Federal vs. State Internet Gambling Regulation: Why Not Have Both?
By Frank Cantania
©I-Gaming Business
As much of the rest of the world has moved toward acceptance and mature regulation of Internet gambling, the United States prohibition has become increasingly self-destructive and indefensible. For that reason, many observers now believe that it is only a matter of time before Internet gambling in some form is legalized in the United States.
If that were to happen, it would immediately raise the question of who would regulate Internet gambling, the federal government or individual States? Until now, it has been uniformly accepted that gambling regulation remains the province of the individual States under the Tenth ("States' Rights") Amendment to the United States Constitution. The federal government has never regulated gambling (except on Indian lands), and has only prosecuted offenders of various federal criminal codes.
During the past term of Congress, several bills have been introduced regarding Internet gambling, with the most notable sponsor being Representative Barney Frank (D-MA). Rep. Frank introduced H.R. 2046, which if enacted into law, would establish a federal Internet gambling regulatory program. A companion bill, H.R. 2607, sponsored by Representative Jim McDermott (D-WA), would amend the IRS Code to establish licensing requirements and fees for Internet gambling operators. In fact, all the congressional bills introduced, with the exception of H.R. 2140, would create a federal agency to regulate Internet gambling. H.R. 2140, introduced by Representative Shelly Berkley (D-NV), would authorize a study of Internet gambling to provide a proper United States response. Rep. Berkley's bill had the endorsement of the American Gaming Association, which supports state rather than federal regulation of Internet gambling.
However, Internet gambling is not the same as land-based casino gambling. Until recently, a person who wanted to gamble had to physically travel to a casino facility. Now, with the rapid development of communication technology and the growing popularity of the Internet, gambling has become a borderless activity with no physical constraints. As long as a player has a computer or phone connected to the Internet, he or she can log on from anywhere and play poker or some other form of casino-style game.
Of course, since the player is not present and cannot put his money in a slot machine or down on a card table, Internet gambling requires a means of getting money from the patron to the virtual casino and back again. Such intermediaries are known as "payment processors," and can be anything from banks and credit card companies to third party cash account depositories. State gaming regulators have little experience with payment processors, since the processors' activities constitute more of a banking transaction than a gambling transaction. However, federal regulators have a great deal of experience in regulating banking facilities.
My suggestion is that, instead of viewing Internet gambling regulation as an all federal or all state proposition, we resolve the issue by allowing each sovereign to continue to do what is does best. Individual States, which already have experience in regulating gambling activities, should be allowed to regulate Internet gambling to the extent the States that decide to opt into the Internet gambling and regulatory process. The federal government should assume responsibility for the regulation of payment processors.
States could be given three options: regulate; prohibit; or do nothing. If a State decided to regulate, it would adopt regulations it deemed sufficient provide player protections to its citizens. This might vary from state to state. Other states could decide they would rather prohibit than regulate, which would be their right as individual States. Some States might decide to take no action at all, leaving it entirely up to their citizens to decide. A State-licensed Internet gambling site would be allowed to accept players from States in which it was legal or States in which no action had been taken, but not from States in which Internet gambling had been prohibited.
The federal government would enact legislation providing that online gambling was illegal unless licensed and regulated by a State. The legislation would provide a regulatory structure whereby the federal government, through the Department of the Treasury, would regulate the payment processing for the online gambling industry. The payment processing would not only include state-regulated Internet gambling, but also the payment processing for sites located offshore in approved Internet gambling jurisdictions. These offshore sites would have to block play from States in which Internet gambling had been prohibited.
The federal government would receive revenue by charging a small percentage on every payment processed. Based on the worldwide revenues of Internet gambling, this system could bring in annual revenues of millions (even billions) of dollars without adding any substantial additional federal bureaucracy.
Although States would be precluded from imposing any processing fees, they would be allowed to collect income taxes as well as other incidental tax revenues from operators located within their borders. Because of the competition to attract operators, States would have to offer attractive tax rates.
States might also require players within their borders to register for a small fee. This fee could be collected online, and would assist in preventing underage players from registering, since the State could easily cross-reference each individual with its various databases such as driver's licenses.
If everyone interested in establishing an Internet gambling regulatory structure in the United States, state and federal officials, land-based as well as some online operators and software providers, were to sit down and discuss the issues, I am sure a mutually beneficial resolution could be found. However, as long as Internet gambling legalization and regulation continues to be viewed as a "zero sum game" which only one party can win, we will either not see any resolution soon or see a resolution with flaws.
Copyright © 2008, Frank Catania All rights reserved