The Future of Gaming, eSports & Gambling Law in 2017

Online gaming, online gambling and eSports are increasingly present across the UK, as well as across the rest of the world. This this creates ample space for illicit activity, betting and cheating. So what are the rules in today’s modern day? Andrew Tait, Partner at Gordon Dadds, has some answers.

What is eSports and Skill Based Gaming?

eSports is competitive video gaming between 2 or more persons, a fast growing phenomenon mainly in the Millennium Generation. Whilst the percentage of eSports players compared to traditional gambling is relatively small, it may well increase in the future as our younger generation are rapidly turning to eSports as a preferred form of entertainment.

Operators breaking into this new market are already looking at ways to commercialise it by adopting very different strategies which will largely depend on whether the activity is considered unregulated gaming or regulated gambling as can be seen below.

eSports may in fact fall within the larger Skills Based Gaming category, which covers a myriad of skill games such as: chess; crosswords; quizzes; spot the ball; skilled slot machines and many other new innovative products. These all share the common feature that the extent of skill over chance is key in establishing how they will be treated from a regulatory aspect, having major knock-on ramifications for both consumers and operators.

The UK vs Other Jurisdictions

A game of chance to win a prize in the UK is subject to regulation (and with it compliance, fees and taxes) under the 2005 Gambling Act, where this definition includes skilled games with a small element of chance unless so insignificant as to not matter. Similarly a competition to win a prize requiring an entry fee to participate will also be subject to regulation unless the skill requirement is so high as to prevent a significant proportion of persons from winning a prize or deterring them from participating in the first place.

This is very different from the approach used in many other jurisdictions, such as the USA which relies on a predominance test, where a dominant element of skill over chance takes it outside the definition of gambling and all the regulatory consequences of that (including prohibition if there’s no regulation)

eSports involving games such as Call of Duty or Counter-Strike are highly skilful games, something even acknowledged by the Gambling Commission in its position paper on this topic. However games which introduce randomly generated elements, (through use of a random number generator) may lead to the game having more than an insignificant level of chance.

eSports which mange to pass this skills hurdle may still be subject to regulation if there is facilitation for participants or the audience to bet on the outcome.

Therefore the UK has a strict approach, when compared with other gambling jurisdictions such as the Isle of Man and Malta, which are both moving towards a tiered regulatory approach with regards to games of chance, skill games and hybrids of both.

What it means for UK Consumers

eSports and skilled games which fall outside the regulatory framework, will by doing so rob  players of the consumer based protections mandated in the regulations such as: game integrity to prevent cheating, controls against compulsive playing (‘problem gambling’) and protection of minors.

Normally operators coming under the regulatory umbrella would be subject to technical and operating standards that would ensure these protections are built into the gambling products and services. Without these, players are dependent on providers adhering to responsible levels of behaviour. To be fair many of the providers in this space have voluntarily joined associations such as eSports Integrity Coalition (ESIC) to maintain standards. Three months ago ESIC handed out a two year ban to a player caught cheating in a Counter-Strike tournament.

Unregulated eSports is becoming more commercialised with the prevalence of purchased in-game items (’Skins’). This creates a particular issue for children who may inadvertently gone on a buying spree of ‘skins’, especially as many games are specifically targeted at them. The lack of protection in this area is particularly worrying, especially to the many parents who get a nasty shock when they look at their credit card bills.

There is however a growing base of professional eSports players who not only earn prize money but also sponsorship fees. Also now that it is an official Olympics event, we will no doubt see this increase in the lead up to the Tokyo Games in 2020.

What it means for the Operators

eSports and skilled game operators generally depend on player liquidity across multiple jurisdictions. The patchwork of international regulation or its absence therefore makes the design of a viable product which for instance, fits in with the US’s predominance test and the UK’s virtual exclusion of chance, problematic to say the least. This will inevitably lead to silos of players and eSports products tuned to compatible jurisdictions.

EU based operators also need to be wary of the VAT that may be chargeable under eService provisions on revenues generated from the games on a point of consumption basis. Regulated gambling operators on the other hand are exempt from this in most EU jurisdictions (including the UK).

Another downside of maintaining their unregulated status is the need to ensure that facilities for gambling are not provided or facilitated. Operators who have tried to commercialise their offering by enabling access to other sites which allow betting on the outcome of the games with Skins or other forms of virtual currency, face the real danger of enforcement action, as occurred in the FutGalaxy case.

However some eSports providers such as Unikrn have gone down the regulatory route, teaming up with traditional sports betting operators to bring greater commercial value.

Gaming & Gambling Convergence: The Future?

Currently only about 8.5% of UK adults bet on eSports but given the US market where eSports, skilled games and fantasy sports are some of the few online gaming sectors where it is possible to participate across a growing number of States, we will no doubt see more convergence between gaming and gambling. Furthermore with the explosion in new block chain technologies and a multitude of crypto currencies, we are already starting on new era of gambling.