InfoTech & Public Policy

We’ve had some interesting class discussion and posts about online gambling, a subject that was back in the news this week. This note is an attempt to summarize (and offer a few opinions on) the recent US decision to ignore a WTO deadline to change federal legislation regulating online gambling.

Background
The tiny Caribbean island nation of Antigua and Barbuda challenged a perceived US ban on cross-border Internet gambling several years ago. I say “perceived” as it is not entirely clear to me when online gambling is legal or illegal in the US; some states have regulated against the activity, and the Justice Department interprets the 1961 US Federal Interstate Wire Act as prohibiting gambling over phone lines. Despite this lack of clarity, Antigua and Barbuda decided to assert their rights under World Trade Organization dispute settlement procedures.

A WTO panel ruled (November 2004) that US laws banning gambling over the Internet were in violation of the General Agreement on Trade in Services (GATS). The US Trade Representative responded that the US would withdraw gambling as a sector from its GATS commitments if this verdict was not overturned. Such a withdrawal is not a simple matter: all other parties to the GATS are entitled to compensation (GATS Article 21) for business lost as a result of a withdrawal. A later ruling (by the WTO Appellate Body, April 2005) altered some aspects of the November 2004 panel findings, but not the requirement of the US to change its laws. More specifically, the US was ordered by the WTO to amend the Interstate Horseracing Act — the Appellate Body ruled that the US ban on remote gambling was not applied to equally to off-track bettors and customers of Internet casinos. April 3, 2006 was the deadline for an amendment, a date that has come and gone without US action.

Options
The US now seems to have three policy options to choose from. The US can (1) make good its threat to remove gambling from its commitments under the GATS (and compensate countries that claim the withdrawal causes lost business), (2) change its laws and practices so that they conform with GATS rules (though some would claim this violates states’ constitutional rights to legislate), or (3) do nothing. It is this last option that is the most appealing, as both others have large downside costs and risks associated with them. Furthermore, Antigua and Barbuda is an unlikely economic threat, even though they are allowed under the WTO to retaliate against the US with new tariffs. Congress is currently debating the reform of the Federal Interstate Wire Act. Presumably, the legislative drafters working on the bill will try to make it GATS compliant. But if they don’t, new legislation means that Antigua and Barbuda would have to consider a further WTO challenge to press for compliance with the original ruling. In sum, the international aspects of regulating online gambling are far from resolved. Poker, anyone?

In the last week I’ve had several conversation with different friends about a certain online game that I thought would be interesting to the class. It is a massively multiplayer online role-playing game (MMORPG or MMO for short) called “Second Life”.

A little background for those not familiar. Most of the popular MMOs are games in which there is a virtual world of some type and players have some sort of avatar that interacts with the world and the avatars of other players. Recently technological advances in the Internet have allowed these games to scale to allowing thousands of players to interact simultaneously and the games themselves have become very large and many are complex to the point of having functional virtual economies. Players are seeing more and more freedom with the release of each new title and the popularity of these games is high enough that people have started businesses where virtual in-game currency is bought and sold on the real-life market.

Second Life pushes the envelope is several respects. It is exceptional in the degree of freedom it provides (players can choose to do just about anything in game) but even more exceptional is the intimate way in which the game is tied with the real-world economy. The in-game currency is readily exchanged on websites for real money and everything in game is based on this currency. The game actively advertises that it is completely feasible to run a business in-game for real life profit, it is part of the design of the game. The game provides an interface to “create” virtual things that can then be bought and sold, and you can open your own business. A recent Wired article

http://www.wired.com/news/technology/0,70153-0.html

features a woman you makes a real salary being an in game fashion designer and makes reference to other business people pulling six figure incomes through other virtual businesses.

Moreover the site actually claims:

+++
Linden Lab’s Terms of Service agreement recognizes Residents’ right to retain full intellectual property protection for the digital content they create in Second Life, including avatar characters, clothing, scripts, textures, objects and designs. This right is enforceable and applicable both in-world and offline, both for non-profit and commercial ventures.
+++

After some digging around I found that they were not kidding – you truly can create any business you want. In particular I found many places to gamble in-game and even brothels. I’ll refrain from linking but it’s a pretty simple google search.

One aspect of this that I find intriguing is how Linden Labs plans to enforce their claims of intellectual property of virtual items “offline”. (It should be noted that this game draws players from around the world.) Is this even feasible? Perhaps someone more versed in international law can comment.

The other thing that sparked my interest is how countries will react to the idea that their citizens can for instance, make money of virtual prostitution or creating Nazi memorabilia or any number of potentially offensive or illegal activities. Is China going to filter in-game Chinese government bashing? Or perhaps they will exert pressure directly on Linden Labs? I didn’t find stories about these kinds of problems, but it seems like it’s only a question of time.

Anyway, I thought it might be interesting. More about the game:

http://secondlife.com/whatis/

http://en.wikipedia.org/wiki/Second_Life

-Martin

Party Gaming, the company that controls Party Poker the world’s largest online gambling site, reported 850,000 new members signed up in 2005. A stunning 70 percent of these new members were from inside the United States. The online gambling industry has grown into a $12 billion dollar industry. In short, it has grown quickly under the shortcomings of current legislation that is all too weak to curtail it.

Congress has been working as recently as last week to create more stringent legislation that will be able to combat this rise more effectively. The Internet Gambling Prohibition Act has been proposed to extend the U.S. Wire Act, which prohibits gambling over telephone wires, to include Internet gambling businesses. The new bill would allow federal and state enforcement officials to block Internet gambling sites that violate the act on the ISP level.

I don’t support gambling legislation. To be perfectly honest, I’m pretty indifferent to it. In general, I am opposed to moral legislation, but gambling legislation isn’t on trial here, Internet gambling is. Ultimately, I think how we choose to handle Internet gambling should be based on what it is we don’t like about gambling. After giving the matter serious thought I have come to think that there are only two logically consistent conclusions we can arrive at.

The act of gambling itself is wrong.

If the act of gambling is wrong in its own right, then I think the Internet Gambling Prohibition Act can only be seen as a natural extension of current anti-gambling legislation. If we prohibit gambling in proxy over phone lines, how is it any different over the Internet? There should be no difference between phone and Ethernet jacks under the eyes of the government.

If we choose to take this line of reasoning and pass a federal law forbidding Internet gambling under this line of reasoning I think we must also work to prohibit gambling in all its forms. If we have decided that gambling is unlawful than all gambling should be unlawful whether it be on the Internet or in a casino or in a race track.

The act of gambling isn’t wrong, it is the negative externalities of gambling that we aim to stop.

Gambling may not actually be the problem. It may be that what we really are trying to stop is the things that are associated with gambling. In much the same way Amsterdam has served as a temporary getaway for the somewhat conservative Dutch we have allowed Las Vegas and Atlantic City to exist as controlled environments where we can allow people to gamble but pay particular attention to stopping the byproducts of gambling. It’s no coincidence that you can’t open the windows in hotel rooms in Vegas.

Gambling has long been associated with corruption and vice, but if the act of gambling itself is not what we aim to prohibit than Internet gambling should probably be lawful. It seems to me that gambling in the privacy of the home is probably the safest way it can be done. Surely the government isn’t about to go after my dad for the monthly poker games he used to play with his friends.

Conclusion

Internet gambling brings to a head an interesting question. What is it we really loathe about gambling? On the one hand I think I would have a hard time telling people who buy a couple of lottery tickets every week or plan a yearly trip to Vegas that they are doing something terrible and yet at the same time compulsive gambling is an affliction many Americans face. Ultimately, I demand consistency in the legislation. If gambling is wrong than it should be wrong regardless of context, medium, and geographic location. If gambling isn’t wrong than in the privacy of the home should be among the first places we condone it.

http://www.online-casinos.com/news/news1692.asp

http://www.toptechnews.com/news/U-S–Takes-Aim-at-Online-Gambling/story.xhtml?story_id=10100A97USGB

With regard to the discussion on the ability to regulate online gambling both in class last week and through the blog, I would like to support the position that regulation as a means to significantly decrease the amount of online gambling is feasible. I wish to use as an example the Australian Interactive Gambling Act 2001 (IGA) which was passed in response to concern about the availability of gambling in Australia and to look at self-regulating measures already taken by host sites.

To give a brief summary of the IAG, the Act was an example attempt to limit online gambling by targeting the gaming companies, not the end users. The Act bans all interactive gambling service providers, whether in Australia or offshore, and whether Australian or foreign-owned, and carries a maximum penalty of $220,000 per day for individuals and $1.1 million per day for corporations. It says that the offence will not apply if a service provider “did not know and could not, with reasonable diligence, have ascertained that its service had Australian customers”. It suggests that reasonable diligence may include informing prospective customers that Australian law prohibits the service, or requiring agreement to a contract that explicitly states that Australians are not to use the service. An additional provision of the IAG is to ban advertising internet gambling in the country.

As a provision, the Act required a review of the operation of the IAG to be done by July 2003, and this review was published by the Australian government in 2004. Interestingly, while the review both points out major shortcomings of the IAG (it claims that the offence provisions are ineffective deterrents because there is very little pro-active policing for breaches of the Act, and because gambling itself is not banned), it also provides evidence that the Act has been effective in significantly reducing internet gambling.

The review discusses the enforcement of the IAG and the major impact of the Act seems to come in two ways: through the closure of Australian Internet-gaming operations, and through the reduction in the use of offshore Internet gaming by Australians. Dealing with prohibited Internet content has occurred through a complaints system whereby Australian residents or companies complain if they believe Australians can access prohibited Internet gambling content. If the content is hosted overseas, filters are notified. ISPs are then required to provide one of the filter products to their subscribers who have the option to ‘opt in’ to the filtering product. The review also includes assessments of the filtering technology available which find many shortcomings in its current capabilities. While these means for enforcement seem to be inadequate, at best dependent on significant voluntary cooperation, the enforcement of the act nevertheless seems to have substantially reduced the amount of online gambling. The review of the Act states that the number of Australian adults using Internet gaming services had dropped from an estimated 58,000 (0.41% of adults) in the twelve months to April 1999 to 18,000 (0.12%) in the twelve months to April 2003.

The class and blog discussion has pointed out the numerous inevitable shortcomings in internet legislation and enforcement, however this example seems to show that less than perfect regulation can still have a substantial impact on the extent of online gambling. While regulation in the United States may be more challenging than in Australia (for example because the number of online gamblers is far greater, etc), I would suggest that such a policy focusing on host companies could nevertheless significantly reduce the practice of online gambling.

One concern that was brought up in Avi’s post was that under regulation the people who will continue to gamble online will likely be those with gambling problems. I agree that this is an issue, but think that the fact that the risk of gambling addiction is a fairly universal concern when it comes to online gambling would make regulating addicted users easier and less contested than regulation in general. Following last week’s class discussion, I took a look at PartyPoker.com, curious as to whether the site addressed any issues regarding legal or responsible use of their site. The site contains a “Responsible Gaming” page, which discusses both the precautions they take to prevent underage gambling and addresses the issue of compulsive gambling. The website gives recommendations and tools for those who feel the need to place limits on their own gambling, and claims that they are always working to enforce controls intended to limit compulsive gamblers. These measures suggest that the host companies realize that if they are to maintain a positive image with their users and to avoid general public and governmental scrutiny, they do need to appear to be supportive only of responsible and controlled gaming. In other words, there seems to be a natural incentive for host sites to cooperate with governments pressuring them to attempt to locate gamblers who seem to have compulsive gambling habits.

In summary, I think that the example of the IAG in Australia suggests that regulation of host companies can be effective in reducing internet gambling, and that users who may not respond to such measures could be targeted by putting increased pressure on companies to ensure that their users do not gamble irresponsibly.

Several key issues seem to come into a debate of Internet regulation. First, is Goldsmith’s distinction between mandatory laws and default ones. The former are laws which for “paternalistic reasons” limit the behavior of individuals[1]. The latter are rules which private parties may override via contract. Goldsmith agrees that “Exceptionalist’s” claims[2] (to use Post’s language) make sense with respect to default laws. It is the mandatory laws, on which they disagree. Many of these laws are enacted to protect a public good or third parties – a need that does not disappear in the virtual world. As a disclaimer: I am making no normative claims about the need for regulation of any specific issue; I am merely considering how government might best go about it.

At this point, it seems silly to consider arguments in abstract. For the remainder of the article, I will use the issue of online gambling, which we discussed on Feb. 14^th in class. This issue contains a mixture of moral (the effect on a gambler’s family), legal (gambling is illegal in most states), financial (potential loss of lottery revenue) and international concerns (most of these sites are located offshore). It well represents the complexity of internet-related issues likely to come before regulators. In class we discussed various methods of regulation and I will give my thoughts on most of them.

The most contentious was the direct regulation via technological means (i.e. filtering). Many (especially the technologically inclined) believe this to be infeasible. They argue that through encryption and the establishment of new protocols over the basic TCP/IP, one could transmit data without the possibility of detection and regulation[3]. While the argument is valid, it ignores the potential of technology combined with realworld legal tactics. The RIAA used both monitoring of P2P networks and high-profile lawsuits to curb student behavior[4]. From what I have seen, the RIAA has managed to curb the music sharing impulse on at least one college campus, despite the ingenuity and resourcefulness of students. If this example is any indication, technological monitoring coupled with legal action works. The real question is whether we, as a society, are willing to tolerate such costs (loss of privacy, threats of lawsuits). An adequate discussion of this will have to be postponed for some other time but it seems that if the RIAA tactics were employed not by a private entity, but by the US Government, the Orwellian overtones would be chilling.

Another solution that was suggested would be to deal diplomatically with countries that harbor online gambling websites. The canonical example is PartyPoker.com, a popular gambling site based in the UK. Considering the state of Anglo-US relations, the possibility of a diplomatic solution cannot be precluded. However, if a diplomatic solution succeeds, PartyPoker.com could easily move to a nation less amenable to use policy (many countries in the Caribbean, for instance, are fiercely protective of their tax shelters). Thus, diplomatic action would only unnecessarily cost the US political capital without substantive benefit. Dealing directly with the companies seems even less likely to succeed: it is hard to convince a company to cut off almost all of its US activities (Gambling from Nevada might still be legal) unless the US Government could threaten it with something substantially worse.

The best solution seems to be requiring credit card companies to freeze payments to online gambling sites. The intercepted money could be returned to the gambler’s accounts and the sites would quickly keep their users from betting. Logistically, this would not be difficult to coordinate: Mastercard and Visa comprise the overwhelming majority of the market, with almost all of the remainder is held by American Express and Discover. David Rosner[5] argues that this would (1) make merchants less trusting of credit card companies and (2) create an impetus for creating new payment companies that would not be subject to the law. The first concern is important to consider, as mistrust could result in substantial economic costs. However, it seems unlikely to occur: the law would be crafted to only affect internet gambling companies, and only halt payments to an updated list of specific accounts that the government provides. Most companies are pretty sure they are not involved in internet gambling (although a solid legal definition would be necessary). The author’s second concern (as well as the more general concern that internet gambling sites could use foreign intermediaries[6]) is unwarranted. Such services require a tremendous amount of capital (and trust) before being established and the industry is highly monopolized (as mentioned above). The law could also be written broadly enough to allow for the regulation of any company providing fund transfers. Lastly, if foreign front companies are created, the government can simply update the list of accounts to block. Ultimately, this regulation is designed only to significantly deter online gambling: by creating enough of a hassle, policymakers hope to deter users from becoming addicted.

Both Post and Goldsmith establish extreme opposition points against which their more nuanced arguments fair better[7]. Ultimately the solution will lie somewhere in between these extremes. For more serious issues like Child Pornography, government monitoring and high profile prosecutions might be warranted. However, for issues less pressing , less drastic measures are required. If online gambling is any indication, establishing barriers to quick electronic fund transfers presents a valuable tool to regulators.

The issue of internet gambling provides us with an example of how major international freedom of speech and commerce disputes may be handled in the future, and perhaps what we need to be careful of.

The $12 billion dollar US market for online gambling won’t be relinquished without a fight, and the US is only now starting to put its foot down. In 2004 the island nation of Antigua won a WTO ruling against the US, claiming violations of free trade for their restrictions on internet gambling. However, Antigua’s only real response to noncompliance would be to impose trade restrictions that would end up being more harmful to their own economy than to the US’s.

The US response of reintroducing a bill for the Internet Gambling Prohibition Act may stir similar complaints to the WTO from countries like the UK, which can have a more powerful economic influence. While the relationship that the US and the UK currently share may preclude any hostile economic sanctions, new nations like South Africa are getting into the internet gambling business. If enough nations develop an economic dependence on US gambling, they could form a WTO backed coalition strong enough to actually force the US into compliance.

However, the bigger issue than internet gambling is how these disputes will be worked out in the future. Unless the jurisdiction over internet commerce is explicitly assigned to some specific body, groups like the WTO will snatch up power where they can. The WTO may use this case to set a precedent for its authority in delegitimizing legislation on internet commerce. This means that smaller nations without the economic punch of the US are limited to idle threats to illicit any changes on the content of the internet they access. The danger here is that “might makes right” could become the new WTO based paradigm for deciding the limits on nations to control internet commerce and content from overseas.

Talk is also beginning that the Hague Conference on Private International Law— a meeting that tries to harmonize the laws of its 65 member nations every five years or so— may be focusing on internet issues in its next meeting. Although the Hague Conference is a much more egalitarian and judicious decision-making body, the trend seems to be that the jurisdiction of international judgments and legislation on internet issues is being claimed in small pieces by many different international organizations, and no one is really making sure it ends up in the right hands.

This trend may be an effective solution, but also poses a number of threats. Organizations like the WTO are not directly responsible to any elected government bodies, and may be dangerous hands to put the governance of the internet in. This kind of “free market” arbitration based on threats of sanctions will also limit the power to compel action to those with a big enough economic influence. Hostile economic arbitration may also damage existing diplomatic relationships. Without a central designated body whose judgments are respected and obeyed, the process of governing the internet may become a survival of the economic fittest.

Many comparisons have been made in previous posts between the RIAA approach to illegal filesharing and possible methods of confronting online gambling. However, for policy purposes, there are a few key differences between music piracy and online gambling that I would like to highlight.
First we can consider the harm done by each. Even after the RIAA began to sue individuals, upping the stakes, many people believed that they could avoid the RIAA’s eye by only downloading files and not uploading any. Once downloaded, the damage was done, from the RIAA’s perspective; there was no need for the user to hold a connection open to play the downloaded MP3 file. More generally, I believe that the primary harm of internet piracy, again from the RIAA’s perspective, was breaking the monopoly-esque power of the record labels. It disinclined people from buying music in the way that people previously bought music: hearing a couple key tracks on the radio from a highly publicized rock star or diva, and fronting $20 for about thirteen songs of varying quality. Since then, consumers have come to appreciate new and less formal methods of music distribution that generally offer them more value: on-demand downloads, online radio, podcasts, and MP3 blogs. While piracy itself has hurt the RIAA’s profits, I think the shift in the market that piracy precipitated has been at least as troublesome a phenomenon for them. Even as their methods of piracy prevention have become more effective, they still have not seen the recovery they would like.
The harm of internet gambling is qualitatively different, and distributed differently over time. Whether the state bans are intended to protect gamblers from themselves, or simply discourage that form of economic activity, let’s assume that there is good reason for the ban and that the harm is very real. Online gambling requires a continuous connection to the Internet, and an indirect method of payment. Both can be attacked. While the RIAA has accomplished nothing until every “free” copy of a file is gone from the ‘net, every gambler who is prevented from gambling on the Internet is a small improvement in the situation. Making it troublesome for a user to connect to online gambling sites will likely also cut down on the addictive nature of playing. The final thing that is different is the issue of trust. Assuming the RIAA doesn’t sue you, taking a “free” copy of a music file from the Internet is relatively safe. While most people are aware of problems with gambling, there’s a certain assuredness in real casinos that the game is fair. I am surprised that this complacency transfers over so well to the Internet. It’s all too easy to create a scam site claiming to be an online gambling site that is in fact cleverly programmed to take money outright from its participants. This is the front I’d take, with a few large media stories about people who lost everything to internet gambling, and touching upon questions of fairness.

The more important question that intrigues me is the larger one regarding the governance of the Internet. In our first class, we discussed the development of an ad hoc form of trademark law by ICANN, and the ambiguities of jurisdiction apply to many more cases than online gambling. As we have discussed in class and on this weblog, copyright, trademark, and even decency standards tend to come into conflict. Conventionally, aside from gamers who enjoy immersive worlds, people think of the Internet more as an institution than a place, the latter word being reserved for real-world geographies. From this point of view, law would seem to straightforwardly suggest that the user is only in the geographical place and not the virtual one, leaving the problem one of enforcement (the aforementioned “arms race”). Is it possible that we might one day all come to think of the Internet a place of its own, that can be governed? Such a view would does make today’s legal questions of double jurisdiction extra-puzzling, for it is the first suggestion that we now have the mysterious ability to be in two places at once. Jurisdiction itself would start to make little sense, as there is only interaction with other people.