The online gambling and gaming industry has become a haven for money laundering and blockchain technology could help fight it.
In the past, money laundering was relatively easy. After all, money cycles normally in the economy. People put their money in investments and withdraw what looks, on the surface, like different money. But law enforcement agencies tightly control such money flows so thieves need to find new ways to launder their dirty money — many where you wouldn’t expect.
Whether it’s Vbucks, Credits, or “Gold,” an increasing number of video game companies have opted to use digital in-game currencies in order to purchase assets. These are often valuable sources of revenue for gaming companies but they have a darker side. There have been reports of significant money laundering operations in both the online gambling world and video games themselves. The solution could be blockchain technology.
Money Laundering Is a Pervasive Problem
Online gaming is big business. In 2017 microtransactions generated more than $2.94 billion in revenue and the majority of gamers have made an in-app purchase at some point. Another rapidly growing gaming segment is online gambling. This sector was worth $58.9 billion in 2019 and has seen considerable growth over the course of 2020.
A problem that both online gambling and traditional video games with microtransactions face is accountability and security. Scams and fraud are a pervasive problem in both sectors and this has caused significant image problems for companies that operate there.
Another significant problem is the pervasive money laundering issues in both sectors. Yearly there is an estimated $590 billion – $1.5 trillion in money laundered. (But it is difficult to make specific statements about the true scale of the problem.) Even if online gambling and gaming microtransactions only make a tiny proportion of total money laundered, it is still a significant problem that is damaging the reputation of the sector.
How Does Money Laundering in Gaming Work?
Money laundering in gambling is the more straightforward of the two. A person with illegally obtained funds is able to upload it to a gambling site. There they bet the money, assuming that they will lose a certain amount. Once they have emptied their initial “investment” they will have obtained “clean” money from the operator. This problem is pervasive. For example, in 2018, the UK Gambling Commission warned five online casinos that they risked losing their licenses.
This problem has been mitigated somewhat by Know Your Customer (KYC) requirements in most jurisdictions. Failure to comply means that a gambling operator could lose their license. This has led to many criminals turning to a more unorthodox way to clean their money, online gaming.
In 2019, Valve revealed that “nearly all” transactions on the popular shooter CS:GO were essentially fraudulent. Users were essentially buying skins and other cosmetic items in the Valve operated in-game store and then trading these items with other users via third party marketplaces. Similar problems have been discovered in the popular Battle Royal game Fortnite, where criminals were buying the in-game currency v-bucks and then selling it to other users at a discount.
If the gaming and gambling industry can’t find a way around these significant problems then it puts their whole business model in jeopardy. KYC alone can’t solve the problem, but cryptocurrency and blockchain technology could make it harder for criminals to operate and easier to catch them.
Bringing More Transparency to Online Gambling
Blockchain technology is essentially a decentralized ledger that contains a list of all transactions that have happened for a given organization or cryptocurrency. These transactions can be monetary, but it is also possible to append metadata to a blockchain. It is the combination of these two features that makes blockchain such a high-potential technology for gaming generally.
Blockchain is often praised for its privacy but it is laughably easy to trace a transaction if you know where to look. Each token is given a unique unalterable ID that can be tracked from wallet to wallet, making it very easy to spot dirty money. This has made it possible to track the movement of funds from major crypto hacks.
If a gaming or gambling company were to implement a centralized blockchain, it would make it much easier to trace where illicit funds were coming from and freeze them. It would also provide an unalterable chain of events that could be presented in court as evidence of money laundering. The same system could be applied to in-game purchases, giving each a unique ID tied to a token. This system would make it more difficult for money launderers to operate, and easier to expose them.
This system would require the company to have control over its own blockchain, and it would need to be paired with more traditional KYC methodologies as well as the anti-fraud measures that are already in place.
A Plan Still In The Works
For the time being, this article is theoretical. But the benefits of internal cryptocurrency solutions could spread beyond making money laundering more difficult. If built correctly, they will allow developers to open up their closed gardens and make it possible to trade virtual assets across entire gaming communities, by using smart tokens.
Any dirty items or money could be blacklisted upon identification and the originating account banned. This would help developers build new ethical revenue streams and could help make microtransactions bring real value to gamers.