UK LEGAL COMMENT
Cryptocurrency
These issues come into sharp focus for businesses funded by investments made via cryptocurrency, including established currencies such as Bitcoin and Ether or the company’s own initial coin offering. The GC issued a statement in January 2022 to the effect that potential operators should not submit a licence application if the business is fully or partially funded with crypto assets, unless the applicant is able to provide a “full and complete history” of the source of the funds. In effect, this means that for every investment the applicant will need to provide documents to show the transfer of funds from the investor into the cryptocurrency and then onto the company, as well as documents proving where the investor derived the money in the first place. This makes it virtually impossible to fund a new gambling business with the company’s own coin offering, as it is very unlikely that every purchaser of the currency will be able or willing to demonstrate this flow of funds. While the GC advocates a risk based and proportionate
approach to preventing money laundering in its guidance to operators, its own approach to cryptocurrency is arguably neither, as it does not take into account the size of the investment nor its relative contribution to the overall funding of the operator. Its approach also indirectly bars operators using blockchain
technology from entering the market, as such operators are very likely to be funded in some way via cryptocurrency investments. Where the GC is nervous about how this technology can be compliant, it should instead be embracing the potential for innovative and improved means of achieving compliance.
New product types
In addition to the challenges for new operators entering the market, it is also difficult for existing operators to launch new and innovative products. A number of years ago, the GC dispensed with a list of “approved casino games” for land-based casinos, allowing new games to be offered provided game rules were published to allow customers to understand how they operate. Whilst this remains the case, what appears to be a flexible approach by the GC in reality means that operators wishing to launch new games must do so without them being pre-approved by the regulator, as there is no formal process to obtain such approval. Where there is any doubt about the classification of a particular new game (for example as a banker’s game v. equal chance, or as a table game v. gaming machine) the casino operator needs to form their own views and hope that at some point in the future the regulator does not decide that it disagrees. In the online environment, the introduction of new and
innovative games can be even more problematic. As the operator of Football Index found to their detriment, the fact that the GC has agreed to licence a particular product does not mean that it will not at some point determine that it in fact falls outside its regulatory remit. In the case of Football Index, the operator did make some changes to the product which may have caused it to cross the line (in the GC’s mind) into a financial service rather than gambling product, although the Financial Conduct Authority does not appear to agree with the GC’s assessment. This case illustrates that questions about the correct regulation of new game formats can leave operators at
an impasse, either unable to obtain a licence or unable to make changes to their product pending a determination by the GC, FCA or any other regulator that may be relevant. If the GC were able to make efficient decisions about the
regulation of new products this might not create such a barrier to innovation. However, there is no mechanism for operators or licence applicants to ascertain in advance whether the GC will consider their new product falls within its regulatory remit and, if so, how it should be licensed. For a new operator, a full licence application must be made, including production of detailed policies and procedures, business plan, financial projections, an AML risk assessment and evidence of source of funds, in order to discover whether they can even get off the starting blocks. Given the risks of wasted time and application fees should a
new operator be refused and the additional risk of the GC changing its approach to certain product types in the future, companies with new product ideas may think twice about even attempting to enter the market.
Effects of the GC’s approach
The GC’s approach to the funding of businesses and to the assessment of new product types is not serving the fundamental goal of the legislation, which is to permit compliant gambling services to be offered in Great Britain. To the detriment of consumers, this will lead to a stagnant market dominated by established operators and the same products. In my experience, designers of new and innovative gambling
products are often exactly the type of operator the regulator should be encouraging. Their product ideas are frequently designed to be fun and engaging, rather than encouraging repetitive or high stakes play. The senior management of a start-up company will usually be involved with all aspects of the business on a day-to-day business and well placed to identity unusual gambling activity early on. They may bring to the table new ideas and technology to assist in protecting customers at risk from problem gambling, identifying proceeds of crime and/or providing gambling in a fair and open way. Applying policies which make it difficult for new companies and new products to enter the market is not the best means to pursue the licensing objectives of the Act.
Melanie is a gambling regulatory lawyer with 13 years’ experience in the sector. Melanie advises on all aspects of gambling law including licence applications, compliance, advertising, licence reviews and changes of control. She has acted for a wide range of gambling operators including major online and land-based bookmakers and casinos, B2B game and software suppliers and start-ups. She also frequently advises operators of raffles, prize competitions, free draws and social gaming products.
Melanie has a particular interest in the use of
new technology for gambling products and novel product ideas.
MARCH 2022 31
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