Some months ago, we took a look at the rapid rise of the skin betting, the phenomenon by which players of online computer games win and trade in-game items, and then convert these commodities into real money by cashing them in on third-party gambling websites.

We noted that these types of activities existed in something of a liminal space, largely devoid of regulation, and concluded that the greater the opportunity for players to convert in-game items into real money, the greater the likelihood of regulatory intervention.

That prediction has recently been confirmed by the UK Gambling Commission. The Commission, which regulates gambling in the UK, has published a discussion paper which sets out its current thinking on skin betting and other forms of gambling relating to eSports and the extent to which such activities fall within its regulatory remit.

The discussion paper provides some welcome clarity on the approach of the Commission to these activities. We review the Commission’s key findings and consider the potential implications for operators below.

Virtual currencies

The Commission has re-affirmed that virtual currencies (such as Bitcoin) are to be considered as “money or money’s worth” for the purposes of the Gambling Act 2005 and thus that their use in gambling will constitute real money gambling.

This should not come as a surprise; this view was expressed by the Commission in a consultation undertaken in 2015, which ultimately led to an update its Licence Conditions and Codes of Practice in July of this year to include digital currencies as valid tender for gambling licensees.

Skins and in-game items

The discussion paper then moves on to consider the position regarding “skins” and other in-game items. The award of such items within a computer game will not constitute a prize of “money or money’s worth” per se. However, where the operator of a website offering gambling facilities treats these items as a “de facto virtual currency”, that website will be required to obtain a gambling licence.

Betting on eSports

The Commission has confirmed that offering bets on eSports events (be it on the outcome, or on various in-play events) is to be treated in the same way as betting on any other event. Operators will therefore be required to manage the risks associated with betting and gaming accordingly – such risks including cheating, match-fixing, gambling to excess, and encouraging children and young people to gamble.

Betting on oneself or paying to play?

There is an increasing trend for eSports platforms to allow competitors to place a bet on themselves to win the match in which they are participating. The Gambling Act defines a ‘betting intermediary’ as someone “who provides a service designed to facilitate the making or acceptance of bets between others” and the Commission’s current view is that this definition captures the practice of allowing players to bet on themselves, making it a licensable activity.

This, however, raises an important question: what is the difference between betting on oneself to win, and paying a fee to participate in a tournament (where each participant’s fee forms the prize pool to be awarded to the victor)?

The Commission acknowledges the need to draw such a distinction, but fails to offer a clear delineation. Whilst stating that it will look at a “number of factors”, the only such factor specified in the discussion paper is the number of participants; a greater number of participants is deemed to be suggestive of a genuine competitive tournament (in which a player pays to participate) rather than a “match up” (in which a player bets on himself).

Operators will hope that the Commission provides greater clarity on this point in due course.

Playing for a prize

Whilst the outcome of many of the games most typically associated with eSports (such as Counter-Strike: Global Offensive, Call of Duty, League of Legends and Dota 2) rely on the skill of the competitors, others (particularly card-based games, which frequently involve use of a random number generator) involve an element of chance.

Such games, in the view of the Commission, fall within the definition of “gaming” under the Gambling Act, and must therefore be conducted under licence, whether or not the player is required to place a stake.

What action will the Commission take?

It appears that, in the first instance, the Commission will allow a grace period before taking enforcement action, whereby it will alert the operator in question that its activities require a licence, and will order the operator to suspend operations in the interim. It will also warn of the risk of further action should such activities be continued without a licence.

Thereafter, a range of potential follow-up steps will be considered, which may range from issuing guidance to instigating criminal proceedings.

The Commission flexes its muscles

It is clear, however, that the Commission will be unafraid to take serious action – particularly when children and young people are at risk.

In October of this year, following an investigation into the now-defunct website ‘FutGalaxy’, two Britons have been charged with alleged offences under the Gambling Act, including providing facilities for gambling, advertising unlawful gambling, and inviting children to gamble.

The charges all relate to use of a virtual currency; the website enabled users to bet “Ultimate Team coins” (in-game items earned in the FIFA football game series) on the outcome of FIFA matches played online.

The case is believed to the first UK prosecution involving skin betting. It will go to court in February 2017, and the outcome should provide a good indicator of how seriously the courts intend to deal with eSports-related gambling offences. Under the Gambling Act, the maximum penalty for providing facilities for gambling is 51 weeks’ imprisonment, a £5,000 fine, or both.

Implications for operators

For established bookmakers with established KYC/AML and social responsibility policies, who simply offer bets on the outcome of eSports events and who already hold a licence, the message should be “business as usual”.

However, it is clear that businesses offering the types of facilities identified in the discussion paper, who up until now were operating in something of a grey area, will henceforth be subject to increased regulatory scrutiny, and the prudent course of action may be to suspend activities and seek to obtain a licence.

In terms of the wider industry impact, much may depend on the zeal with which the Commission and the courts seeks to tackle unlicensed businesses, but clearly there are administrative and financial requirements associated with conducting a regulated activity. Will we see smaller operators close down in the face in these burdens? Will such operators use geo-blocking to sidestep the UK regulatory regime? Time will tell.

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