(This post was contributed by Alan Conklin, a third year law student at the Villanova University School of Law and intern for Roger Quiles, Esq.)

​A FIFA YouTube gaming star and his business partner appeared in court on February 6, 2017 to defend allegations that they violated the UK’s Gambling Act.
 
During Monday’s hearing at the Birmingham Magistrates’ Court, Craig Douglas, better known under the YouTube alias NepentheZ, pled guilty to charges of advertising unlawful gambling and being an officer of a firm that provided facilities for gambling without a license. For his actions, the Court ordered Douglas to pay £91,000 (est. $97,000).
 
His business partner, Dylan Rigby, was forced to pay a much heftier fine. Rigby, who created and ran the gambling website, pled guilty to two charges of providing facilities for gambling and one charge of advertising illegal gambling. For these offenses, Rigby was ordered to pay fines and costs of £164,000 (est. $175,000).
 
The website, FUTgalaxy, allowed users to gamble virtual currency they earned playing FIFA 17 on real life matches played in the UK, France, Germany and Italy. If successful on their bets, users could then transfer the virtual currency back to the video game or exchange it into actual currency through an online black market.
 
Gambling in the UK
While it is typically legal to gamble on sporting events in the United Kingdom, the country’s Gambling Act of 2005 strictly forbids providing facilities for gambling without having an operating license. The United Kingdom’s Gambling Commission (the “UKGC”) has made it clear that the Act extends to popular forms of esports gambling that involve virtual currency.
 
In August 2016, the UKGC published a discussion paper entitled “Virtual currencies, eSports and social gaming.” In the paper, the UKGC addressed virtual currency betting, a type of gambling that has become prominent in the esports community over the last few years. Virtual currency betting is identical to traditional gambling but instead of using monetary currency, players use in-game items they have earned which have assigned values. For example, in FIFA 17, players can earn FIFA coins by winning matches and competitions in the game’s Ultimate Team mode. These coins can then be traded for different items that have assigned values. The fact that this type of currency can be traded for items with real values, or for actual currency, has led the UKGC to consider it a “de facto virtual currency.” Accordingly, the UKGC requires any facility that fosters gambling with this type of currency to have an operating license.  This license requirement is intended to protect consumers, especially children and other vulnerable people who may be exploited by this new form of gambling.
 
Here, Douglas and Rigby did not have an operating license for their gambling site, effectively making it illegal. Additionally, Douglas often promoted the unregulated site to his 1.4 million YouTube subscribers, many of which were under the UK’s legal gambling age of 18. In one video from his YouTube channel, Douglas even acknowledged the age limit and stated, “You don’t have to be 18 for this, because this is a virtual currency.” The unregulated site had no age restrictions and allowed minors to use a credit card to place bets in the form of FIFA coins. FUTgalaxy generated a pre-tax profit of around £96,000 (est. $103,000) between July 2015 and February 2016.
 
More to come?
This case is an important milestone in the esports industry, as it marks what may be the first successful government prosecution of a person involved in unlicensed gambling of virtual items. It will be interesting to see whether this ruling will have any impact on future virtual currency issues across the globe, including the United States, which has much stricter gambling regulations.
 
In the United States, one State has already had to address the issue of virtual currency gambling. In October 2016, the Washington Gambling Commission  (the “WGC”) ordered Valve Corporation, the creator of Counter-Strike: Global Offensive (“CS:GO”), to stop its skin transferring system, which allowed CS:GO players to use skins, or in-game items that can be used to change the appearance of game characters or guns, as virtual currency. Unregulated gambling websites, similar to FUTgalaxy, allowed skins to be bought and sold for actual currency, essentially assigning the skins a real-world value.  On these sites, players were able to bet their skins on esports matches, coin flip games, lotteries and casino games like blackjack and roulette.  This unregulated market was on pace to exceed $7 billion in 2016 prior to the WGC’s order. Trevor Martin and Tom Cassell, popular YouTube personalities, owned one of the most notorious skin gambling websites, the now defunct CSGO Lotto. Value Co., Martin and Cassell are currently in a class-action suit that alleges the parties created and promoted an illegal gambling market. However, unlike in the FUTgalaxy case, US and state government agencies have yet to take any action against these parties since the gambling sites have been shut down.
 
With the rapid growth of the esports industry in today’s world, it is very unlikely this will be the last gambling case involving virtual currency.

Virtual currencies have exploded recently and have been used as investment devices and freely tradeable currency. There has been a growing trend of businesses accepting virtual currencies as payment, despite warnings from the U.S. Securities and Exchange Commission and the Consumer Financial Protection Bureau. However, virtual currencies, such as Bitcoin, have not been regulated by the federal government nor by any of the States. New York is seeking to be the first State to do so. 

Last month, New York's Department of Financial Services released proposed legislation for businesses that provide virtual currency financial services. Notably, this legislation does not apply to merchants and consumers that utilize virtual currency solely for the purchase and sale of goods or services. Instead, the proposed legislation focuses on businesses that provide Virtual Currency Business Activities, which it defined as any one of the following activities involving New York or its residents:

• Transmitting virtual currency or receiving virtual currency for transmission
• Securing, storing, or maintaining custody or control of virtual currency on behalf of others
• Buying and selling virtual currency as a customer business
• Performing conversion services where actual currency is converted/exchanged for virtual currency, where virtual currency is converted/exchanged for actual currency, or where virtual currency is converted/exchanged into other virtual currency
• Controlling, administering, or issuing a virtual currency

Under the proposed legislation, businesses engaged in any of the above virtual currency financial services must obtain a Bitlicense from the Department of Financial Services to operate. The Bitlicense necessitates that the businesses also be subject to a multitude of rules governing:

• capital requirements
• the custody and protection of customer assets
• record keeping
• auditing
• anti-money laundering programs
• cybersecurity programs 
• disaster recovery
• advertising and marketing
• consumer protection measures
• business ownership

One of the most notable aspects of the proposed legislation is the record keeping provision, which requires that information regarding all parties to a transaction (including names, addresses and account numbers) be kept for at least ten years. Such a requirement is instrumental for the regulation of virtual currency as anti-money laundering efforts and protection from theft or fraud require this information to hold people accountable for their actions. However, anonymity had been a highlight of utilizing virtual currency thus far.

As of July 23, the Department of Financial Services' proposed virtual currency legislation is in its 45 day public comment phase. After the phase ends, the Department will revise the proposed legislation and re-release it for further review. It is important to note that the final version of this proposed legislation may be very different than its initial proposal. 

This proposed New York legislation, which can be accessed through a link above, is the first attempt in the United States to regulate virtual currencies such as Bitcoin. As New York moves forward with some form of this legislation (pending revisions and approval) other States will certainly take notice. Of course, the real wild card is that the federal government has not yet regulated virtual currencies. Regulation by the federal government has been much anticipated, as favorable regulations could help virtual currency prices soar or conversely, tight regulations could depress prices. Federal regulation also helps guide states, who may wish to enact stricter regulations as they see fit. 

Whether businesses that provide virtual currency financial services like it or not, regulation is coming. If businesses disapprove of New York's proposed legislation, they should submit their commentary to the Department of Financial Services while the public comment period is still open.