Cryptocurrency and blockchain: An emerging problem, or a vital solution?

Much has been made of the potential of blockchain and cryptocurrency, and there has been talk recently of its potential application as a way to enhance safer gambling standards. Yet one individual working in the gambling and crypto sector is dubious as to whether operators are exploring its potential.

The crypto space is probably a good decade behind gambling in terms of customer protections, they say.

“On the crypto gambling side it is a sliding scale, but most are basically the same level as a Curaçao licensee at this stage - in fact most now have Curaçao licences. A few are trying to at least show they are going above and beyond.”

Among those taking that step is Yolo Group’s Sportsbet.io, sponsor of Premier League club Southampton FC. It was involved in the club’s ‘Listen to the Saint in you’ campaign in 2020, to highlight the potential risks of gambling, and promote its Safer Gambling Week hub.

However some see a wider opportunity being missed here. “If there was a will, crypto/blockchain operators are in a potentially stronger position to introduce better protections than we see in the fiat world,” one person explains. "The open nature of the blockchain (in theory) gives them the opportunity to build a far more holistic view of what a player is spending on (not just the amount they are gambling directly with them).

“But as I say, there would need to be a will for that to be a thing.”

The value of the ‘bit’ over the ‘coin’

The will is there, though it comes from the fiat gambling space.

Paul Foster, a veteran of gaming operators such as bwin.party, Gala Coral, Ladbrokes Coral and GVC Group (now Entain) serves as chief executive of Crucial Compliance, a Gibraltar-based provider of regulatory, corporate responsibility, compliance, and professional service solutions.

He turned to research body nChain, and its blockchain interface platform Kensei, to aid the development of the business’ Crucial Player Protection monitoring solution, which was designed to log and track player review, interaction, and intervention.

“[The] nChain relationship came from us looking at a problem that needed a solution, and the problem was data integrity,” Foster explains. “The issue we had is we had built a system which had great data integrity, which would fulfil the requirements of operators and regulators, but the fact is that data sits with the operator. So there is a risk it could be manipulated and therefore would never have total data integrity.

“Knowing that we went out to try and work out how you could get an independently held database. We went through all the options with third party providers, and the cost was astronomical - the industry would never accept it.”

This, he says, relies on the bit - the data - rather than the coin - the payment mechanism. Most forms of crypto were still too expensive, though Bitcoin SV (Satoshi Vision), which is used by nChain, was looking to break down the blockchain into smaller components, treading transaction costs and providing easy and cost-effective data storage.

“nChain had already understood the issue and had built the Kensei system, which we are going to use at Crucial Compliance to access BSV and store all of this data,” he adds.

“It was a problem that we found a solution to, because a company was thinking in the same way as us and was a leader in their field. This meant that you could use the blockchain to store player protection data, which will always have integrity, which will always have date stamps, which can never be changed, and is also easy to access if you have the code stream number. The time was right.”

Foster believes the gambling sector has largely focused on the monetisation and payment side, rather than the distributed ledger technology that powers cryptocurrencies.

“When you then look at the gaming industry, they’ve only been looking at it as a form of payment or monetisation rather than actually thinking about the chain,” he says. “Everybody has been a bit slow to put two and two together to realise that the answer to a lot of questions being asked on the regulatory side was the blockchain.

"And once that accessibility of that blockchain was there through BSV and nChain, it opens opportunities to create real-life user examples of how it can be used.”

Ultimately he sees the partnership with nChain as the first example of blockchain being used in a regulatory environment to enhance player protection, meet regulatory requirements and drive innovation in “a very staid” area of compliance.

But this, he adds, is very much contingent on the underlying technology. “Being able to separate from the idea of crypto trading, crypto exchange and crypto gaming, and actually look at traditional gaming, traditional payments and traditional AML and compliance actually flips things on its head.

“That’s what we’re trying to do - create that first user example of how blockchain can be used to support traditional gambling compliance.”

Foster sees these practical applications as the future of blockchain, rather than as a payment solution. By leveraging the underlying technology it supports, rather than replaces activity funded by fiat currency.

Gambling by any other name

Many in the industry have been screaming out for a practical application of blockchain that goes beyond facilitating payments. Foster and nChain look set to provide just that.

Though while this may enhance safer gambling in the real-money space, there’s an emerging issue with addiction that is yet to be tackled, and it involves cryptocurrency trading. And according to Tony Marini of Castle Craig Hospital in Scotland, this shares all the characteristics of gambling.

He outlines the descent into addiction that many face. As with gambling, it starts out as a fulfilling activity.  Traders regularly engage with people, businesses or companies that they see as being of value, and they can access a lot of appealing content. The fact they are rewarded quickly for successful trades or price movements means they will often fantasise about buying things.

As the trader chases that feeling of fulfilment, it can result in riskier use. This leads to increased usage - trading is a 24/7 activity. According to Castle Craig, traders can become increasingly irritable, emotionally distant from relationships, and feel increasing social anxiety, while self-confidence and self-worth becomes linked to the performance of their investments.

If this goes unchecked those involved can become completely dependent on crypto trading. This can ultimately destroy their self-worth, contribute to substance abuse, criminal activity, and more isolation - even the inability to distinguish what’s real from what’s not.

When they hit rock bottom, the person suffering from crypto addiction can be suicidal, have problems with work, family or friends - even the law - and end up having a total emotional breakdown.

Having identified this trend, Marini, who has experience working with multiple types of behavioural and substance abuse issues, with a focus on those involving drugs, alcohol, gambling, sex and gaming, claims to have established the first clinic offering treatment for cryptocurrency addiction. It aims to take people out of that spiral, and break that cycle of addiction.

Unifying characteristics

The characteristics - and treatment - for those affected is the same, he explains. Just as problem gamblers may chase losses, looking to quickly recoup money lost from losing bets, crypto has “revenge trading” where a big loss is immediately followed by further trades to attempt to break even once again.

One person working in the crypto space, speaking anonymously, points out that a lot of the trading platforms present themselves as a form of investment rather than gambling on an outcome.

“A lot of these products have done a great job convincing people they are 'investing' in something, when in reality it is pure casino which is probably more volatile and risky than putting money through a slot,” they say. “At least you get a decent return to player (RTP) on those.”

When playing a slot machine, there is a set number of times that the player can be rewarded for each spin. Cryptocurrency values are governed entirely by supply and demand, meaning prices can spike or plummet regularly.

Bitcoin, the best-known cryptocurrency, was priced at £9.921.15 on 24 October, 2020 according to Coinbase. It has appreciated by 349.83%, to £44,627.90 as of 23 October, 2021, down from a peak of £48,426.53 on 20 October. This is more than double its lowest value of 2021, £21,864.49 on 21 July. It fluctuates frequently, so the opportunity for reward is almost constant.

And uptake has been influenced by broader, macroeconomic factors.

The Robinhood effect

Securities trading was once the preserve of The City or Wall Street, traders in glass-and-chrome offices working on trading floors. In recent years, retail trading, popularised by platforms such as Robinhood and campaigns on social networks such as Reddit, has attracted a new audience of investors and speculators.

The highest-profile example here came in 2021, with trading on shares of video game retailer GameStop. In what is now described as the first social media-driven coordinated buying of stocks, users of the r/wallstreetbets subreddit triggered a short squeeze on its shares.

GameStop’s New York Stock Exchange closing share price soared from $19.94 per share on 11 January 2021, to $347.51 per share on 21 January. This saw amateur traders accumulate vast returns in a short space of time, attracted the interest of Tesla founder Elon Musk, and international news coverage.

Much of the trading was carried out on commission-free trading platform Robinhood, which has since listed on the NYSE. In its most recent results, covering the three months to 30 June, 2021, it saw monthly active users grow 108.8% year-on-year to 21.3 million.

Transaction-based revenue jumped 141.2% to $451m in that same period, of which cryptocurrencies contributed $233m, up from $5m in the prior year and the highest of any product. It noted that over 60% of its net cumulative funded accounts trading in crypto - that was also the first quarter in which a larger share of new customers placed their first trade on crypto than on equities.

GameStop, and a similar short squeeze on cinema chain AMC Entertainment, may have involved securities. But the rewards from crypto trading can be significantly higher, thanks to its volatility. Yet the safeguards generally focus around criminality, rather than the addictive potential of trading.

Robinhood notes that customers’ securities of up to $500,000 (including $250,000 for claims for cash) are protected by the Securities Investor Protection Act. Crypto investments are not protected through this scheme, though it does offer crime insurance that will cover a portion of the cryptocurrency held from theft.

What it doesn’t explain are the safeguards available for investors, who trade compulsively. Dedicated cryptocurrency trading platforms such as Binance and Coinbase were contacted for clarity on the safeguards they offer, but failed to respond.

In Marini’s view the reason for the lack of information on safeguards is simple: “This is not regulated in any way,” he says.

However Amega, a broker offering commission-free trading across all assets, says that a level of protection is afforded to players. It incorporates Negative Balance Protection, to ensure traders cannot lose more than they have invested, and has introduced margin calls and stop out levels for leverage trading.

Since cryptocurrencies are particularly volatile, Amega says, it limited leverage (which provides traders with greater exposure to markets without having to deposit the full amount of the trade) to 1:20. For forex pairs - the most heavily traded fiat currencies - the maximum leverage offered is 1:1,000.

It has also implemented internal risk management policies that take into consideration the type of trading instrument, historical volatility and expected volatility due to economic or political events.

“According to the company’s risk management policy, Amega limits maximum allowed open volume position per instrument in order to protect the clients from abnormal volatility and potential losses,” it explains.

However Foster argues that the idea of player protection and safeguarding was never driven by Bitcoin gaming operators or exchanges.

“They have been looking at compliance in order to fulfil the requirements of being a regulated and legal body, specifically in AML,” he says. “This collaboration with nChain has come about from a genuine need from companies not using blockchain, not using crypto, coming greenfield to the whole area and looking to find out how they can use it in a way that doesn’t damage the industry reputationally, that they understand, and that makes sense.”

This certainly shifts the focus away from crypto as simply a payment solution, and to more expansive - and potentially transformational - applications.

As for its use as a currency or a trading asset, Marini argues this is likely to be a short-term phenomenon. “This started really with criminal activities such as buying drugs and money laundering,” he says. “The way it is going I think that we will see more and more governments banning or regulating this, and most will collapse.”