States' rights and fragmented Internet gambling markets

In America, each of the 50 states decides its own unique restraints on gambling. Nevada has hundreds of casinos and even sportsbooks, but Utah permits no gambling whatsoever. Theoretically, the social values of the people determine each state’s regulatory choices. The people of Nevada value the economic prosperity of a vibrant gaming and tourism industry, but the people of Utah value a code of behavior aligned with their prevalent religious views.

The nations of Europe are likewise accustomed to deciding their own restraints on gambling. In the U.K., casino games and sports betting are permitted, and a government agency watches over private sector operators to ensure fairness and honesty. But in Norway, casino games are prohibited and the government itself functions as the only legal operator of sports betting. The people of the U.K. are generally comfortable with gambling, so they choose an open regulatory system that yields high economic efficiency. But the people of Poland are generally cautious of gambling, so they choose to allow it only under the strict surveillance of a government monopoly.

Gambling on the Internet: Black markets and gray markets
In America, the problem is the same in every state. Despite a federal prohibition against interstate Internet gambling, Americans wager billions of dollars annually on black market games. From the earliest years of Internet technology, overseas governments recognized a giant global demand for government agencies that could verify the fairness and honesty of Internet games. Although some of the overseas agencies seem to take the role of regulator seriously, others seem primarily concerned with keeping operating costs low for their licensees. Scandal and controversy have been common, but Americans continue flocking to foreign operators nonetheless.

Black market games are a problem in Europe too, even in nations that have enacted laws to regulate Internet gambling. For example, the U.K. grants Internet gambling licenses but is having difficulty attracting operators away from overseas jurisdictions. Many dominant operators have chosen to simply continue plundering the U.K. market from overseas because taxes and operating costs are tremendously lower there. And operators who have obtained licensure in the U.K. find themselves competing against operators who can offer better prices and promotions due to their reduced costs overseas.

Another problem is the so-called gray market that is arising as individual nations begin enacting their own laws for Internet gambling. Today most European nations acknowledge that the Internet can be a legitimate delivery channel for gambling products, but many want to continue prohibiting games that have been banned from their culture for generations. And some still believe a government monopoly is the only acceptable way to regulate certain games. However, free market interests denounce government monopolies as trade protectionism. And so national governments do not always forbid licensees from offering services internationally, even if customers are located in a nation whose government has declared a monopoly.

The Solution
A plan advancing through European Parliament finds that the ultimate priority is protecting nations’ sovereign right to control gambling laws in their territory. The plans recognizes that gambling, especially on the Internet, is a special type of economic activity because of the inherent social risks. Nations are therefore entitled to control Internet gambling in ways that might not otherwise conform to free trade treaties. And so to ensure that European government will not interfere with nations’ rights to control their own gambling laws, Parliament’s Committee on the Internal Market and Consumer Protection recently approved a report declaring that Parliament will not pass a new law to uniformly regulate Internet gambling.

And yet the committee’s report recognizes that cooperation among national governments is necessary or else black and gray markets will continue to frustrate all of their intentions. If nations would work together, they could develop common standards for inspecting fairness and honesty. Then they could feel safer about licensing foreign companies to compete in their territory. And if national governments could communicate with one another better, then they could take joint action to repel black market operators. But Parliament does not have power to make any of this happen. Ultimately each nation is responsible for enacting its own laws.

Meanwhile the policy proposals emerging in America are careful to ensure the protection of states’ rights to control their own gambling laws. Additionally, the necessary cooperation among state governments will be more easily achievable in America because the states do not fear intrusion from the federal government like European nations do from Parliament. In fact, in matters involving interstate commerce the states have come to expect and rely heavily on federal assistance.

Still the envisioned role of the federal government is limited. The decision whether to allow Internet gaming would belong to each of the states. Utah would be free to prohibit all games, and Nevada would be free to regulate as broadly as it wants. The federal government would get involved only to facilitate healthy relations among the states. For example the federal government could help develop common control standards, which would benefit regulating states by making it easier to connect their markets. But states would be free to develop even stricter control standards if they desire.

So while Europe seems fated to many more years of incompatibility, the United States should benefit immensely from their more cordial union. State legislatures will continue to gain confidence in their ability to regulate gambling on the Internet, but they will be careful not to impose their laws outside their territory. And eventually U.S. Congress will have to recognize the federal government has a duty to help.