UK: Commercial And Dispute Resolution: Speculating For Gold On The New Frontiers Of Gambling

Last Updated: 5 September 2007
Article by Carl Rohsler

Ten years ago, on what we then called the Internet but now presumably should call "Web 1.0", lawyers from around the world were grappling with the fundamental issues concerning the legal systems which would apply to gambling transactions which straddled international boundaries. Of course, there are even now fundamental disagreements about how to approach those questions. However, in the world of Web 2.0, there are new questions floating to the surface. One which is particularly pertinent is where the "edges" of gambling activity lie. The purpose of this article is to examine 3 examples of how recent developments challenge us to understand what exactly we mean by gambling, and where the limits of gambling blend in with entertainment or even normal commerce.

Let us start with one of the most prevalent aspects of Web 2.0, the "virtual worlds" which are attracting so much interest in the press. Currently, Second Life, the most popular of these platforms has over 8.3 million residents who spend more than US $1.5 million each day on purchasing tracts of imaginary land, developing them and trading services amongst themselves. The world allows players to create and personalise avatars which can interact, play, do business and otherwise communicate with each other. One of the most prevalent features of Second Life is the hundreds of virtual venues which offer users the opportunity to gamble using that world’s virtual currency, the Linden Dollar. Linden Dollars currently trade at approximately $265L to $1US, and some are alleged to have made millions from the creation of graphic objects which they then sell on-line to fashion-conscious members.

Whilst it is difficult to estimate the total size of the gambling economy in Second Life, some figures quoted by Reuters indicate that the three largest casinos each earned profits in the region of Ł750 per month. Whilst this is relatively modest, the expansion of Second Life may soon make it a viable business model at a larger scale. In the US, the FBI has been assessing the compliance of Second Life gambling operators under the Unlawful Internet Gambling Enforcement Act (UIGEA). Since UIGEA covers gambling that involves "hazarding something of value" and since Linden Dollars are essentially freely exchangeable, there seems no reason to treat it differently from any other form of electronic token. Linden Lab, the developer of Second Life, takes the position that UIGEA does not apply to its activities, arguing that it merely provides an interactive simulated 3-D environment in which users engage in activities of their own creation. This is similar to the defence adopted by ISPs for several years in relation to potential liabilities for the activities of their subscribers, and we have all become familiar with the concept that ISPs cannot be primarily responsible for all of the content displayed under their names, though once notified by a complainant, they may assume some responsibility for it. However, virtual worlds differ from ISPs in the crucial respect that they provide not only the forum for such operations, but also the financial mechanisms to allow trading to take place.

Whilst Second Life has been embraced by fashion, music and sport, the major internet gambling operations all seem to have decided to stay away for the time being. Factors such as the instability of the Second Life environment, the greater degree of anonymity amongst players, the danger of collusion and a handful of known bugs in the system may all be factors why the major gambling operators have chosen to stick to "conventional" internet gambling.

Meanwhile, in another one of the collaborative environments of cyberspace, there are reports that a number of Chinese "factories" have been set up to play the popular network game "World of War Craft"(WOWC). These factories employ players (often for low wages and long hours) simply to play the game and to kill large numbers of the virtual enemies, frisking the corpses for their gold and/or weapons. These prizes are then sold at real value to lazier and more affluent players. Online retailers bulk buy WOWC gold coins at a rate of approximately 100 coins for $3 and then sell on the digital currency at a profit creating a secondary marketplace in this commodity. Some estimates place the number of workers in these "gold factories" at over 100,000.

At one level, such activity might be seen only as commerce in the normal sense of the word – just as a commercial organisation might recycle an unwanted bi-product or a commercial fisherman might cast his nets on the seas in hope of a gain which he can sell for profit. However, one is inevitably reminded of the fact that the individuals fighting for virtual gold are playing a game for winnings in money or money’s worth – one of the classic definitions of gaming. However, if this activity is gaming, it currently seems to be almost entirely unregulated – a reminder of the early days of more conventional Internet gambling.

As a final example, one may turn to less esoteric forms of internet entertainment. A number of more conventional websites currently offer colourful and alluring games for prizes to children. One example is the French website which is clearly directed towards young children and allows them to amass a currency known as "bubz". The games on offer include not only conventional java based video games in which players collect "bubz" by completing levels in the game, but also by a number of scratch card games. These scratch cards have to be bought with bubz but allow the player the opportunity to win if 3 identical values are scratched off. Once enough bubz have been collected, it is possible to cash them in for actual prizes of CDs, video games, toys and other attractive merchandise. Once again, there is no cost (in monetary terms) for children to play the games – and yet once again there is clearly an activity in which something of value is hazarded in order to try to reap a return based partly on chance.

One might ask why such sites operate at all – they do not appear to derive revenue from click through advertising which was the (flawed) paradigm of the last generation of the Internet. What is really of value to the operator, one assumes, is the establishment of a database of young individuals who have grown used to the concept of hazarding safely on line with no chance of losing anything but an imaginary currency. The appeal of such a database to a more conventional gambling operator must surely be obvious. Such sites also arguably represent the mechanism by which habits are formed among those who will become the customers of online gambling sites in years to come. It is probably wrong at this stage to enter into the debate about whether such sites are harmless fun, teaching children the value of trading and taking risks, or whether they represent a more insidious mechanism for grooming the gamblers of the future. What is clear, however, is that they exist, and that they are highly popular forms of entertainment among the younger generation.

In conclusion, one cannot help but be impressed by the ingenuity of Internet operators to conceive of new ways to entertain and generate traffic. Many of these mechanisms will no doubt meet the same fate as some of the more woolly ideas of the previous dot com revolution – and one is tempted to say also that a number have at their core a currency which is no more real than South Sea Bubble stock or the value of tulip bulbs which soared and then crashed in the 18th century. But there will also be winners because, just like cinema films (or on-line slot machines), they can generate revenues from those who continue to enjoy spending money on something which has a genuine element of distraction or entertainment. Whichever of the models succeed, I believe that we are beginning to see the commencement of a softer and more all-encompassing form of on-line gambling and one which hard-pressed regulators have still not managed to get to grips with.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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