[toc]The UK Gambling Commission issued a position paper this week on “Virtual currencies, esports and social casino gaming.”
The paper sets out how the UKGC will treat esports activities such as tournaments and skin gambling. It explains the factors it will consider to determine whether an activity requires a gambling license.
The paper is the final output following a consultation on the position paper that was issued in August 2016.
That opinion has been borne out by the final paper.
The top-line takeaway on esports from the UKGC
The UKGC’s general conclusion is that it can and should regulate esports betting. It can be handled in the same way as other gambling activities.
The paper is the first that any regulator has issued that sets out a practical, comprehensive approach to esports gambling regulation.
It is certain to an important source document for other regulators struggling to grapple with the same issue.
UKGC CEO Sarah Harrison said:
“Gambling on esports with in-game items is growing and we need to make sure all gambling is fair, safe, crime-free and protects the young and vulnerable.”
Parliamentary Under-Secretary for the Department for Culture, Media and Sport, Tracey Crouch, added:
“esports is a phenomenon that gets bigger every day and is enjoyed by millions, but it is a concern that there are unlicensed websites jumping on the back of popular video games and encouraging children to gamble.
Legislation is running behind technology
The central point behind the UKGC’s analysis is that the legal position regarding activities that are involved in the new esports industry is not clear.
Technology has run ahead of the law. The commission concluded it needed to set out a regulatory framework against a background of uncertainty:
“The interpretation of legislation is ultimately a matter for the courts, and in developing our response we have noted the lack of contemporary and directly applicable case law in some of these areas. This paper therefore seeks to balance an interpretation of the legal framework governing remote gambling in Great Britain with an assessment of where interactive entertainment has crossed, or is in danger of crossing boundaries into licensable gambling activities.”
What will the UKGC do?
To manage its responsibilities, the UKGC draws the following conclusions which constitute the key takeaways of the paper:
- Applying the existing regulatory framework allows for proportionate control of the risks associated with betting on esports.
- Maintaining public confidence in the integrity of esports as an entertainment and betting event relies upon those seeking to benefit commercially from it, applying the best practice available from other sports.
- Where in-game items or currencies which can be won, traded, sold, converted into cash or exchanged for items of value, under gambling legislation they are considered money or to have value equivalent to money.
- Whether participation in a video game for a prize requires a gambling license will be determined by reference to a number of factors, including how the outcome is determined and how the facilities for participation are arranged.
- It will focus on those activities which blur the lines between video/social games and gambling and present a risk to the licensing objectives. In particular, it will prioritize those made available to children, those involving expenditure and those presented as gambling or associated with traditional gambling.
The rest of the position paper relates these conclusions to specific areas of esports where there may be an element of gambling.
Esports betting research added to quarterly participation survey
In order to begin gathering a data set for esports gambling, the commission has added the subject to its regular participation surveys.
The first results show that:
- 8.5 percent of adults have place a bet on esports at some point their life
- 88 percent of these have bet with money
- 90 percent have bet with in-game items (skins)
- 78 percent have bet with both money and in-game items
- These are high numbers for a “relatively new mainstream gambling activity,” but the UKGC notes that the figure for “recent participation” is 3.1 percent.
The research also indicated that a comparatively high proportion of women engaged in sports betting. In all, 42 percent of bettors were female.
The UKGC said that is was reassured by the age profile of bettors where 25-34 year olds were most likely to bet on esports. Nonetheless, it remains concerned about the activity being particularly attractive to children.
Existing regulations are adequate for esports betting
The UKGC does not believe it needs to change the current regulatory framework to deal with esports:
“Although some respondents consider there may be heightened risks associated with esports betting compared with other betting events, our view is the existing regulatory framework, rigorously applied, is sufficient to mitigate these risks even where they do manifest themselves differently.”
Under-age gambling risks are a predominant concern
The commission paid attention to consultation responses that suggest esports betting and skin betting increase the risks of underage gambling. But it believes that the existing measures are sufficient to control the risk:
- We recognise that esports is an attractive activity for children to participate in and watch; however existing controls are in place to protect children from gambling harm.
- Licensees are required to have in place controls to prevent underage gambling. Age verification checks are integral to the compliance of licensed operators with regulatory requirements underpinned by a number of criminal offenses detailed in Part 4 of the Act.
- Specific regulation also exists for marketing both with and to children. Section 5 of our principal Code of Practice in LCCP details how marketing communications must not include a child or young person under 25 years old featuring gambling, unless specific conditions are met. Operators must also abide by relevant provisions of theCAP or BCAP codes, especially section 16 on children and young persons.
Esports integrity was raised as a concern by some consultation respondents. The UKGC acknowledged its awareness that there is no central governing body taking responsibility for match fairness.
The UKGC recommended that those benefiting from or organizing esports competitions should actively implement measures to address integrity issues. These include:
- Ongoing and rigorous assessment of integrity risks
- Arrangements for the monitoring of betting markets for suspicious activity
- Protocols for the receipt and dissemination of intelligence
- Establishment of a participant’s code of conduct. That includes rules on sports and betting integrity matters (e.g. rules on participants’ betting and availability of personal records)
- Effective investigation of allegations and availability of disciplinary sanctions to address misconduct
- Proactive player education programs on integrity risk
- Transparent and appropriate controls for circumstances in which companies with licensed gambling interests enter into commercial agreements with participants, teams or leagues.
Skin betting is gambling, but game developers must also take care
The UKGC made it clear that skin betting is an activity for which operators need a license:
“In our view, the ability to convert in-game items into cash, or to trade them (for other items of value), means they attain a real world value and become articles of money or money’s worth. Where facilities for gambling are offered using such items, a licence is required in exactly the same manner as would be expected in circumstances where somebody uses or receives casino chips as a method of payment for gambling, which can later be exchanged for cash.”
The UKGC identified three key areas of concern:
- Risks to children
- Third-party skin gambling
- In-game activities that might constitute gambling
Risks to children
The UKGC made much of its recent prosecution of the operators and advertisers of the FutGalaxy website. It warned that it had specific worries about skin gambling and its attractiveness to children.
The paper quotes from the FutGalaxy case ruling:
“The defendants knew that the site was used by children and that their conduct was illegal but they turned a blind eye in order to achieve substantial profits. The effect on children of online gambling was rightly described by the Court as ‘horrific’ and ‘serious’.”
In making its point, the UKGC is also explaining its philosophy that harm reduction is a key measure. The commission is reluctant to interfere with activities and unlikely to take action unless there is evidence of harm.
“We will focus on activities which present a risk to the licensing objectives. In particular, we will prioritise activities made available to children, those involving expenditure and those presented as gambling or associated with traditional gambling.”
Third party skin gambling: Developers retain responsibility
The commission acknowledged efforts that game developers have made in recent months to shut down skin gambling at third-party operators.
However, developers cannot simply ban the activity or make it a contravention of the terms and conditions. Those steps are not sufficient to evade responsibility.
“However, we are strongly of the view that the video games industry should not be, or perceived to be, passive to the exploitation of their player community by predatory third parties. The significant risk of harm posed by these unregulated gambling websites, whilst unintended, is nonetheless a by-product of the manner in which games have been developed and in-game economies incorporated for commercial benefit.”
The UKGC recognizes that game developers don’t obtain a direct benefit from third-party skin gambling. But it says that the developers do obtain an indirect benefit.
It uses the example of a player who loses all of his skins at a gambling site and then either:
- Buys more from the developer or
- Plays more in order to win them during the game.
In-game activities that might constitute gambling
Of immediate concern to game developers will be one warning in particular. The commission could consider some in-game activities to be gambling.
The UKGC gives an example in the paper. In some games, players can purchase a key or similar that unlocks a prize containing extra skins. Under some circumstances this could be gambling:
“The payment of a stake (key) for the opportunity to win a prize (in-game items) determined (or presented as determined) at random bears a close resemblance, for instance, to the playing of a gaming machine. Where there are readily accessible opportunities to cash in or exchange those awarded in-game items for money or money’s worth those elements of the game are likely to be considered licensable gambling activities.”
UKGC approach to illegal skin gambling
It is not the UKGC’s habit to act in a draconian way when it has identified its concerns.
The paper sets out the commission’s approach to dealing with skin gambling issues. That approach that involves assessment of risks and consultation.
In a veiled reference to the Valve crackdown, the commission recognizes the mitigating effect that developer actions can have:
“Reports of the estimated impact of the action taken by one prominent game developer to crack down on misuse of their network during 2016 is, to us, a powerful indicator of the positive role network providers can play in protecting their community of players.”
The commission admits that operating a “zero-tolerance” approach. Prosecuting all offenders is unlikely to work, nor would it be the most effective way of dealing with the issue.
Its preference is for game developers and betting operators to take ownership of the problem. The UKGC wants them to put in place their own measures for consumer protection.
This philosophy is visible throughout the position paper.
Where the commission identifies harmful activities, it will act forcefully, as in the case of FutGalaxy. Otherwise it seeks a process of dialogue to resolve problems before they pose real risks to consumers.
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Participation in esports for a prize
The UKGC does not see the existing esports competitions in need of regulation. That’s good news for esports tournament organizers and competitors.
It accepts the argument of video game producers that such tournaments are contests of skill rather than games of chance. They are more akin to sport than gambling.
As games of skill, “the playing of esports for a prize would not be caught as gaming and in the absence of any other gambling-related issues would not fall within our remit. Our current assessment is that the majority of professional esport events would fall into this category.”
In this case the caveat is that the UKGC does not classify esports as sports.
It points out that that is a decision for the secretary of state, who has not made any determination. Therefore esports are not exempt from the Gambling Act definition of a game.
The act states that gambling is “playing a game of chance for a prize.”
It excludes traditional sports from the definition of “a game” but esports are not.
“Where we are alerted to or have concerns around a particular game we would expect to see evidence from the games publisher/creator which explains the mechanic of the game, the skill and chance elements and what player experience that collectively delivers.”
Competition formats can also introduce chance
The UKGC is reliant on a subjective test in making its categorization as to whether a tournament is gambling or not.
The Commission suggests that tournaments may cross over into the realm of chance if they include elements such as:
“the random assignment of individual competitors to teams, or the designation of characters, weapons or other key tools of variable effectiveness to different participants.”
Match-ups/bet on yourself
The issue becomes more starkly defined when considering esports tournament formats. In some, players play head to head or can bet on themselves. In a head-to-head match, the entry fee itself could involve a player betting on his own performance.
“Setting aside betting integrity rules, which routinely disbar participants from betting on themselves, if a professional sportsman staked money with a bookmaker, or through a betting exchange, on themselves to win a contest, that transaction would readily be recognised as a bet.”
Understanding the difference between a wager and a competition
The commission tries to help tournament organizers and game developers understand how the UKGC thinks about the issue. The position paper includes a graphic looking at all the factors that go into differentiating a wager from a competition.
- A wager is a “bilateral contract between two persons or groups of persons to win or forfeit stakes upon an outcome of doubtful issue.”
- A competition is an arrangement where a promoter agrees to award a prize(s) to competitors who carry out or best carry out a task laid down by them.
In a concluding point, the UKGC explains that it is not attempting to interfere with normal competition. It doesn’t want to set out hard and fast rules:
“A definitive set of objective tests intended to draw a clear boundary, whilst perhaps desirable for those seeking certainty, would not in our view prove sustainable or effective in tackling activities which may push boundaries either deliberately or inadvertently. In the majority of cases a common sense approach to arranging genuine competitive tournaments or providing facilities for individuals to come together to play eSports is unlikely to raise gambling-related questions.”