Olswang on eSports: gambling under scrutiny

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

At the end of last year, we looked at the opportunities the eSports industry had to offer the gambling sector. Since then we've seen movement in this space as regulators put the industry under the spotlight and illegitimate betting websites come under fire. Will increased regulation prolong the life span of this fledging market, or mean 'game over' for the interplay between gambling and eSports?

Skins betting crackdown

In June and July, two class actions were filed in the US against Valve, the developer of distribution platform and online marketplace Steam and the popular game Counter Strike: Global Offensive (or CS:GO). The first alleged that Valve was complicit in the operation and promotion of illegal gambling through enabling millions of Americans to link their individual Steam accounts to third-party websites where they could participate in 'skins betting' in respect of CS:GO.

'Skins betting' - for the uninitiated - consists of wagering covers or 'skins' for weapons (which can then be used in play) on eSports events as well as using these as casino chips in casino type games. It was claimed that, as such skins are available for purchase for real money on the Steam marketplace, and can be traded and used as collateral for bets placed on third party websites, 'skins betting' constitutes gambling. Therefore, by enabling players to link their accounts to third party websites offering such services, Valve is complicit in this. As the plaintiff's claim puts it: "in sum, Valve owns the league, sells the casino chips, and receives a piece of the casino's income stream through foreign websites in order to maintain the charade that Valve is not promoting and profiting from online gambling…".

The second class action meanwhile was filed by a mother on behalf of her son, a minor, against not only Valve but also CSGOLotto Inc. and the owners of this third party website. Again, the suit alleged that Valve knowingly allows – and directly profits from – the illegal gambling of skins. Both class actions seek damages and restitution on behalf of their classes.

Many in the industry, however, have been quick to suggest that the actions are likely to fail. Questions have been raised surrounding whether or not the plaintiffs suffered any damage and whether Valve actually profits directly from the third party websites - whilst Valve receives a fee for each skin purchased in the first instance, they do not receive profits directly from their wagering. Irrespective of the chances of success, however, Valve has responded strongly, issuing cease and desist orders to all skin betting sites found to be using the Steam trading system. Reportedly as many as 23 websites received such letters. This crackdown so far appears to have had the desired effect, with the majority of the sites being closed down.

Where does eSports betting go from here?

It is arguable that Valve's response will benefit the regulated gambling industry, as operators acting legally will potentially inherit a group of customers keen to continue gambling on their sport of choice. In addition to this, some argue that the class actions have forced Valve to act now, sidestepping a more damaging scandal – which would impact the reputation and viability of the whole eSports gambling market – further down the line.

The first point, however, assumes that the average skins betting punter would readily move to the other available legitimate option: betting on eSports as a traditional sportsbook market. The popularity of such betting has certainly increased already. It is estimated by Sportradar that there are now at least 80 licensed operators offering bets on eSports, up from 15 nine months ago, and one five years ago. This, however, is unrelated to Valve's actions, and whilst such growth is encouraging, looking at what made skins betting so popular in the first place, suggests that it may be more difficult for this market to adopt the skins betting population than one would imagine.

The ease with which players could link their Steam accounts to the third party websites and start staking their skins is much more straightforward, and less daunting, than linking a credit card account to a traditional betting site for instance. Simultaneously, by its very nature, being unregulated meant that skins betting was easy to do – there is no need for KYC or age verification and hence less hassle for the customer and operator alike. Finally, and as a result of this, the demographic for skins betting is young, and with a large proportion of punters being underage, their potential transition from skins betting to sportsbook will have to wait.

In addition to the above, the notion that a scandal has been avoided and any fall out minimised, carries less weight in light of recent reports of Paypal's concern over the legality of payments linked to eSports websites. The world's largest internet money processing company is investigating potential regulatory and legal issues with their payments being associated with gambling. This illustrates the potential knock on effects that the unearthing of the illegitimate market may have on the wider eSports industry.

Regulatory attention

Amidst all of this, it is unsurprising that the Gambling Commission of Great Britain has started to turn its attention to the market. In its 2015/2016 annual report and accounts, Sarah Harrison, stated that "the growing market in esports and computer gaming has scope to present issues for regulation and player protection – issues which are being examined by gambling regulators in other international markets. These issues range from the emergence of real money esports betting markets, to trading in-game items which blur the lines between gambling and social gaming. Our focus will be to understand developments, including engaging with key stakeholders, and we will work wherever we can to ensure the risks associated with these, particularly to children and young people, are minimised".

Philip Graf meanwhile – Chair of the Commission – also commented in a speech at the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA), that eSports was an area the Commission was starting to turn to. Again, he stressed the link between competitive video-gaming, social gaming and children – the need to protect minors making the sector an area of particular interest for the regulator.

Whilst no guidance has been provided or regulatory action taken by the Commission in this space, the rhetoric of the regulator very much suggests that this may not be the case for much longer. In the wake of the Valve cases – irrespective of whether they succeed – action in respect of skins betting websites is probable, and the real money eSports betting market will likely rise up the regulatory agenda.