The commission sent a letter to Valve co-founder Gabe Newell on Sept. 27 ordering the company to cease and desist offering the popular form of virtual currency gambling related to its game, Counter-Strike: Global Offensive.
“‘Skins’ continue to be used as consideration for illegal gambling activities on third party websites,” the WSGC said in Wednesday’s release.
“The Gambling Commission expects Valve to take whatever actions are necessary to stop third party websites from using ‘skins’ for gambling through its Steam Platform system, including preventing these sites from using their accounts and ‘bots’ to facilitate gambling transactions.”
The Bellevue, Wash.-based video game company has until Oct. 14 to respond to the letter and explain how it is in full compliance with Washington state’s gambling laws.
If it does not comply, the WSGC letter said, Valve could risk the seizure and forfeiture of property used to conduct illegal activities, forfeiture of its corporate charter, as well as criminal charges.
The announcement came on the same day that a District Court for the Western District of Washington state granted a skin gambling website’s motion to dismiss a complaint related to a class-action lawsuit involving it and Valve aiding and abetting skin gambling.
WSGC, Valve, in contact since February
The WSGC first contacted Valve in February 2016. According to the Sept. 27 letter sent to Newell, it met on Feb. 17 with the company’s in-house counsel, Liam Lavery, to address its concerns that Valve was offering illegal gambling.
Specifically, the WSGC said, it was concerned with Valve’s facilitation of the use of skins as a virtual currency with which to place bets.
After that initial meeting, the WSGC said, it reached back out to Lavery on multiple occasions to learn more about how Valve’s API, Steam, helps third-party websites conduct gambling in the first place.
Those later attempts to contact Lavery, the WSGC said, elicited no response.
How skins are used to wager
Skins are purely cosmetic items used to decorate weapons in Counter-Strike.
They have since taken on real-world value—ranging from as little as one cent to hundreds of dollars—by virtue of their ability to be bought and sold on third-party sites for $USD. An ESBR analysis found that the average value of a skin is around $9.75.
Websites offering casino-style gambling, sportsbook-style betting on the outcome of professional esports matches, and even head-to-head betting, all accept skins as a form of payment.
They do this by linking to Steam, Valve’s free API. Bettors looking to wager a skin on a game of roulette, for example, would be prompted to sign in to their Steam accounts directly on the third-party gambling site.
At that point, bettors could wager a skin on the outcome of an event by first transferring that skin to the website via a “trade bot,” or an automated mechanism that accepts the transfer of a skin as if it’s being traded for something.
Unlike skin wagering, skin trading is believed to be legal, and is another popular form of engagement for Counter-Strike players who want to acquire skins. Steam functions, in part, as a skin trading marketplace, as do several other third-party sites.
Once a player wagers a skin and wins based on the outcome of a casino game or an esports match, they are usually paid out in skins, again, via bots that are “trading” the skin to the user.
WSGC: Valve failed to enforce its own trade bot policy
The WSGC alleges that Valve aided illegal gambling activities because it is aware that third-party sites use Steam to conduct activities, yet doesn’t do enough to stop it.
“Valve Corporation appears to have rules against the use of bots in its user agreement,” the WSGC said.
“However, it has not strictly enforced its user policy preventing the use of bots and continues to knowingly allow third-party websites to conduct gambling transactions through its Steam platform.”
The press release Wednesday elicited strong reactions from the esports industry.
Unikrn CEO Rahul Sood, whose company is also based in Washington state, praised the decision by the WSGC. Unikrn offers legal virtual currency betting on esports, and is considered to be among the first esportsbooks in existence.
“The bottom line is skins were the currency for what seems to be the largest underage and often fraudulent gambling ring in the history of gambling — it’s been abused on every level, and continues to be abused,” Sood said.
“Washington State took a leadership role in this decision, and knowing Valve I’m certain they don’t want any part of illegal gambling either,” Sood said.
Valve ordered 42 skin wagering sites to cease and desist in July
Regardless of the amount and efficacy of Valve’s actions to enforce its bot policy and limit skin gambling, it did take some action to that effect.
Just as Valve itself was ordered to stop abetting unlawful gambling activity, it ordered dozens of skin wagering websites throughout the world to cease and desist using its API to offer wagering via skins.
It did so in separate actions on July 19 and July 29, telling sites that they were violating the terms of Steam’s subscriber agreement. The letters gave the named sites 10 days in each instance to shut down all skin gambling-related operations.
Some skin wagering sites directly flouted Valve’s orders
The results of the C&D were mixed. Many sites, such as CSGOLotto and CSGOShuffle, shut down.
Others, such as CSGOWild, halted commerce temporarily but have vowed to come back online. Many other sites, such as CSGOFast and CSGOCosmos, have stopped operating in the US but continue to directly flout Valve’s request in other countries.
Since Valve is the creator of the Counter-Strike virtual ecosystem, it owns all skins as well as any API used to transfer those skins. But Valve does not appear to have been joined in its July C&D efforts by law enforcement.
It’s possible skin gambling operators therefore felt less pressure to swiftly comply with Valve’s order than they would have if they were contacted directly by law enforcement.
Valve has not responded to repeated requests for comment.
Skin wagering underwent exponential growth in first half of 2016
A recent report by ESBR and Narus Advisors examined the volume of skins bet at one of the world’s largest skin sites, CSGOLounge.
That report found that the site, which accepted skins as bets on the outcome of professional esports matches, took in 103 million skins, or the $USD equivalent of $1 billion in handle, in the first seven months of 2016.
Lounge was one of the 42 sites named by Valve in C&D letters. Initially it did not shut down, but only restricted some skin betting in some jurisdictions, while offering it in others.
The day after a report emerged on Aug. 15 that Lounge’s parent company had a 90 percent stake in a professional esports franchise, the site shut down all skin betting worldwide.
Lounge has since launched a new, free-to-play, coin-based betting product.
Further research from Narus and Eilers & Krejcik Gaming earlier this year estimated skin wagering on esports would take in $7.4 billion in handle.
Those estimates were later revised down following Valve’s C&D actions in July, and the belief that they would decimate the skin wagering market.
While skin wagering still exists, albeit in a much more limited form, Narus still projects that the global esports betting handle will reach $5.5 billion in 2016, and estimates that North American esports revenues in 2016 will reach $275 million.
Courts beginning to rule in matters regarding class-action suit vs. Valve
Separately on Wednesday, a US District Court in Washington State granted a motion to dismiss a complaint against former skin gambling website CSGOLotto.
The compliant was tied to a larger class-action suit in which defendants sought damages not only from Lotto, but Lotto’s owner Trevor Martin, and Valve, for aiding and abetting illegal gambling via skins.
Martin was embroiled in an ownership controversy earlier this summer that precipitated several rounds of negative publicity for the skins industry.
Martin was found to have gambled on his own site without disclosing his ownership position, and with potential knowledge of outcomes of Lotto’s casino-style games.
After winning skins from several of those games, he published video of his winning on his heavily subscribed to YouTube channel. In one of the videos, he claimed to have just “found” the site online by chance.