Will the gaming industry go all in on crypto? | Nelson Mullins Riley & Scarborough LLP

The popularity of cryptocurrency exploded in 2021 and consumer interest continues to grow. A prospect of particular interest to investors is the use of cryptocurrency in the gaming industry, and in particular for sports betting.¹ State lawmakers, regulators and gaming operators have so far taken a cautious approach.²

Wyoming became the first state to allow the use of cryptocurrency for sports betting transactions when it launched sports betting in September 2021.³ Wyoming law allows sports betting platforms to accept cryptocurrencies provided the currency can be converted into a cash-based currency.⁴ Colorado passed the Digital Token Act in early 2022, which among other things allows residents to use cryptocurrency for sports betting and even to pay taxes.⁵ Colorado has strict licensing standards for gaming operators who want to accept cryptocurrency.⁶ Other states, including North Carolina and Texas, have proposed legislation that would allow the use of digital, cryptocurrency and virtual currency respectively in sports betting.⁷ Industry commentators have predicted that sportsbooks will partner with crypto exchanges to offer digital wallets and enable betting with digital currencies.⁸

Despite significant customer demand, gaming operators have yet to embrace cryptocurrency in the United States even where it is legal.

Regulatory obstacles are slowing down the integration of crypto into the gaming market

Generally speaking, gaming operators are heavily regulated and must work with regulators to create opportunities for innovation. To date, the entry of cryptocurrency into the US gaming market has been somewhat limited, in part due to the lack of a specific gaming regulatory framework at the state level, the friction between the anonymity of crypto and Know Your Customer (“KYC”) requirements. , and anti-money laundering (“AML”) regulations.⁹

A precursor to cryptocurrency acceptance is cashless gaming. In May 2022, Las Vegas became home to the first fully integrated cashless resort casino.¹⁰ This casino allows patrons to use their mobile wallets for all purchases and games on the property.¹¹ This major advance marked the first step towards the expanded use of digital payments, mobile technology and cryptocurrencies in the casino environment. Significant state and federal regulatory hurdles, and uncertainty, must be overcome before casinos can accept cryptocurrency direct bets. However, recent actions by the Nevada Gaming Control Board show progress.

In January 2022, the Nevada Gaming Control Board approved a rule change that would allow customers to use an app to create and fund a cashless account.¹² This makes it easier for customers to use cashless casino games. Prior to the regulatory change, customers wishing to use a digital wallet in the casino were required to verify their identity in person at the casino before funding the digital accounts for use. In voting in favor of the regulation, a Gambling Control Board commissioner observed that consumers may have a much different view and experience of what might otherwise appear to be a minor regulatory requirement.^{1. 3}

Notably, the Nevada Gaming Control Board’s proposed regulation came after the Nevada Deputy Attorney General opined that such regulation would not conflict with federal anti-money laundering laws, clearing the regulatory path for the Gaming Control Board to act.¹⁴ The Gaming Control Board recognized the need to balance the integrity of the game with the incorporation of advances in technology.¹⁵

This careful and deliberate action underscores how, even in a gaming-friendly jurisdiction like Nevada, it is critical for operators seeking to innovate to engage with and educate regulators on how best to navigate and reform the regulatory landscape to embrace digital currency.

Examples of early cryptocurrency adopters include a small group of casinos that have added cryptocurrency exchange kiosks at their properties, allowing customers to convert their crypto holdings into US dollars.¹⁶ A casino on the Las Vegas Strip allows verified customers to use a cashless account via a mobile app.¹⁷ Last year, the casino started accepting bets from customers’ crypto wallets.¹⁸ However, bets are not made in cryptocurrency. Rather, the cryptocurrency is converted into US dollars. This casino announced a partnership with a cryptocurrency exchange to explore the use of cryptocurrency in gaming, which currently lacks regulatory approval in Nevada.¹⁹ The chairman of the Gaming Control Board informed the Nevada Legislature’s Joint Interim Standing Committee on Revenue that the board welcomes proposals from cryptocurrency industry participants and gaming companies.²⁰

An online sportsbook operating in Colorado is taking advantage of the Digital Token Act by allowing crypto deposits into betting wallets facilitated by a third-party payment provider.²¹ To provide some protection against the volatility of cryptocurrency, this operator locks the exchange rate of the cryptocurrency against fiat for 15 minutes while the customer decides whether to make a deposit to their sports betting account. But there are limits – no games or withdrawals in crypto.²² A resort in Mississippi recently added cryptocurrency ATMs to the casino floor, allowing customers to access bitcoin in their crypto wallet and convert the coin to US dollars.²³ Other gaming-friendly jurisdictions, such as Wyoming and Nevada, remain states to watch as lawmakers and regulators attempt to create a legal structure for gaming and sports betting operations involving cryptocurrency.

Federal Cryptocurrency Regulation

At the federal level, the Biden administration has taken an interest in cryptocurrency regulation.²⁴ As this firm wrote in March, President Biden issued an Executive Order on Ensuring the Responsible Development of Digital Assets, which seeks to develop a comprehensive federal framework around digital assets. The FBI announced a digital currency unit earlier this year, and the Justice Department established a new national cryptocurrency enforcement team.²⁵ FinCEN has specifically highlighted money laundering risks associated with the use of crypto in sports betting.²⁶

Given that states have historically been the primary regulators of the gaming industry, there may be some challenges in reconciling future guidance and regulation at the federal level with the evolving body of state gaming legislation governing cryptocurrency. For gaming operators, this provides an opportunity to engage with regulators in the jurisdictions in which they operate or plan to operate in, to offer assistance in establishing and amending regulations regarding cryptocurrency in the gaming industry.

The way forward

There is clearly a market for games and sports betting that includes cryptocurrency. Consumer curiosity and engagement with blockchain and cryptocurrency will continue to drive the integration of this technology into everyday life. If operators can work to fill regulatory gaps in this area at the state and federal level, they will have the opportunity to draw these customers into the regulated gaming industry.

1. ^{According to the National Institute of Standards and Technology of the US Department of Commerce, “cryptocurrency” includes “digital asset/credit/device in the system, which is cryptographically sent from one blockchain network user to another. In terms of cryptocurrency creation (as a reward for mining), includes the publishing node a transaction that sends the newly created cryptocurrency to one or more blockchain network users. These assets are transferred from one user to another using digital signatures with asymmetric key pairs.” See NIST glossary, Cryptocurrency. Other regulators, including the US Securities and Exchange Commission (“SEC”) use the term “digital asset” to refer to “an asset that is issued and transferred using distributed ledger or blockchain technology.” Declaration on the issuance and trading of securities in digital assets, Division of Corporation Finance, Division of Investment Management and Division of Trading and Markets, SEC (Nov. 16, 2018), available here. As the SEC has noted, digital assets include, but are not limited to, virtual currencies, coins, and tokens. ID. A digital asset may in certain cases be considered a security under federal securities laws. Although not defined in the securities laws, the SEC often refers to digital assets that are securities as “digital asset securities.” ID.}
2. ^{See Pat Evans, Cryptocurrency in Legal Sports Betting: What’s Next?Legal sports report, (9 June 2022).}
3. ^{Matt Rybaltowski, SportsHandle, Wyoming, South Dakota Approves Sports Gambling Rules, (August 2, 2021); Zack Jones, The Next Frontier For US Sports Betting Is Crypto And Blockchain Technology, Forbes (Sept. 12, 2021).}
4. ^{Jones, supra.}
5. ^{Matt Rybaltowski, US sports betting industry is warming up to crypto, but concerns remainSportsHandle (28 July 2022).}
6. ^Ibid.
7. ^{Heather Morton, Cryptocurrency 2021 Legislation, National Conference of State Legislatures(December 16, 2021).}
8. ^{Jones, supra n.3.}
9. ^{See above n.5.}
10. ^{Steve Ruddock, BettingUSA.com, Resorts World Casino goes cashless with Play+(June 16, 2021).}
11. ^Ibid.
12. ^{Colton Lochhead, Nevada regulators approve rules for cashless gamingLas Vegas Review-Journal, (21 Jan. 2022).}
13. ^Ibid.
14. ^{Howard Stutz, The Nevada Independent, Nevada Gaming Commission Approves Regulation Allowing Cashless Registration(January 20, 2022).}
15. ^Ibid.
16. ^{Howard Stutz, The Nevada Independent, Experts: Nevada Casino Industry Can’t ‘Bury Its Head’ Over Cryptocurrency(February 28, 2022).}
17. ^{Steve Bittenbender, Casino.org, Nevada Gaming Commission approves mobile verification for cashless gaming accounts(January 21, 2022).}
18. ^{Steve Schult, card player, New Las Vegas Strip Casino Accepts Cryptocurrency as Payment(May 10, 2021).}
19. ^Ibid.
20. ^{Nevada Regulator Weighs Cryptocurrency in Gaming Floor, Calls It a “Complex” Subject Due to Price Fluctuations(June 6, 2022).}
21. ^{See above n.5.}
22. ^Ibid.
23. ^{Yasmin Moore, Gambling News, Mississippi sees first cryptocurrency ATM installed at casino(3 Nov 2021).}
24. ^{Ryan Haar, US officials are sending mixed messages on crypto regulation. Here’s what it means for investorsNextAdvisor, (18 April 2022).}
25. ^{Sarah N. Lynch and Chris Prentice, FBI to form digital currency unit, Justice Dept taps new crypto czarReuters, (February 17, 2022).}
26. ^{See above n.5.}