GPWA Times Magazine - Issue 28 - April 2014

mously. (Asanexample, this isanaddress whereuserscansendbitcointoWikiLeaks: 1FJDgwHdBb9invpFeSk4U8UsXDuHQ8QhEc.) Bitcoin canbeobtainedeitherbypurchas- ing coins (or fractions of a coin) through an exchange, by selling something for it, or throughmining. In an exchange, users fund an accountwithfiatmoney (curren- cy that derives its value fromgovernment regulation or law), such as U.S. dollars, then purchase bitcoin at the prevailing exchange rate in the sameway onemight exchange money for a foreign currency. To obtain bitcoin through a sale, users provide their Bitcoin address (that long string of numbers and letters) to anyone whowants to sendyoubitcoin. Mining is much more complicated and only the most die-hard enthusiasts will get bitcoin in thismanner. "People pool their cryptographic mining resources into what's known as mining pools," saysMicon. "Mining cryptograph- ically secures the network. The more hashingpower, themore secure it is." So as more users adopt Bitcoin, which has afinite limit of 21millionbitcoins, the more the price increases. As the price in- creases, thegreater the reward forminers, which creates more hashing power. And themore thehashingpower, themore se- cure thenetwork. Why theonlinegambling industry lovesBitcoin There's a long list of reasonsmany in the online gambling industry love Bitcoin, but perhaps themost important ones are its ease of use and the irreversibilityof its transactions. Credit cards offer consumers a great deal of protection, including the ability to call up the provider of their card anddispute a charge. Tell a credit card company you didn't authorize a charge to an online ca- sinoandyou'll get a refund.And thereare plenty of unethical peoplewhomake de- positsatonlinecasinosandcashoutwhen they win but dispute the charges when they lose. Affiliates, who often take a hit when their referredplayers resort to such tactics, arewell awareof thepractice. "The affiliate agreements that I have drafted in the past have always carved out chargebacks as a reduction in affili- ate fees," says Stuart Hoegner, an inter- national gaming lawyer and accountant with Gaming Counsel, based in Toronto. "Those chargebacks go away in the Bitcoin environment, because there can benoabilityby the customer to clawback frommerchants." Players alsohave agreat deal of difficulty in some jurisdictions making deposits with credit cards as the issuing banks won't allow online gambling transac- tions, even when those transactions are with operators licensed in the player's ju- risdiction. Bitcoin, however, does not act as a gatekeeper. So long as you have the correct user account, transferswill not be interceptedor blocked. Sowhat are theproblems withBitcoin? Perhaps the most serious issue with Bitcoin, from a regulatory standpoint, is the reason it is so attractive to libertarian- minded people. The anonymity it pro- vides allows sites such as Silk Road to offer an online marketplace for people looking tobuy and sell illegal drugs. (Silk Roadwas shut downand144,000bitcoins were seizedby theFBI inOctober 2013.) "As an iGaming provider, you have to knowwho the player is; you're doing ex- tensive (knowyourcustomer) checks, and all that kind of goes away (withBitcoin)," says Tim Richards, general manager and senior vice president of Global Cash Access, a payment processing firm that workswith the gambling industry. "Then you have to begin to wonder where that currency came from." In addition to the black andgraymarkets that operatewithBitcoin, it has seenwild fluctuations in value. Two years ago, one bitcoinwas worth about $5. In late 2013, that valuehad jumped toover $1,000. The collapse of MtGox and other recent events have resulted in a bigdrop in con- fidence in Bitcoin, causing the price to drop to less than $500. "It's an issue, and I think it's going to set confidenceback inBitcoin," saysHoegner. "People trusted MtGox. My understand- ing is other exchanges are more secure, but in any event, it does not impact the underlying technology,which is sound." Hoegner believes that regulatory over- reachwill likely be the biggest challenge for Bitcoin, and a recent rulingby the IRS suggests he may be right. The U.S. tax agency says thatmerchants receiving bit- coin as payment must pay tax on its fair market value. That seems fair and logical, though it does present some accounting issues for people who do a large volume of business in bitcoin, especially as bit- coin's value when compared to the U.S. dollarfluctuates sowildly. 14 Bitcoin'sboom-bust cycle letsplayersgamble twice