IN-DEPTH 21 February 2018
Blockchain: Better the Devil you know?
The battle of the blockchain rages on. The technology that underpins cryptocurrency has proved deeply divisive, both in the gaming industry and wider financial markets. Up until now blockchain has suffered from a reputation as a tool for circumvention of controls and a platform for the underworld, but could the decentralised and transparent nature of the technology transform the gaming landscape as it promises? We asked two of the world's leading experts on blockchain gaming if it has finally come of age
By Gambling Insider
Jez San, Founder, FunFair Technologies
Why is blockchain enjoying its biggest period of popularity now?
I think it’s a combination of multiple factors converging to make it the ideal time to consider cryptocurrencies. They have undoubtedly become more and more mainstream over the last few years, and although they still have some way to go, when you have Floyd Mayweather and Paris Hilton tweeting about token companies you can see clear evidence of this increase in popularity. The second factor is that the technology surrounding blockchain has improved dramatically in the last few years.
The average man in the street is now talking about cryptocurrencies in a way that has never happened before and it’s certainly becoming more mainstream than ever before.
Why blockchain is well placed to support the gaming market?
There are at least two reasons. The first is the most obvious one, which is the transparency and fairness which blockchain brings; it lets people look inside their own games and see that they are not being cheated, and that is a huge benefit. In our case we are using blockchain and smart contracts, and we don’t need servers because of this.
That has enabled us to do something which is very novel and different from existing regulated businesses. Because there are no centralised servers, the regulation requirements of certain countries might not apply. If it is a truly peer-to-peer offering it might already be allowed under existing laws in certain jurisdictions, because when you play poker with your friends at home for money for example, you aren’t breaking the law as it allows for person-to-person play as long as no one is operating the games for you.
The regulations in each country are very different. Some countries specifically mention what isn’t allowed and what is regulated within their legislation, without mentioning specifics we are a few months away from talking in detail about this. The technology which we are developing is so different to existing technology in that it opens up completely new markets, and there is huge opportunity there.
Through blockchain, the player is protected in a way that they have never been protected before. Not even regulated casinos can protect their players in the same ways that an operator using smart contract technology can, as there is a massive custodial risk for the player; the casino still requires the player to make a deposit into the casino and leave their funds with them, putting their trust in the casino, which is true in all regulated, online and evenin most Bitcoin-based casinos.
Most scams or player losses in the past are because of casinos going bust, selling or running away with players’ funds, or spending them. Almost all the times that players lose money is because of the custodial risk of leaving money in the casino for prolonged periods of time, and we have eliminated that custodial risk. Any casino operator using smart contracts can offer this, however most blockchain casinos don’t have it. No Bitcoin casino has this protection and probably the vast majority of companies operating in blockchain don’t have it yet.
How do you think blockchain can benefit anti-money laundering efforts and payment security in gaming?
In respect of payments there is no fraud in blockchain, so when you get paid in cryptocurrency that is like an actual real funds transfer, there is no credit card fraud or potential chargeback, and in terms of a reliable payment it’s actually very good.
For a pure crypto gaming company, all of the players immediately arrive with their funds because they already have crypto funds. So you don’t have the processing problems that you do with credit cards, for example you might not be sure if a payment is going to work or the potential risks from card details being stolen. It is much cleaner and simpler to use cryptocurrencies.
On the money laundering side the benefits are harder to prove, it usually depends on what kind of game you're talking about. Casino games typically don’t have money laundering problems, in a typical casino money would come from a credit card and casino games have an edge statistically, in that if a player spends $100 dollars they will probably end up with less at the end of the game, which is not a very efficient method of laundering money. Also, at the end of the session the prizes/money go back to the player’s credit card using that same inefficient funds transfer method, which also exposes them to the aforementioned custodial risks.
In a cryptocurrency casino if a customer makes a deposit using a crypto address and they eventually transfer their winnings out, the money goes back to that crypto address, meaning there is no opportunity for money laundering and there is also a full audit trail of all activity on the crypto account, making it a terrible way to launder money.
It is different when it’s poker because it’s a peer-to-peer game in that you are playing to win or lose money from one person to another person, so that makes it more possible to launder money.
That’s a poker problem in general, and the good thing about crypto is about that every part of every transaction gets recorded on the blockchain and it would all be visible at all times. It's public information so anyone can trace you, not just the police: You would have to be an idiot to even attempt it.
So there are no additional risks involved in blockchain gaming?
Where blockchain gaming might be different than credit card gaming is that to make a deposit you haven’t needed to disclose your identity, and so currently there are a number of companies working on blockchain identity systems like Civic, uPort and others.
Later this year the problem will be solved, but today when people play on blockchain games, players generally don’t have to give their identity.
However, not having to disclose your identity usually stimulates business, because some people want to play casino games but don’t want gambling bills appearing on their credit card statement and so they want a bit of privacy in that regard.
However it’s not like its anonymous, because if authorities wanted to track them down they could, because they can follow the money backwards and forwards and see where it went, but it does give the players a level of privacy which encourages people to play. In some ways it’s a lot like bringing cash into a Vegas casino where you don’t have to undertake identity checks to play.
What issues does the absence of verification present when stopping minors from playing?
That goes back to identity as well. When these identity systems are live later this year you can proactively have your ID authorised, which will then validate you from then on; when you use that address people can see that you have been validated correctly.
What it does is to link your identity to a blockchain address which allows you to prove your identity when you need to and it will let you prove you are over 18 or over 21 where applicable. Those technologies have been invented and they are usable systems now.
By next year when we go live, whoever wants to perform identity verification can do, because some casino operators will want to do that and the technology will be available for them to do so. Today it is still in its infancy.
How can we speed the take up of virtual currencies by gamers in general?
There is still some resistance. In Bitcoin there’s probably not much you can do about it, it is what it is. There is some concern around the price stability of cryptocurrencies, however Ethereum is much more programmable and so people have been working on something called stablecoins, which are coins which run inside Ethereum like tokens, but they will let you peg it to the dollar for example and they’ll do derivative hedging functions inside using their own market making technology.
These serve to keep the currency more stable, and as those technologies have already been worked on, very soon we will all be able to use them and then we won’t have volatility problems. They are smart contracts that buy and sell the underlying derivatives to maintain the
value of a token and make it stable.
That is the great thing about the Ethereum ecosystem; there are a lot of people working on different problems that will support getting this rolled out more widely and we will all be able to benefit from each other’s work. This will ultimately benefit the cryptocurrency market as a whole.
John Caldwell, The Double C Foundation
Can blockchain make a positive impact on the land-based gaming industry?
In my opinion using current blockchain technology in a micro-transactional game event basis, for example in slot based games with rapid play and multiple RNG events each second, is not really a workable solution with the technology as it exists today – particularly at scale. I think that by its definition the technology today is a little too deliberate to be of use in that eventual application.
For me, I think for land-based operators the biggest applications for blockchain will be in the areas of deposits and withdrawals like you see in the online world. I also believe that it could be used in things like loyalty programs and I think in this space there’s a lot of potential applications, relating to connecting humans to the actual brands in a clean, transparent and verifiable way.
How do you foresee this playing out?
Having a loyalty programme on blockchain could be used to record every customer transaction, giving customers access to records which showed their activity in the casino. It also allows the casino to see all the customer’s interactions and analyse them in a clear way, but also to do so in a way that is publicly available and verifiable. It may be contrary to some thinking today in terms of data protection of the individual casinos and players but I think that you’ll see that it’s one application that is particularly well suited to the task and we’ll solve those problems long-term.
How do you prevent cryptocurrency from being used to manipulate and get around existing ID verification?
The ironic thing about cryptocurrencies is that they are essentially designed to provide transparency and verifiability, it is written into their DNA, especially when you think of blockchain. In the early days of cryptocurrency it was often misused for other purposes, however I think that this misuse was just a product of the people who were the earliest adopters and the culture that surrounded it rather than something inherent to cryptocurrency itself.
With cryptocurrency becoming more and more mainstream, this sort of activity is less and less tolerated and I think that we will definitely see a greater number of applications including more stringent ID verification checks. The beautiful irony of this is that crypto is absolutely designed for people to take control of their own lives in a visible and publicly transparent way and I think ultimately that this is its biggest plus point.
Will there be more regulation of blockchain in the future?
Without question. I think this is already occurring specifically with elements like blockchain and individual cryptocurrencies like bitcoin for example. At this point, from a regulatory perspective, nearly everyone across every business (not just gambling) is certainly becoming aware, if not keenly aware, of what blockchain brings and so I think many are trying to get out in front of it from a regulatory perspective.
Governments by definition tend to be slower and more careful entities and will take time, but I think you will see a broad swath of regulatory measures in the next two weeks to two years. It is just a matter of when it comes to bear.
What are the barriers that are preventing your average punter from getting online and betting with bitcoin?
Much of the betting in bitcoin is handled by third party KPI services like BitPay, so you have a frictional layer there that is both real from a practical perspective but also potentially creates some questions as it relates to flow of funds.
I think that because it gets an inordinate amount of press, the perception of how far along we are in terms of actual adoption of cryptocurrencies is more than a little inaccurate. We are quite far away from broad adoption, but I believe that all coins that are specifically designed for individual industries do have a real chance of being adopted, because the possibilities regarding what you can do in crypto and blockchain are broader than traditional currencies. However, we are still at a very early stage when it comes to adoption, and I think that’s going to have to change. As there are so many stories about crytocurrencies being circulated in the media a lot of people are under the impression that 20% of the world is using digital currencies at this point, when the reality is only about 1-2% at most. It’s about proving to people the practicality, utility and all of the benefits of cryptocurrencies - then people will jump aboard.
In your opinion will there be a unified cryptocurrency further down the line?
I don’t think so; I think that it’s probably going to be a lot like the way in which the internet was developed.
In the boom years of the early internet, you had a seemingly infinite number of internet businesses offering services around the world, with a myriad of related websites. However, on the internet today you have what is in effect four or five nation states that dominate both the conversation and the technology, with Google, Amazon and Facebook being obvious examples.
Taking this model to cryptocurrency, I believe that there will be a lot of different coins initially, but I don’t think this number will eventually shrink down in the same way that the internet did. This is because with the decentralised nature of cryptocurrencies you cannot
make acquisitions in the traditional sense, so I doubt that you’ll actually find acquisition trends as you see on the internet. Actual utility and tangible benefits will win out in the long term. One trend I think you’ll see in the future is governments going digital with currency, and I wouldn’t be surprised if in 20 years’ time you will see many forward-facing first world nation’s currencies only existing in digital form.
Now that doesn’t mean that the banks will go away, in fact they won’t, but I believe we will eventually see a sort of e-Pound or i-Euro in Europe, and indeed the world as a whole, operating in lieu of actual hard currency. Governments are generally very slow at adopting these processes and many people are very attached to the physicality of money.
At present physical wealth is more tangible than electronic wealth. For example, if you have a thousand pounds in your pocket, you actually have the physical thousand pounds rather than an electronic thousand pounds, be it on a credit card or mobile where there is no physical element. I think this perception is rapidly eroding and eventually all people will accept that if you have a thousand pounds in ‘money’ on your phone, you have a thousand pounds.