Blockchain-based sports betting, rapidly maturing into a multi-billion-dollar global industry, may find a formidable barricade in U.S law. Expected to hit $180 billion by 2030, the largely online global sports gambling industry has begun to attract blockchain-based startups interested in disrupting the space. Notably, even the founder and former CEO of FanDuel, a major player in the traditional sports betting industry, has ventured into the blockchain-based sports betting space, with a platform recently licensed in Ireland.
However, within the U.S, the situation is somewhat more complex. Undoubtedly, sports betting was legalized in the U.S in 2018. However, the 1961 Federal Wire Act (Wire Act) and the 2006 Unlawful Internet Gaming Enforcement Act still apply, and though their enforcement has rarely inhibited online sports betting within the country, an expansion of blockchain-based sports gambling to the U.S is potentially fraught with legal hurdles.
The Wire Act prohibits businesses from employing interstate communication technology in the operation of sports wagers, a law enforced even in the age of internet communications. This necessitates online sportsbooks to invest heavily in making sure that they accept bets exclusively from the state where they are licensed. For an on-chain sportsbook, given that its operations interact heavily with smart contracts and blockchains and can be accessed from anywhere via a cryptocurrency wallet, this geofencing becomes particularly hard to enforce.
In recent years, the online sports gambling industry has made claims that the Unlawful Internet Gaming Enforcement Act (UIGEA) adequately expresses Congress’s intent to accommodate online intrastate gaming by defining “intermediate routing.” While this may hold for traditional sportsbooks, on-chain sportsbooks would be ill-advised to rely on the UIGEA defense as a smart contract on a public blockchain is spread out over nodes around the world. An on-chain wager, unlike a conventional data packet, is stored on all the nodes of a blockchain without any control over whether the node recording the initial wager and the node settling the bet are in the same state as the on-chain sportsbook.
Nevertheless, there may be ways for an on-chain sportsbook to operate within the strict boundaries of the U.S law. For instance, soulbound NFTs might be used as a proof of state residency, transferring node operations to layer 2 blockchains on top of a public blockchain might confine on-chain wagers within a state, or else on-chain sportsbooks could create their private/permissioned blockchains in collaboration with state gaming commissions and compliance departments. Further, there are also options for P2P sports betting exchanges.
The burgeoning global blockchain-based sports wagering industry is too large a pie for U.S sportsbooks and state governments to pass up. To capitalize effectively on an untapped revenue pool and tax dollars, there needs to be a concerted effort to modernize federal and state laws binding sports gambling lest they continue to impede the growth of the U.S sports gambling industry.
For a comprehensive understanding of the legal implications of blockchain-based sports gambling under U.S law, read the thoughtful article by Samir Patel, an innovation and technology attorney at Holland & Knight.