What U.S. Federal Laws Apply to Video Game Gambling?

This article is the second of three parts. Part one introduces readers to the various forms of video game gambling. Part two covers the legislative landscape for video game gambling in the United States. Part three discusses the unique properties of virtual currencies in video game gambling, as well as their tensions with state gambling laws.

In America, states are largely responsible for regulating gambling within their borders as part of their constitutional authority to legislate over the health, safety, and morals of their inhabitants. When technology broadened gambling activities beyond state borders, Congress passed several federal statutes to reinforce state gambling laws and address unregulated interstate gambling.

Scholars have identified four federal statutes applicable to online video game gambling: the Interstate Wire Act (Wire Act), the Illegal Gambling Business Act (IGBA), the Unlawful Internet Gambling Enforcement Act (UIGEA), and the now-repealed Professional and Amateur Sports Protection Act (PASPA). However, three out of four of the aforementioned statutes predate the internet. As a result of this regulatory patchwork, the world of online video game gambling exists in a legal grey area. 

The Interstate Wire Act, 18 USC § 1084

Despite being the oldest federal gambling statute, the 1961 Wire Act may have the largest impact on the esportsbook and in-game currency betting markets. Unlike other federal gambling statutes, offenders do not need to violate a state gambling law to attract criminal liability under the Wire Act. In other words, the Wire Act may be able to restrict esportsbooks and in-game currency betting sites even without state regulations.

The Wire Act applies to anyone who “being engaged in the business of betting or wagering, knowingly uses a wire communication facility 

(“prohibition 1”) for the transmission in interstate or foreign commerce of bets or wagers

(“prohibition 2”) or information assisting in the placing of bets or wagers on any sporting  event or contest, or 

(“prohibition 3”) for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or

(“prohibition 4”) for information assisting in the placing of bets or wagers”.

Congress originally enacted the Wire Act to curb organized crime and the use of interstate technologies, such as the telegraph and telephone, to bet on sporting events. After the Second Circuit Court of Appeals extended the definition of “wire communication facility” to the internet in United States v. Cohen, federal prosecutors used the Wire Act sparingly to restrain online sports gambling in the early 2000s.

Since the Wire Act only covers individuals “in the business of betting or wagering”, mere bettors on video game gambling sites are not at risk of criminal sanctions under the statute. Persons who violate the Wire Act may face fines of up to $250,000, prison for up to two years, or both.

Courts likely will not face difficulties characterizing the online transmissions between a virtual currency bettor and a host site as “transmissions” for the purposes of the Wire Act. However, federal prosecutors will experience two significant hurdles if they invoke the Wire Act against video game gambling websites. 

First, as recently affirmed by the First Circuit Court of Appeals in New Hampshire Lottery Commission et al. v. Barr et al., the Wire Act only applies to bets or wagers on sporting events. Therefore, prosecutors will need to establish that esports are “sports” as defined by the Wire Act. More importantly, the statute is inapplicable to video game gambling sites that do not rely on the outcome of esports matches. For example, skin betting sites, which simply allow users to wager skins on casino-style activities, do not fall under the Wire Act’s purview. 

Second, prosecutors will need to prove that the activity constitutes a “bet or wager”. Many video game gambling sites operate through virtual currencies, such as skins, instead of cash. These virtual currencies raise unique challenges when attempting to characterize an activity as a “bet or wager”. Part three of this article will address some of these issues in depth. 

The Illegal Gambling Business Act (IGBA), 18 USC § 1955 

Video game gambling operations using virtual currencies may face criminal liability under the 1970 IGBA. Under the IGBA, federal prosecutors do not need to show that the defendant knew that their actions were illegal. Individuals liable through the IGBA may face up to $250,000 in fines, five year in prison, or both. 

Prosecutors must prove that that a business:

1. Violated a state gambling law;
2. Involved five or more persons who conducted, financed, managed, supervised, directed, or owned all or part of the business; and 
3. Operated on a “substantially continuous” basis for over 30 days or grossed over $2000 in revenue in a single day.

The IGBA empowers prosecutors to choose a particular state to initiate criminal proceedings. Therefore, prosecutors can choose a state with a broad definition of “gambling” under state laws to expand the scope of liability. Nonetheless, as discussed in part three of this article, online gambling activities operating through virtual currencies may not meet the legal definition of “gambling” at all. 

Most video game gambling sites will also likely fall through the IGBA due to the statute’s second requirement, which only covers business with five or more persons. U.S. District Courts of Appeal have repeatedly affirmed that, to attract liability under the IGBA, members must perform a “necessary function” in the operation. Furthermore, courts have held that customers who merely use the business’s services to place bets are not involved in “conducting” or “financing” the business.

Since virtual currency gambling sites are simple and inexpensive to set up and maintain, these operations are often run by fewer than five persons. For example, CS:GO Lotto, a now-defunct skin betting site incorporated by two prominent figures in the online gaming community, was solely run by four officers and directors. One esports attorney estimated that the cost of launching a skin betting site may only be several hundred dollars – a negligible amount compared to its profitability.

The Professional and Amateur Sports Protection Act (PASPA) – REPEALED

Enacted in 1992, PASPA prohibited individuals from operating, advertising, or promoting gambling schemes based on professional or amateur sports leagues. PASPA also empowered professional sports leagues to legally bar individuals from operating sports betting schemes. 

Commentators believed that PASPA may have offered an effective tool to regulate esports betting sites. However, in 2018, the U.S. Supreme Court in Murphy v. NCAA repealed this statute through the constitutional doctrine of anti-commandeering. In other words, the court held that PASPA was invalid because it compelled states to enforce federal law. After Murphy, states now have the sole authority to legalize intra-state sports betting.

The Unlawful Internet Gambling Enforcement Act (UIGEA), 31 USC § 5363

Passed by Congress in 2006, the UIGEA is the most recently enacted federal gambling statute. Similar to the IGBA, prosecutors can only invoke the UIGEA against an online gambling site if the enterprise violates a state gambling law.

The UIGEA prohibits persons “engaged in the business of betting or wagering” from knowingly accepting an electronic financial transaction related to an unlawful bet or wager. In other words, the UIGEA does not directly preclude individuals from operating gambling websites. Rather, the statute targets the income of gambling sites by prohibiting financial institutions, online payment processors (e.g. PayPal), and gambling enterprises from accepting funds used in unlawful online gambling. The statute defines a “bet or wager” as:

1. Risking or staking something of value on the outcome of a sporting event, a game subject to chance, or a contest of others;
2. Purchasing an opportunity to win a lottery or other prize, where the opportunity to win is predominantly subject to chance;
3. Unlawful sports gambling on an amateur or professional competitive game; or
4. Providing instructions or information to establish or move funds by bettors in, to, or from an account for the purpose of betting. 

In a closed list, the Treasury Department listed five “designated payment systems” encompassed by the UIGEA: (i) automated clearing house systems, (ii) card systems, (iii) check collection systems, (iv) money transmitting businesses, and (v) wire transfer systems. Through section 5363(4) of the UIGEA, the Federal Reserve can issue regulations to include additional types of transactions covered by the statute.

Applying the UIGEA to Cash-Based Esportsbooks 

In 2011, federal prosecutors employed the UIGEA to shut down three leading online poker sites after they continued to accept payments from American users. In a similar fashion, the UIGEA will also likely apply to interstate esportsbook sites where players directly bet on esports matches with cash. Even if competitive esports matches do not meet the standard of a “sporting event” under the UIGEA, they undoubtedly fall under the definition of a “contest of others”.

Applying the UIGEA to In-Game Currency Betting

Federal prosecutors will likely face an uphill battle if they aim to regulate in-game currency gambling sites through the UIGEA.

The type of transaction between players and gambling sites that solely deal in virtual items does not fall under the narrow list of “designated payment systems” covered by the statute. Namely, players generally do not link their electronic payment information to these sites nor use real-world currencies to engage in gambling activities. Players transfer in-game currency, such as skins, to these sites as a sort of credit. After a player finishes wagering their virtual items on a gambling site, the site returns these items to the original video game. 

Further, players are wagering virtual property created by and solely usable within a video game. Since players are not using real-world currencies on these sites, activities such as skin gambling may not meet the UIGEA’s first requirement of “staking something of value”. 

No cases or statutes have addressed whether virtual items constitute “something of value” under the UIGEA. However, courts may be reluctant to find that virtual items have value due to the limitations in a video game’s End User License Agreement (EULA). EULAs often stipulate that the game publisher owns all in-game items, whereas players merely have revocable licenses to use the items. EULAs also often assert that players do not have any ownership interests over in-game items and that virtual items lack financial value outside the game. Steam’s Subscriber Agreement, for example, provides that any virtual items traded, purchased, or sold over the Steam Marketplace are license rights, in which there is no ownership interest. Accordingly, district courts have consistently held that items in a video game are valueless if the game’s EULA declares as such. These courts further held that in-game currencies are valueless even where players can sell their accounts on third-party markets for real-world currencies. Part three of this article will discuss these cases in further detail in the context of defining “gambling” under state laws. 

UIGEA Exemption: Intrastate Gambling and Fantasy (e)sports 

The UIGEA outlines two exemptions that are relevant to esports betting sites.

The first exemption, section 5362(10)(b) of the statute, covers intrastate gambling. As long as participants make a bet that is legally sanctioned in the state where the bet is initiated and received, the bet does not contravene the UIGEA. 

The second exemption, section 5362(1)(E)(ix), permits online fantasy leagues. Since the UIGEA exempts “participation in any fantasy or simulation sports game… or contest”, websites do not need to prove that esports are sports to rely on the fantasy league exemption. The UIGEA outlines several conditions to rely on this exemption:

1. Fantasy league participants cannot draft the full roster of an actual team in a professional or amateur organization;
2. All prizes and awards must be established and made known to participants before the game or contest, and their value cannot be determined by the number of participants or the amount of fees paid by participants;
3. All winning outcomes reflect the relative knowledge and skill of the participants; 
4. No winning outcome is based on any single performance of a real-world team or a combination of such teams; and
5. No winning outcome is based on any single performance of an individual athlete in any single real-world event.

At the federal level, courts have not yet addressed whether one subset of fantasy esports, “daily fantasy sports” (DFS), falls under this exemption. In contrast to traditional fantasy leagues, which run alongside the regular season of a professional sports league, DFS sites feature a truncated fantasy league season. For example, DraftKings, a popular DFS site, offers weekly competitions. Due to the short durations of DFS competitions, luck plays a bigger role compared to other fantasy sports. However, the Illinois Supreme Court recently gave a positive outlook for DFS operators across the country. In Dew-Becker v. Wu, the court held that the outcomes of DFS contests are predominantly skill-based. As a result, DFS competitions do not fall under the legal definition of “gambling” under the Illinois loss recovery statute.

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In part three of this article, we will explore why using virtual currencies to gamble in video games may not meet the definition of “gambling” under state laws.