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Author Topic: A Cautionary Tale: What the poker community can give to the bitcoin community  (Read 2136 times)
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July 09, 2011, 10:16:34 PM

There has been some reasonable interest in bitcoin from the online poker community.  As a member of that group I thought I'd share some wisdom that we have gained over the last decade or so with regards to online money, governments, and the institutions, which will hopefully help all of those in the bitcoin community to be better prepared to face future hurdles.

Online poker started in the mid-90's, but didn't explode until 2003 when Chris Moneymaker won the World Series of Poker Main Event ($10k USD buy-in).  After seeing a nobody best some of the best poker players in the world (including outlasting Phil Ivey, who took 10th), many people figured they'd try their luck at poker.  Some became very good, and made piles of cash.

Some of you are probably wondering why this relates to bitcoin at all, so without being longwinded:

Part 1: The US Government Fears all Things New

You used to be able to fund most poker sites with PayPal.  I'm not sure on the exact timeframe when it was banned, but it was before the major boom.  I started playing online in 2003 and was never able to use it.

Next came Neteller and Firepay.  Neteller was definitely the 600lb gorilla in terms of e-wallets that served online poker sites.

In 2006 we saw the passing of the UIGEA (Unlawful Internet Gambling Enforcement Act).  For many of us that lived in States where poker was explicitly legal, we continued to play under the safe harbor clause of the 1961 Wire Act (where the UIGEA drew power), Section 1084 b) states that:

(b) Nothing in this section shall be construed to prevent the
    transmission in interstate or foreign commerce of information for
    use in news reporting of sporting events or contests, or for the
    transmission of information assisting in the placing of bets or
    wagers on a sporting event or contest from a State or foreign
    country where betting on that sporting event or contest is legal
    into a State or foreign country in which such betting is legal.

Basically saying, if it's legal where you are, and legal where the servers are hosted, then it's all good.

Others concluded that since the UIGEA explicitly stated it only applies to "[contests] which opportunity to win is predominantly subject to chance", and therefore poker was exempt as many States in the US who allow for poker, have ruled that it is not a game predominantly subject to change, and is a game of skill.

The UIGEA was not an immediate threat, as part of the law stated that Regulations would have to be decided upon by the Department of Justice (DOJ), this did not happen until 2009.

In 2007 we experienced our first major hurdle when Neteller had all of its funds seized, using the UIGEA as justification (note, the regulations were not released).

It took about 6 months, but eventually all player's funds were returned.  Some players had 6-figure sums stuck in Neteller.  Poker continued as new processors were found, but the moral of the story is that the DOJ does not care about the law other than their own interpretation.  As biased as I may be, you are free to read any of the links provided, and decide for yourself if the DOJ over-stepped their bounds.  But the point isn't to argue the legality of poker, the point is to tread carefully in waters lacking legislation or DOJ oversight, especially with as many choke points as bitcoin has.  Also, do not pretend that just because you are in another country that the US DOJ won't have an impact on you.

Part 2: The Players

Life went on after the Neteller bust, and new processors popped up to facilitate transfers, until more recently, on April 15th 2011, we took a major blow when the DOJ seized the domains of Full Tilt Poker and PokerStars, freezing almost all payment processors in the process, stranding $150M+ of player's funds online.  As an aside, the 2009 UIGEA Regulations expressly state that player's funds are protected, and will be returned, however, proceeds from processing payments and from accepting payments, can be confiscated.  In layman's terms this means that the DOJ is not going to take funds from anyone playing online poker, but will take measures to stop funding.

You can view poker sites as bitcoin exchanges in this analogy, as these recent events uncovered terrible truths about how some of these businesses elected to run.

PokerStars elected to hold player deposits, and not to invest them or use them for business expenses.  Poker sites make their money by charging a rake, or a small fee per pot played.  It was estimated that in peak times, a site like PokerStars was making anywhere from $3-$5M USD per day in rake.  Because of this, PokerStars was able to make a deal with the DOJ and pay players back in roughly a month.

Full Tilt Poker, did not elect to hold player funds in earnest.  And as of this day (July 9th, 2011) there is no word on receiving payment because Full Tilt is insolvent.  Not only did they not hold on to player funds, they absorbed the cost of chargebacks for a period of 6 months and amounts of up to $60M USD.  A chargeback is where you purchase something on your credit card, then later dispute the charges.  Full Tilt did not want to have to deal with the PR nightmare of having to take back winnings from players because of a losing player's chargeback, so they simply absorbed the cost and had no money left when it came time to pay back players.

Part 3: Choke Points

Bitcoin is touted as a decentralized currency, but that statement is only as true there are e-wallets willing to transfer currency into bitcoin.  While I don't pretend to have figures, right now it seems that Dwolla is the current winner by a landslide, followed by LibertyReserve, followed by private bank wires.

This is in reality, highly centralized, and everyone should be cautious as all any over-zealous DA needs to do is allege fraud to freeze entire e-wallets, crippling the entire system.  However, I would point out that the stronger the bitcoin economy is (merchants etc), the less impact this will have, but still, converting native currency to bitcoin is highly bottle-necked.  (As an aside, we need a futures exchange asap!!!!! Business will be able to hedge much more of their risks given an exchange, traders will be able to serve more liquidity, and miners will be able to lock in rates).

Part 4: Summary/TL;DR

The moral of the story is that the US government will not like bitcoin, and will go after it.  Who knows how long this will take, but it will come.  As long as our ability to exchange our native currency to bitcoin, is facilitated by only a handful of institutions, we will be at risk.  In our favor is the fact that the process is slow, and time is on our side.

Secondly and IMO **MOST IMPORTANTLY** is to NOT TRUST THE EXCHANGES, any of them!  And by this, I do not mean don't conduct business with them, but it means to DEMAND clear policy on how they handle deposited currency or bitcoin, and to pressure them to have 3rd party audits or oversight committees to make sure our funds are safe and managed in our best interest!

This post was most certainly not designed to steer people away from bitcoin or any potential profitable ideas you may have, the point was to proceed with caution, to never underestimate how far the Federal US Government will overreach, and how poorly these exchanges will manage your funds, especially when it benefits them to do the wrong thing.

Don't be complacent, and don't assume that adoption on a wide scale means US government acceptance.  There are literally hundreds of poker related shows, on major networks, who run ads for the very poker sites mentioned in this post.  Poker is a past-time enjoyed by a large portion of Americans, and yet that level of acceptance was no where near enough to stave off the pressures from overzealous US Attorneys, and large lobbys.

Please be cautious, but moreso, please help protect bitcoin and yourselves!

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Jered Kenna (TradeHill)
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July 09, 2011, 10:31:48 PM

Excellent post, I actually read the entire thing which isn't something I've done to a wall of text since we launched.

You're spot on with this:

Secondly and IMO **MOST IMPORTANTLY** is to NOT TRUST THE EXCHANGES, any of them!  And by this, I do not mean don't conduct business with them, but it means to DEMAND clear policy on how they handle deposited currency or bitcoin, and to pressure them to have 3rd party audits or oversight committees to make sure our funds are safe and managed in our best interest!

We encourage you to diversify your funds and only keep funds on our exchange that you are currently or expect to be trading. 
There are some obvious advantages to keeping the bulk of our funds offshore but at the same time it scares the people that aren't concerned about the US government seizing our (your) assets.
We've made it very clear that we're not a fractional reserve bank but you shouldn't trust us based just on me typing that. We've done security audits (3rd party) and internal financial audits.
3rd party financial audits are coming as well. These should all be the minimums and we hope will be in the future.

Exchanges are a weak point in the BTC system. We are open to any option that will help protect Bitcoin and are already taking steps in that direction.
There is a lot of similarities between what has happened to poker and could happen to Bitcoin that you laid out. The DOJ has already proven that they will act how they interpret the  law and wait to be corrected.
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July 09, 2011, 10:58:23 PM

They seized all the .com domains names. So bitcoin business should learn from this and dont use .com or .us.

Better use .net? .org? Or .co which is not based in us.

Bitcoins - Because we should not pay to use our money
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July 09, 2011, 11:12:25 PM

thanks OP, very good of you to pass on your experience, its great to get some outside information rather than constantly seeing new double trouble threads !

i agree with everything you say

but the moral of the story is that the DOJ does not care about the law other than their own interpretation

insert many parts of usgov/oligarchies and the statement holds true.. they openly acknowledged they are prepared and willing to bomb, poison, pollute, pillage, overthrow, torture, kill and nuke anybody or country that they want to....  Roll Eyes

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July 09, 2011, 11:31:22 PM

This is a very powerful post and is making carefully think about whether or not to release my Bitcoin-related product anonymously when it's ready.  My gut reaction is to scoff at anonymous Bitcoin-related business -- how can I trust you if I don't know who you are? -- but at the same time I'm understanding the motivation behind the anonymity more and more.  Perhaps we should just start judging Bitcoin businesses on how trustworthy they behave, and not what their name or location happens to be.

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July 10, 2011, 12:00:33 AM

Without getting into specifics, I currently have about 3% of my total earnings from poker stuck online.  Point being, nothing risked, nothing gained.  Don't let my post stop you from trying to be a pioneer, just understand the risks.

One of the reasons I made this post was because I was just reading a question from a forum member about how MtGox handles their redeemable codes.  There were a few posts in there about how "Of course they take those codes out of their bitcoin account".  I would bet dollars to donuts, that they don't.  There are some other things MtGox does that seem pretty shady on the trading side of things, but I don't have enough proof to make a post about it.

Jered, I would definitely invite you to post links on your security audits and your reserve policies, as well as plaster them all over your site.  I think it would be really good for everyone, including your business.  However, I definitely learned from poker that people are very complacent, and only really make a fuss when things go wrong, so I'm not sure how the average person will view this post, or those warnings.
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July 10, 2011, 12:33:29 AM

"the DOJ does not care about the law other than their own interpretation."

Now you know why gun owners complain so much.  Wink

Fighting for liberty always means fighting for people you disagree with FIRST.
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July 10, 2011, 03:01:19 AM

Excellent post.
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July 10, 2011, 03:21:15 AM

I agree that it is inevitable for the US gov't to take an aggressive role. Simply because they aren't getting a cut. What i tend to do is not leave anything in any one place. I do not use gox at all. I decided before they got hacked to leave them alone just because something didn't seem quite right. As far as the illustrious retards that run my country they pretty much do whatever they want whenever they want. I do not think they can stop bitcoin as they haven't been able to stop things like file sharing and etc. Then again file sharing isn't really a threat to their collective wallets either.

Best thing to do is to have lots of options and to be prepared i guess

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July 10, 2011, 03:32:01 AM

Thanks for the post; much along the lines of what I have been thinking. 

I've been exploring several possible projects for building the Bitcoin economy through web development.  Perhaps the most glaring business idea is online gambling.  It would be an easy way to fill a void left by Full Tilt poker and the problems running online poker in general.  Bitcoin adds an extra layer of obfuscation and plausible deniability on the part of the site operator.  It is also an easy way to jump into a revenue stream as a company to sustain your site.  Those are not the best reasons for the sustainability of Bitcoin as a whole.

You are spot on that the first method of attack by the DoJ would likely be the exchanges; and frankly I do not want to see them go down as they are far more critical to the Bitcoin community in general rather than for just transfering Bitcoin winnings to fiat.  However, the exchanges would be painted as the offenders when building the case to cease the new method of online gambling.

In the end I decided not to pursue any online gambling projects as these would be sites operating in the "grey" of the law.  For Bitcoin to reach widespread usage it must be presented and utilized as much as possible in the "white" and far away from the "black" (market) as possible.  Regardless of its true merits that we in the community know and believe at some point it will be labeled and assaulted under the guises of its shady uses.  There must been clear and present examples of the GOOD that Bitcoin is used to greatly outweigh the bad. 

Bitcoin will one day face a PR war in the eyes of governments and people.  There must be more out there to use as awesome examples than online poker.
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July 10, 2011, 03:43:54 AM

I believe Namecoin is designed to get around the whole US Gov't seizing domain names. Personally I think namecoin is one of the best innovations to come out of the bitcoin project.
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July 10, 2011, 03:51:17 AM

Good post. I was an online player and will be again eventually. Well, I guess I already am, I play some at betco.

The exchanges make great choke points right now because there is so much wealth to be converted. But eventually people will just live 'inside' bitcoin earning and spending without needing to convert. People who must convert will find a dealer much more easily than they can find weed. Right now there are only $100M worth of bitcoins spread around the world which means there can't be many deep reserves in each city, but when it is $100B there will be plenty of local liquidity. And I don't just mean geographically local. Everyone will have a cousin or brother in law who needs to or can go the opposite way.

This is a way better situation than PS or FT where there is one place where your cash is. Hit that point, done. With Bitcoin they get some inconsequential amount of flow and then they have to deal with a more dispersed trading situation.

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July 10, 2011, 08:02:45 PM

I also forgot one of the biggest stories that came out of the poker world:

Ultimate Bet/Absolute Poker scandal
Cliff's: Guy sells company, guy makes deal with programmer in charge of auditing the site's Random Number Generator (RNG) to give him a backdoor, allowing him to see opponent's hole cards.  Guy makes north of $20M, but is brazen and stupid, generates attention with a correct T-high call to win a tournament.  The 2+2 poker community begins auditing his results and realizes that it's statistically impossible to run as hot as he has.  People come forward with very bizarre hands.  Eventually Ultimate Bet refunds players roughly $22M, but has done irreparable damage to online poker's reputation (afterall, a lot of people don't like online poker because they think this type of cheat is common place).

Other scandals include ponzi-esque poker sites that attract players with large deposit bonuses (you deposit money, and get an extra percentage bonus that is released over time).  This would be analogous to the power that exchanges have, except the exchanges have even more power via the anonymity that bitcoin provides.  The problem is easily divided into two parts: 1) Amount to me made from scamming > Revenue made from legit business, and 2) Another exchange exists, of a size large enough to handle bitcoin laundering.

I don't foresee these being an issue right now, but what we've learned from the poker community is that nastier things happen when the shit hits the fan.

Analogous to the UB/AP scandal linked above, would be exchanges front-running large orders and/or fixing the markets.  Frontrunning is where the exchange places a smaller order in front of a large order, and rides that order's momentum to profits.  Exchanges are in a unique position to do this because they obviously see all of the orders, and they pay no commissions.  Dark pools are really bad for bitcoin imo.

If MtGox is still claiming to not have Darkpools enabled as of this date (7/10) then they are definitely doing something fishy.  I don't want to expose too much of what I do, but I can access market data reasonably fast (sub 1 second) and can execute trades there as well.

Two days ago (7/8) my system was telling me to trade buy  at the Ask on MtGox.  I don't remember the exact price, but it's not important so we'll call it 14.4550, but the volume was 0.100.  I placed my buy order for 0.100 volume and was filled immediately, fantastic!  What happened next was strange, but not unusual, in that the exchange was delayed and the volume remained at 0.100 at price 14.4550.  I've seen the exchange lag before so I didn't think much of it, but was curious enough to see if it would allow me to buy again.  I did, and it was filled.  Again, at no point did my system show that the volume had been taken out of the depth of market (sub 1-second reads).  I did this roughly 10 times, and all of them were successful.  In times where the exchange has lagged, it will not fill my orders, they just say "in queue" or "active" sometimes, so this behavior directly implies one of two things:  1. There was a darkpool sell order right at that price, 2. MtGox is trading with us and/or someone very close to MtGox has instantaineous access to place trades and access to the order book.

The last I had checked, which was a few days ago, Darkpool orders on MtGox were disabled.

But in any case, be weary!  A community can do a lot of damage to scammer's efforts as the UB/AP scandal proved.  We just have to be skeptical, and always assume the worst.

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