Regaluting eSports in the iGaming Industry

Regulating eSports in the iGaming Industry

Christopher Dalli

Dr Christopher Dalli, Gonzi & Associates Advocates

From the united states to Korea, the UK and even Malta, ‘esports’, defined by the UK gambling commission in a recent discussion paper as ‘the playing of computer games which can range from play by two individuals (including ‘match-ups’) to playing in professional competitions’, has hit the igaming industry by storm armed with an exponential potential for growth. With popular contests including league of legends, dota, and counter-strike:global offensive (cs:go), surveys carried out by digital games market intelligence firm newzoo show that awareness of esports has increased by 36% from 2015, 69% of which are males between the ages of 21-35, the key target demographic in the gambling industry.

In view of this recent spike in popularity, regulatory authorities in various states have cautioned against the risks involved in eSports, with issues such as cheating, match-fixing and under-age betting becoming a legitimate concern. With papers such as that issued by the UK Gambling Commission, the implication seems to be that regulation is inevitable. In terms of the local dynamic, a distinction is made by virtue of which betting on eSports falls within the ambit of a Class II licence issued by the Malta Gaming Authority (MGA), whilst organising of tournaments is not considered to be licensable by the MGA.

In its position paper ‘Digital Games of Skill with Prize’ issued in December 2015, the MGA suggested that digital games which include chance but are ‘significantly influenced by skill’ should be licensed with a ‘lighter touch’ than other gambling games, stating that the requirements should reflect the risk posed by the operation, whilst simultaneously distinguishing such games from those of pure chance. In fact, in August of this year the authority issued a notice stating its intention to introduce legislation regulating certain skill games to mitigate increased risks to the consumer. In the interim, Legal Notice 271 of 2016 has exempted daily fantasy sports from requiring a gambling licence but no such equivalent exists for eSports as yet, so it will be interesting to see whether eSports will be catered for by the entry of this new legislation.

It may be stated from the outset, that regulation is both encouraged and embraced and is an indispensable tool to avoid incidents such as the conviction in South Korea of StarCraft II star Lee “Life” Seung for match-fixing earlier this year. As with all growing industries, regulatory checks and balances are imperative in the fight against corruption. With that being said, the manner and form of regulation are factors which must be carefully assessed, in the words of the MGA, so as not to ‘go beyond what is necessary to ensure a safe and fair environment for consumers, free from criminal activity’.

Is Regulation For eSports Really Necessary?

Providing facilities for gambling without the required licence is an offence in all jurisdictions which regulate gambling.

It is necessary therefore for operators and regulators alike to clearly distinguish between activities needing a licence and others which do not. Maltese regulators have stated that currently, games including both chance and skill are licensable if the authority considers that chance is the prevalent factor in determining the result. Games with a negligible amount of chance therefore do not need to be licensed, although certain standards such as age restrictions and financial protection should still be imposed.

Opinions are many but conclusions are few when it comes to determining whether eSports would be considered a game of chance, a game of skill, or a combination of both. The MGA has sought to determine the extent of skill in games by looking at factors such as whether the game is played against human players, whether the skilled players win more often than those which are unskilled, and the presence of random draws. Whilst on the face of it eSports would be considered a game of skill, when taking into consideration that the outcome of eSports contests are influenced by a random number generator (RNG), the answer becomes somewhat less clear.

Regardless of the above, it is uncontentious that betting on skill-games, which is what betting on eSports would seemingly fall under, is a licensable activity under the laws of Malta; but is a ‘traditional’ gaming licence enough to cover the entirety of the risks posed by eSports, and should the organisation of eSports competitions also require regulation?

The Envisaged Risks
Match-Ups

Regulatory authorities across the board seem to be in agreement in acknowledging that betting on eSports should be no different from other events upon which bets can be placed, with the risks presented such as cheating, excessive gambling, and match-fixing being the same as all betting activities.

The rise of eSports has also brought about the emergence of companies which offer facilities for players to play against one another (match ups) for prizes. Some of these allow the players to bet on, or even against, themselves. The Gambling Commission is of the opinion that a company offering such match-up facilities would be tantamount to a betting intermediary, providing a service which facilitates the making or accepting of bets between others. This, according to the Gambling Commission, is a licensable activity determined by assessing various factors, most notably the number of people involved in the competition where a large amount of participants would lean more towards the organisation of a tournament (which is unregulated) than that of a match-up. Match-ups provide risks of cheating and collusion, where a contestant may on the one hand cheat to win by using tactics such as ‘trigger bots’ allowing players to shoot enemies without the need to aim their weapon, and on the other hand cheat to lose, where players could bet against themselves by maintaining different accounts.

Money’s Worth

The terms ‘virtual currencies’ and ‘money’s worth’ are often associated with currencies such as bitcoin and litecoin. However, close attention is to be given to in-game items such as skins or even playing accounts, for these can be won or purchased within games and later traded in for cash. These skins are aesthetic upgrades for knives and weapons which are bought, sold and wagered. To boot, because of the lack of regulation, checks such as age verification are non-existent resulting in minors betting high value virtual items which are then converted into real money.

Based on this premise, the UK Gambling Commission has in its discussion paper held that when skins are traded or tradeabe, and when facilities for gambling with such items are offered, a license is required. This could have various effects on the eSports industry, mostly due to the fact that if the number of skins sites decrease this may indirectly affect the sponsorship of eSports teams by such sites.

An important factor which has been overlooked by regulators thus far is that such virtual in-game items are often only convertible into money via illegal third party marketplaces which usually breach the terms and conditions of the game itself. In order to introduce this new effective addition to our gambling legislation, a risk analysis as to how virtual items such as skins are traded must be carried out, failing which we could be experiencing significant consequences for the iGaming industry.

Games For Prizes

A further factor which needs to be assessed is at what point do eSports games, where a prize may be won, is considered to be a gambling activity. This is determinable based on whether eSports is considered to be a game of chance or a game of skill. It is uncontentious that the outcome of many eSports contests are influenced by a RNG, which gives rise to the question of whether participating in such games for a prize which locally would fall under a Class I Licence. Determining which eSports titles are considered to have a sufficient level of RNG, thereby requiring organisers to obtain a licence, is a difficult task and onerous when considering that the discussion here targets the underlying game mechanics. This would affect tournament organisers who may be required to obtain appropriate licences, and the development of eSports games, where organisers would be deterred from including elements with complex consequences for eSports industries.

The Way Forward

The operative question in the iGaming industry is whether new developments require new legislation or whether it is satisfactory to the industry that games such as eSports are encapsulated within traditional licences.

Malta must, as it always has, strive to retain its position as a remote gaming hub and therefore regulation must strike a balance between the protection of the consumer, remaining innovative and the sustainable growth of the industry. This exercise is one which must be carried out with the cooperation from both the authorities and the operators who must, in an effort to avoid complex legislation, display self-regulation and ensure a reliable environment for players. We augur that the process shall involve the various stakeholders in the industry to ensure the appropriate application of modern future-looking legislation while also avoiding the stifling of this young and growing niche.

Author: Christopher Dalli

This article was published first on SiGMA Magazine. The magazine was launched at SiGMA show last November. For SiGMA17 sponsorship opportunities click here.

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