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 NewYou 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 PlayersLife 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 PointsBitcoin 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;DRThe 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!
