Since starting this thread, seals with clubs has been
shut down in April 2015 and others are starting to pull out of the USA or ban US customers.
http://www.coindesk.com/bitcoins-gambling-boom-just-getting-started/But.......
http://cointelegraph.com/news/112319/coinbase-case-demonstrate-the-pitfalls-of-regulatory-complianceWhile gaming operators may relish the prospects of BTC enabling the further growth of online gambling, the reality is that it comes with significant risks that many simply do not understand.
This is an extended analysis of the regulatory and business risks of operating gaming services using traceable crypto currencies.
BackgroundAs many will now know, Coinbase recently closed down customer accounts because they employed block chain tracking tools that identified customers Bitcoins as having come from gambling sites.
Coinbase took the view that they would rather shutdown the customer accounts than risk being accused of being complicit, now or in the future, to aiding financial transactions that may have come from illegal gaming.
http://www.reddit.com/r/Bitcoin/comments/2e2yxr/beware_coinbase_is_banning_accounts_that_play_on/This and the Newsweek story that a new Poker site was using Bitcoin to avoid or evade regulations because Bitcoin was anonymous and could skirt the US laws, led me to consider opening this thread.
On Sunday, at 6 p.m. ET, poker players around the world will log onto a gaming site with the curious name of SealsWithClubs to bet not with the dollar, euro or pound, but with bitcoin – increasingly the currency of choice among poker players from parts of the world laden with restrictions on online gambling, including the U.S.
Hosting a weekly gathering known simply as “Big BTC Sunday” (BTC refers to bitcoin much in the same way that USD refers to U.S. dollars), the site is the biggest for online poker using bitcoin, attracting hundreds of players to its poker rooms 24 hours a day and boasting, at last count, 72,841 player accounts worth millions of dollars.
and
“Bitcoin is not just for people looking to buy anonymous weed or micropayments to Africa,” he tells Newsweek. “It’s useful for poker too. We are focused on anonymity and for players looking to control their bankrolls, we have the fastest payouts in the industry.” Other well-trafficked bitcoin gambling sites include BetCoin and SatoshiBet.
http://www.newsweek.com/introducingbitcoin-poker-266405It is evident from these two stories that:
* Some gaming and poker operators do not seem to know that Bitcoin and other crypto currencies are traceable; and
* Exchanges are tracing Bitcoins and shutting down customer accounts who interact with gaming sites operating, directly or indirectly, in the USA.
Bitcoin and Gaming Traffic AnalysisTracking analysis is not new. It was first considered in
the 1980s by Dr. David Chaum who predicted that electronic communications would be linked together to create a picture of what people are doing and with whom. His work ended up being instrumental in the creation of
TOR.When applied to Bitcoin and online gaming, traffic analysis can help to identify individuals. Satoshi Nakamoto identified this in his
2009 paper:
Some linking is still unavoidable with multi-input transactions, which necessarily reveal that their inputs were owned by the same owner. The risk is that if the owner of a key is revealed, linking could reveal other transactions that belonged to the same owner.
Early attempts at Bitcoin traffic analysis showed that exchanges and gaming have been, and still are, the main hubs for Bitcoins:
As others have pointed out before, online gaming businesses are usually targeted for acting illegally, rather than customers of gaming sites. But there have been situations where customers were also targeted by law enforcement agencies.
Rather than risk damaging Bitcoin's reputation further by giving the media fuel to focus on illegal gaming and pointing out to customers that they risk their accounts being shut down and highlighting that their adult pursuits are being watched by anyone that cares to do so, I will try to:
* Educate, as much as my reasonable technical and regulatory knowledge allows, operators who are not aware of some of the risks;
* Try to make the case for being more careful when using Bitcoin in certain jurisdictions; and
* Looking at how to protect customers so that they are not faced with bad experiences with their currency of choice.
Tracking Bitcoins & IP Addresses
The ability to track block chain transactions has been known for several years.
Sathohi himself knew about the issues very early on. He did in actual fact have an Alpha Wallet that sent coins to an IP address or a public bitcoin address. The IP address feature was quickly dropped.
The science and technology to track block chain transactions has been steadily picking up.
Indeed, developments in decentralised contracts rely on block chain tracking technology.
Research has since highlighted that there are methods for tracking Bitcoin transactions by using tools to identify the IP addresses of senders and receivers of Bitcoins.
A research paper published in May 2014, highlighted the approach that could be taken to reveal IP addresses of those using Bitcoin: Deanonymisation of clients in Bitcoin P2P network,
http://arxiv.org/pdf/1405.7418.pdfWith research increasingly focused on Bitcoin's lack of anonymity in certain circumstances, in addition to research showing how users IP addresses could be uncovered by using Bitcoin, there is a reasonable assumption that either users could be put off using digital currencies, authorities could try to restrict digital currencies because of potential infringements against privacy laws or a combination of these and other factors.
Bitcoin's exposure to IP scanning is not something new, as noted by Bitcoin's former chief scientist and senior Bitcoin Foundation board member Gavin Anderson, but sophistication in scanning for bitcoin addresses and peoples location and identity is now starting to gather pace.
http://bitcoin.stackexchange.com/questions/193/how-do-i-see-the-ip-address-of-a-bitcoin-transactionUsing Bitcoin for online gaming carries multiple risks.
The Downside of IP Addresses
http://www.scribd.com/doc/238796613/Silk-Road-Prosecution-4th-Amendment-Rebuttall"Central to the FBI’s rebuttal was that agents noticed that the server’s Internet protocol (IP) address was ‘leaking’ information from the Silk Road website due to an “apparent misconfiguration of the user login interface by the site administrator”.
"Exploiting this error, the FBI says, it was able to reveal certain IP addresses that were not protected by the Tor network, and could thus trace the addresses to physical locations."
http://www.coindesk.com/fbi-illegal-techniques-used-silk-road-investigation/The FBI's View On Online Gaming
....it’s illegal to gamble online in the United States.
That means:
…No placing cyber bets on sporting events or in virtual card games;
…No transferring money electronically for gambling; and
…No wagers in offshore Internet casinos even if you live in the U.S.
What’s allowed? Some free online games, fantasy leagues, and Indian gaming sites that aren’t strictly defined as Internet gambling.
It’s also illegal for businesses to run gambling websites and to solicit online bets. Even companies handling transactions for cyberspace bettors can face federal charges.
http://www.fbi.gov/news/stories/2007/june/gambling_060607Now And In The FutureThe block chain is happily capturing data that is available now and in the future.
Block chain tracking and IP tracking tools are available today. As each day passes, the tools simply get better, while the pool of data to mine also gets larger.
Gaming Regulatory OverviewOnline gaming is legal in many parts of the world. Some of the largest gaming businesses are listed on the London Stock Exchange.
This is a useful USA regulatory summary of what can be found on Wikipedia.
In September 2006, both the House of Representatives and Senate passed the Unlawful Internet Gambling Enforcement Act of 2006 (as a section of the unrelated SAFE Port Act) to make transactions from banks or similar institutions to online gambling sites illegal.
In response to Unlawful Internet Gambling Enforcement Act, a number of online gambling operators including PartyGaming, Bwin, Cassava Enterprises, and Sportingbet announced that real-money gambling operations would be suspended for U.S. customers.
In June 2009, the U.S. Department of Justice seized over $34 million belonging to over 27,000 accounts in the Southern District of New York Action Against Online Poker Players.
This was the first time money was seized from individual players as compared to the gaming company. Jeff Ifrah, the lawyer for one of the account management companies affected, said that the government “has never seized an account that belongs to players who are engaged in what [Ifrah] would contend is a lawful act of playing peer-to-peer poker online."
In December 2009, the House Financial Services Committee held a hearing on UIGEA and Rep. Frank’s Internet Gambling Regulation, Consumer Protection, and Enforcement Act of 2009 (H.R. 2267) where experts in the fields of online security and consumer safety testified that a regulatory framework for Internet gambling would protect consumers and ensure the integrity of Internet gambling financial transactions.
On July 28, 2010, the committee passed H.R. 2267 by a vote of 41-22-1. The bill would legalize and regulate online poker and some other forms of online gambling.
On November 22, 2010, the New Jersey state Senate became the first such US body to pass a bill (S490) expressly legalizing certain forms of online gambling.
The bill allows bets to be taken by in-State companies on poker games, casino games and slots but excludes sports betting, although it allows for the latter to be proposed, voted on and potentially regulated separately in due course.
On April 15, 2011, in U. S. v. Scheinberg et al. (10 Cr. 336), three online poker companies were indicted for violating U.S. laws that prohibit the acceptance of any financial instrument in connection with unlawful Internet gambling, that is, Internet gambling that involves a "bet or wager" that is illegal under the laws of the state where the bet is made.
The indictment alleges that the companies used fraudulent methods to evade this law, for example, by disguising online gambling payments as purchases of merchandise, and by investing money in a local bank in return for the bank's willingness to process online poker transactions.
The companies argue that poker is a game of skill rather than a game of chance, and therefore, online poker is not unlawful Internet gambling.
There are other legal problems with the government's case; and, interestingly, the indictments did not mention the Wire Act. On July 31, 2012, it was announced that two of the three companies indicted for money laundering and forfeiture settled with the Manhattan U.S. Attorney for $731 million without legally admitting guilt.
The government also asked the judge to approve a settlement with the third defendant, Absolute Poker.
Useful summary:
http://www.washingtonpost.com/wp-srv/investigations/poker/time.htmlBitLicences
BitLicences, as currently (Aug-2014) released, are somewhat confusing on whether or not Bitcoin is legal or illegal for use on gaming sites.
http://www.dfs.ny.gov/about/press2014/pr1407171-vc.pdfs.200.2
(m) Virtual Currency means any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology. Virtual Currency shall be broadly construed to include digital units of exchange that
(i) have a centralized repository or administrator;
(ii) are decentralized and have no centralized repository or administrator; or
(iii) may be created or obtained by computing or manufacturing effort.
Virtual Currency shall not be construed to include digital units that are used solely within online gaming platforms with no market or application outside of those gaming platforms...Because Bitcoin can be used for other things than online gaming, it becomes a virtual currency - money. That means it can be captured by the online gaming laws in the USA, Unlawful Internet Gambling Enforcement Act of 2006.
My understanding, at the moment, is that online gaming can be regulated on a State-by-State basis, provided that the online gaming is through a business that holds a licence to operate a physical casino.
ExchangesThe problem that exchanges like Coinbase face is that they are an enabler, according to US regulators and law enforcement.
In 2007 a Payment Services Firm had its officers arrested for enabling gaming and money laundering.
http://www.justice.gov/usao/nys/pressreleases/January07/Neteller%20Arrests%20PR.pdfCases such as this would be compounded by BitLicences which directly attach money laundering regulatory laws to crypto currencies (not that the existing laws do not cover them already).
Chances are, if you offer online gambling using crypto (if it can also be used elsewhere) and a US Citizen uses the services, then the operators of the online crypto gambling site could face arrest warrants.
Privacy from the block chainSince Darkcoin hit the top 5 on coinmarketcap.com, many more anonymous crypto projects have sprung up.
https://bitcointalk.org/index.php?topic=568166.0;allAs with any alt-coin project, there are good and bad projects.
Are anon coins legal?This is a question that often comes up.
Commenting on anonymity within crypto currencies, Jennifer Shasky Calvery, Director, Financial Crimes Enforcement Network, United States Department of the Treasury, confirms that financial privacy is a real and important aspect of all financial transactions.
The view on regulation is currently being considered in a similar light to Bitcoin. The Bank Secrecy Act and existing AML policies towards digital currency will still apply. In general, moving in and out of fiat requires the use of regulated entities.
Non disclosure of financial transactions on a block chain ledger is not a reason to stop anonymity tools such as Darkcoin.
https://www.youtube.com/watch?v=M7bbDpwlTws&feature=youtu.be&t=11m48s~12mins
The laws in the USA still enable regulators and law enforcement agencies to carry out a search for illegal activity. However, they must do so on the basis that some wrong doing is taking place, in accordance with the USA's constitution, the Fourth Amendment:
The fourth amendment to the US Constitution is a part of the Bill of Rights and prohibits ‘unreasonable’ searches and seizures. It requires investigators to carry out searches with a judicially sanctioned warrant, supported by probable cause.
http://www.coindesk.com/ross-ulbrichts-silk-road-defence-invokes-fourth-amendment/Disclosure of personal details to gaming operators can be requested and should be provided where legal powers are obtained lawfully. However, there is nothing to say that a block chain must be available for public inspection and analysis.
Banks don't have to publish their customers transactions and court orders have to be obtained to search customer records, so why should crypto give away financial privacy? This was highlighted by the Chairman of the Bitcoin Foundation in
Spring 2014:
"Privacy is extremely hard to come by on the Internet. Bitcoin itself is not very private right now.
"Publication of the owner of a single Bitcoin address can yield an incredible amount of personal financial information, information that cannot be put ‘back in the box’ – it will be available forever, encoded into the blockchain. This is the sort of information that law enforcement agencies would typically need to subpoena a bank for; instead right now we offer it to the entire Internet.
"It seems therefore critical that we do everything we can to support efforts that enhance this privacy from global inspection."emphasis addedDarkcoin - Decentralized Privacy Currency: Cash Over The Internet
Darkcoin is a project that I have followed for some months. Primarily because:
* The developers are working with a Bitcoin codebase (clone) and the Darkcoin APIs are compatible with Bitcoin
* The developers are working hard to make Darkcoin privacy effective and easy to use
* The Darkcoin project aims to make tracing transactions a waste of time, including obscuring IP addresses from public view
* The developers have made themselves known and more recently they have launched an official
foundation, with the assistance of an attorney
* The Darkcoin project is looking at an alternative to Tor through its near 1,000 independently operated decentralised Nodes.
This wallet highlights how Darkcoin works.
Essentially, coins are pre-mixed with others on the network, while the coins are sitting in the users wallet. When he (or she) is ready to spend his anonymous currency, the user spends in the same way they would using a Bitcoin wallet. However, because their coins have been pre-mixed, the block chain can't reveal any data about the history of the coins - traffic analysis is rendered useless.
Darkcoin will also hide the IP addresses of users, meaning that their spending cannot be linked back to particular locations, whether they user Tor or not.
What Darkcoin Means For GamingDarkcoin is cash over the internet.
For gaming operators, it is a crypto currency based on Bitcoin and therefore it has compatible APIs.
From a privacy point of view, Darkcoin does prevent traffic analysis and also IP tracking - there is no distinction between national and international customers. This protects customers from their accounts being closed down by exchanges.
From an operational prospective, gaming sites can accept Bitcoin and Darkcoin. For those that prefer Bitcoin but would like to have privacy from the blockchain, their funds can be exchanged in and out through Darkcoin.
All that is left for each gaming operator to do is comply with their local laws, and keep track of customer personal details, as required by each jurisdiction they serve.
Development RoadmapThe next stages of Darkcoin
development are due to include:
* Electrum
* Support for Android and iOS
* Encrypted messaging
With gaming sites able to use privacy centric crypto currencies, customers funds will be difficult to trace by exchanges. They will have to rely on asking customers for their historic dealings, as opposed to tracking their movements without their permission.
Developers project update
https://darkcointalk.org/threads/development-update-august-19-2014.2086/Darkcoin FAQ
http://wiki.darkcoin.eu/wiki/FAQ-----------------
work in progress...
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If you spot any errors, please let me know.
If you would like any specific areas covered, please let me know.
If you have any thoughts, please let me know.
etc.
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NB:
This is not legal advice. Nor is it an invitation to participate in any gaming or particular gaming sites. Nor is it investment advice or an invitation to invest in anything.
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In order to have a free society you need to have freedom from traffic analysis
