“Legally Not Gambling” in Post-UIGEA America

Legally Not Gambling in Post-UIGEA America

Legally Not Gambling in Post-UIGEA AmericaHumanity has flourished through the ages thanks in great part to its willingness to take risks in order to gain greater rewards. Yet there are few words in the English language so overloaded with connotations and so socially divisive as the word “gambling.” This is especially true in the United States thanks to the country’s more socially conservative regions, where opposition to gambling is as much a part of the social fabric as church on Sunday. In all of those places, though, there’s still plenty of gambling going on – it’s just going by a different name.

When it comes to placing bets on the outcome of games involving some sort of chance, the law usually comes down against them and explicitly categorizes them as Illegal Gambling. Roulette, blackjack, wheel of fortune, craps, slot machines – these games are almost all outlawed in most jurisdictions in the U.S., as are games like poker with an additional skill component. In some jurisdictions these games enjoy protected status and we refer to them as Gaming; the risks and rewards of the game, both financial and social, are still the same, but for any number of reasons the law has changed. And there are other enterprises of risk and reward which are defined under completely separate statutes, making them Legally Not Gambling. For society, and for the individual, the only real difference between the three is whatever the words on the law books read at any given moment.

Though it was nominally designed to take on illegal gambling, the Unlawful Internet Gambling Enforcement Act of 2006 rearranged the chairs on the Gaming deck in a most curious manner. First, rather than providing a definition of what is considered “illegal online gambling” under federal law, it simply carved out protected status for a number of different forms of gambling. Then, it deputized banks to do the government’s investigative work – a measure that the banks opposed but ultimately gave into – and to prevent Americans from using the most common financial instruments to fund their online gambling accounts. The end result was that opportunities for creating new forms of Gaming appeared.

Fantasy sports, for instance, were explicitly protected by the law. Since its original passage a range of new sites that comply with UIGEA by offering daily skill-based fantasy sports contests have flourished. Instead of waiting an entire season to see who wins a fantasy football league, you get to start all over again with every new contest. It’s a brilliant innovation on the familiar equation, and because it’s on the right side of the law you can pay for it with your credit card or PayPal account.

Likewise, horse racing received protected status under UIGEA. Political considerations figured heavily into the UIGEA carve-out for the $50 billion horse racing industry, which employs around 1 million people throughout the United States. Now not only can you bet on horses online in the U.S. if your state’s laws allow for it, but you can fund your account with a debit card, credit card, BillPay service, check, money order, or nearly any other common instrument used for retail purchases.

America’s finest example of Legally Not Gambling, stock speculation, was untouched by UIGEA. In fact, the very first exception to the definition of a “bet or wager” is for activities governed by securities laws, “as that term is defined in section 3(a)(47) of the Securities Exchange Act of 1934 for the purchase or sale of securities (as that term is defined in section 3(a)(10) of that Act).” This is despite the act of purchasing stocks being, on a basic level, nearly identical to the act of putting your chips in the middle of the poker table. Both involve the risk of losing your principal investment and both offer potential rewards that are limited only by how much money people have put into the market.

Ask any hedge-fund-manager-turned-poker-player (David Einhorn and Dan Shak both come to mind) why he took up poker as a hobby and he’s likely to tell you that it’s because the skills from his day job translate almost directly to the felt. But despite the inherent similarities between poker and securities trading, the two are treated completely differently. There are many places in the United States where you could tank entire companies or industries through a multibillion-dollar market play gone wrong at your day job in the financial industry, escape any sort of retribution because your activities enjoy a protected status under the law, and later the same day find yourself arrested and charged with a crime for playing a game of $1/$2 no-limit hold’em with a few hundred dollars out of your own pocket.

Insurance is another classic form of Legally Not Gambling, essentially a bet that something bad is going to happen. For example, life insurance is a bet that you’re going to die with a payoff that helps your family to deal with your funerary expenses and the loss of your income. The essential nature of insurance changes a bit when it’s required by law, since you’re no longer choosing to make the bet, but in its original form it was clearly a wager. (Consider that the first published book on insurance was a 1488 work by Pedro de Santarém called On Insurance and Merchants’ Bets.)

Then there are auctions. As I. Nelson Rose observed in this article “But is it gambling”, the online auctions that people remember from the early days of the internet boom have evolved into something much different. Online auction house QuiBids, which allows people to purchase bids for 60 cents each, has penny auctions that have been breathlessly described in Time as “like pure heroin…for anyone that finds a bargain even mildly stimulating.” By charging for each bid the bidding house acts much like a poker room in taking a rake from every pot. And yet, because they meet the legal definition of what an auction is, they’re Legally Not Gambling and tapping a vein with them is perfectly legitimate.

There are all sorts of ways to take risks in modern America – certainly too many to list in a single article. Some of them involve more variance than others, some involve more luck than skill, but the only real difference between them is what the law books say at any given moment.