and immediately turn it around and sell it for whatever the Beckett stated price for that baseball card is. You have to haggle over condition, and its worth. This is akin to the stock market, governed in real time by users. You can see its value on a number of different sites and immediately sell it.”

Indeed, when an eSports team, iBUYPOWER, threw a match in which they had bet skins against themselves in August 2014, there is little chance they were doing so because they wanted some eclectic new designs for their combat knives and assault rifles – the fixing was down to the financial value of the skins they stood to win through skin gambling.

Whether technically gambling or not, skin betting looked set to become an increasingly lucrative and cemented activity in 2016, with an article published by Bloomberg in July stating that the market was expected to take $7.4bn in bets throughout 2016. Skin betting’s move towards becoming a marketplace swimming in enough cash to make even the likes of Scrooge McDuck blush does, however, appear to have suffered a severe blow in the face of recent PR and legal manoeuvrings undertaken by Valve.

As many fans of 2004’s critically acclaimed video-gaming sensation Half-Life 2 will tell you, as their wait for a sequel approaches its thirteenth year, Valve have never appeared the quickest to react when a response is requested of them. Whether the developer was happy to simply collect its 15% from every skin sold on the Steam marketplace prior to the outbreak of controversy is a contentious issue, and one open to debate. Per Mark McGuiness, “I think only time shall tell about that statement, as it’s one for the lawyers to prove or disprove as the case may be”.

The developer kept its counsel in the immediate wake of the recent CS:GO gambling controversy, issuing no statement on the class action lawsuit alleging its complicity in allowing illegal gambling to take place, nor on the Tmartn and ProSyndicate non-disclosure scandal.

On 13 July, however, Valve broke its silence, issuing a short PR statement through its website Steampowered.com to clarify its stance that “using the OpenID API and making the same calls as Steam users to run a gambling business is not allowed by our API nor our user agreements”. Not stopping there, Valve moved to distance itself further from skin gambling, issuing cease-and-desist letters to 23 skin gambling sites on 19 July, decrying the use of Steam accounts for “commercial” purposes as in violation of Steam Subscriber Agreement.

Does this sound the death knell of skin betting? In what is becoming a bit of a theme, the outlook is a murky one, demonstrated in the splits in opinion of the analysts surveyed by Gambling Insider. Mark McGuiness foresees a “bump in the road” for the industry, that the outcome stemming from Valve’s stance shall be one of “evolution rather than revolution”.

“Skin or item trading was developed within the eSports supply chain and ecosystem, by a generation that is extremely tech savvy and are constantly pushing the boundaries of current thinking and business models. They will adapt very quickly as they have grown up with agile development, coding, and the decentralised internet, so watch this space.”

Jessica Feil, Associate at Ifrah Law, offered a different perspective: “For several years, skin betting sites had relied on Valve turning a blind eye to their activities. Skin gambling sites had taken advantage of Valve’s open API – and lax enforcement of its terms of service - to enable players to gamble skins and redeem winning skins for cash. Although such use of the API was against Valve’s terms of service the entire time, Valve had not taken steps to stop the wagering.

“But now, as Valve’s statement and cease and desist letters demonstrate, the company is newly committed to enforcing its terms of service. Without access to the open API, the skin betting sites cannot function, and the vast majority skin betting sites have shut down completely. It was a smart move for Valve, as this will protect their product and insulate them from liability for illegal gambling. At this point, it is fair to say that skin betting is over.”

Whether Valve were specifically denouncing skin gambling is in itself open to interpretation. As Bryce Blum points out, what we still require before we light the funeral pyres “is a specific delineation of what the wrongful behaviour is”. Blum indicates that Valve’s principle issue might not be with the gambling, but what is referred to as “botting”. In layman’s terms, “bots” act as the house for skin gambling sites, holding the inventory of the wagering players and dishing it out upon the outcome of events being bet upon.

Blum notes: “These bots that are created and handle thousands of transactions as they’re taking in and giving out inventory and making calls as if they’re a typical user, but they are not. That to me seems to be the behaviour that Valve is saying is in violation of their terms of use. If that’s the case then there are a number of sites that have similar or identical functionalities but are not gambling sites. The question becomes whether that is the behaviour that Valve is saying breaches their terms of use, and if it is, are they going to enforce it solely against gambling sites, are they going to enforce it across the board? Furthermore, they could go back to amend their terms of use to specifically call out gambling, which they’re fully within their rights to do, although they haven’t updated those terms of use since 2010.”

Diverse is the word best suited to describe the reaction of the named skin gambling operators in the wake of Valve’s attempts to uncouple the websites from Steam. More than ten, including CS:GO Diamonds and CSGODouble, have ceased operations, while a few shuttered while tentatively teasing a relaunch. Following Valve’s announcement in July, Bets.gg and CSGOBIG went down for maintenance, but on the proviso that they were working to comply with Valve’s terms of service, mirroring Blum’s remarks that it is “botting” that Valve were moving to prevent, and not gambling in its entirety. Both are now active once more, although CSGOBIG ensures all signing in must declare they are over 18 and not a resident of the United States.
The largest of the bunch, CSGO Lounge, initially made a bid for legitimacy, informing its users that it was applying for gambling licences in the countries which it operates, impacting the UK, US and much of Europe, although this did nothing to address Valve’s main demand that these sites stop using the Steam API. Psyonix, the developer of wildly popular football-cum-demolition derby game Rocket League announced plans for a similar loot-drop system to CS:GO, but has opted to avoid integration with the Steam API in a move to avoid the creation of a gambling market.

what CS:GO has shown is that you can drive mass engagement around a title through gambling and so I think it’s hard to argue with the value and profit of allowing a secondary marketplace and allowing gambling to existBryce Blum
Whether Psyonix’s rejection of the model will be universal among videogame developers is uncertain, as is whether we can expect other games to build up skin betting communities of their own. Bryce Blum suggests that: “It’s hard to say, and down to the individual company’s approach to things like corporate risk tolerance, as well as philosophy and strategic direction. Obviously what CS:GO has shown is that you can drive mass engagement around a title through gambling and so I think it’s hard to argue with the value and profit of allowing a secondary marketplace and allowing gambling to exist. This obviously comes with a lot of downsides. It can be a PR hit, it can be a legal headache should you get sucked into a lawsuit, it can cause damage to your user base if under age folks are sucked into gambling sites, not to mention all the fraud and scams that have come to light over the last couple of months, so it’s purely for me a risk/reward analysis, and sitting here today I can’t say one way or the other whether another game company is going to follow in those footsteps.

“Although, I am very comfortable saying that a lot of publishers are watching all of this unfold, and will base their decision on how all of this plays out over the next year or two.”
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