The Gambling Industry’s Regulatory Lessons for Cryptocurrency

By: Sara Dalsheim

While most of American population has mixed feelings on the results of the 2024 election; the cryptocurrency (“crypto”) industry does not. Crypto companies made up one-third of all direct corporate contributions to political action committees, and it resulted in 85% of all winning congressional candidates being supporters of the crypto industry. So, what does the win mean? Likely, a clear regulatory authority and rules over the industry.

Setting a new regulatory path over such an industry comes with its challenges. When the Supreme Court repealed PASPA in 2018, allowing states to legalize sports betting, each state was given the opportunity to decide whether to legalize and regulate a new wagering industry. The legalization of the wagering industry demonstrates that while productive, setting forth a new regulated landscape for an industry comes with challenges. The challenges and lessons that the gaming industry has learned provide great baselines and could be beneficial for the crypto industry.

Currently, the digital asset and crypto ecosystem is overseen by several different agencies. It is a hodge-podge approach to regulatory authority that is primed for pitfalls and uncertainty. When it was time for the sports wagering industry to be regulated, it was left to each individual state to decide how. For the most part, the state-by-state approach has been successful. However, as in the regulation of any new industry, it has its issues; the state-by-state hodge-podge-like regulation has left consumers vulnerable in some areas. A prime example is since sports wagering is not regulated in every state, the ever-present offshore sportsbooks remain present in some regulated and nearly all unregulated states. Additionally, some states are more restrictive on the wagering conduct their residents can take part in while others have a more open market. Players in a more restrictive market may hop over to another state to place a bet, ask a friend to place wagers for them, or find other technological loopholes to allow them to engage in the conduct they wish to engage in. Similarly, there is not a centralized system for responsible and problem gambling tools– these mechanisms have faced challenges because tools that may be set up for a customer in one state on one platform may not be recognized in another.

So, how might the crypto industry avoid similar vulnerabilities? Below we list some suggestions and lessons that the regulated crypto industry may consider.

First, lawmakers need to thoroughly do their research, and work with the industry to find the best way to regulate. They also need to regulate in a way that is forward looking to all potential possibilities of the industry. This starts with talking with knowledgeable industry representatives, and not just the largest or most well-known players. For example, in the sports wagering industry, it would be impossible to understand needs and problems by just speaking with the largest operators or even just the operator companies. The most successful regulatory schemes in the wagering industry come from those that allow suppliers and vendors of the industry to also weigh in. The crypto industry should look to do the same. Thorough research and conversations can help lawmakers clearly evaluate compliance efforts and decide to what extent regulation of the industry is necessary. Additionally, it can provide guidance regarding whether licensing or registration is necessary, and if so, for what entities in the industry.

Lawmakers should also find consumers that are currently engaging with crypto. What issues do they face? This is something that the wagering state regulators could have benefited from.

Talking to one person or entity representative or reading one or two articles/editorials is not enough. Soliciting diversity of thought and opinion is paramount when regulating a relatively new industry. These conversations are likely to be the most effective way for lawmakers to correct the current crypto industry information asymmetries, address fraud, address market manipulation, and to prevent other misconduct currently present.

The crypto industry should avoid an emphasis on parallel authorities across agencies and state lines, where possible. This is a current issue in the crypto industry: the U.S. Department of Treasury has tried to assert authority starting in 2020 when it announced it would be more aggressive with going after the industry to reduce financial crimes and bringing transparency to the complicated asset class; the Securities and Exchange Commission has weighed in by viewing crypto as a security like any other stock or ETF; the Financial Crimes Enforcement Network began to recognize digital assets as a substitute for currency, asserting authority and requiring money transmitter licensing under the Bank Secrecy Act; the IRS has asserted authority by treating crypto as property and thus charging capital gains taxes on relevant transactions; and the Commodities Future Trading Commission has started enforcing crypto regulations and taking action against Bitcoin futures changes, enforcing laws prohibiting wash trading, and addressing Bitcoin-related Ponzi schemes. This hodge-podge approach to federal regulatory authorities is convoluted and not helpful to the industry or consumers.

The issue of having various regulatory authorities came to light in the gaming industry recently when U.S. lawmakers sought to implement new federal minimum standards for all sports betting operators throughout the U.S. via the SAFE Bet Act – the various issues with this approach are discussed in our blog post found here.

Perhaps it may be best for the crypto industry to decide on one agency with ultimate authority, forming crypto specific branches in each relevant agency with synchronized goals, or to start a new federal agency. However they decide to proceed, they must remember that the intent of regulation should be to make engaging in crypto transactions safer and more transparent for the American people. Sadly, by leaving it to each state to go after illegal offshore sportsbooks, the federal government has failed to understand the point of regulated the sports wagering industry – making the industry safer and better for consumers. The legalized gambling industry has been stifled by the ever-present offshore market, that federal authorities have refused to step up and stamp out. Federal lawmakers have only stepped into the wagering industry in ways that would stifle competition and choice. Crypto lawmakers and regulators should learn from this mistake and choose a better path.

The final lesson the crypto industry should be mindful of is understanding the goal of regulation and continue to shape the industry and its regulations off this prime objective – to make it safe and transparent for consumers. People want to engage in sports wagering, the same way that they want the ability to engage in crypto related transactions. The key is not to stifle industry or make it harder for them to succeed; instead, take the time to find the best way to allow these industries to flourish in a manner that puts consumer safety and experience first.