Internet Gambling: Prohibition v. Legalization

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Thank you for inviting me to testify today on the relativemerits of prohibiting Internet gambling versus legalizing it. Theissue certainly deserves our careful consideration--but not becausepublic debate will determine whether Internet gambling getsprohibited or legalized. No amount of debate will do that.Ultimately, it does not even matter whether legislators and lawenforcement officials try to outlaw Internet gambling. Publicdeliberation and government action willdetermine whether legalized Internet gambling comes slowly andpainfully or quickly and cleanly--hardly a trivial matter. Allfacts indicate, however, that sooner or laterAmericans will legally gamble over the Internet.

My testimony today will describe some of the factors that willfrustrate attempts to prohibit Internet gambling and compel itseventual legalization. I will focus on three factors:

First, Internet technology renders prohibitionfutile. The Internet's inherently open architecture alreadyhobbles law enforcement officials, while relentless technologicalinnovation ensures that they will only fall farther and fartherbehind.

Second, as an international network, theInternet offers an instant detour around merely domesticprohibitions. Principles of national sovereignty willprevent the U.S. from forcing other countries to enforce a ban onInternet gambling, and it takes only one safe harbor abroad toensure that U.S. citizens can gamble over the Internet.

Third, consumer demand for Internet gamblingand the states' demand for tax revenue will create enormouspolitical pressure for legalization. The law enforcementcommunity, which has until recently enjoyed the media spotlight,will quickly find its calls for prohibition drowned out by theseand other political forces.

Since the hard, cold facts about the inevitable failure ofprohibition will undoubtedly depress some decent andwell-intentioned people, I will leaven my analysis with somecomforting words about Internet gambling. A dispassionate accountreveals that Internet gambling offers several benefits:

  • Internet gambling will drive network development;
  • It will provide a more wholesome environment than real-worldcasinos; and
  • It will benefit consumers by increasing competition in gamblingservices.

Before launching into the details of why legalization will trumpthe prohibition of Internet gambling, and why that outcome shouldcause no great alarm, allow me to clear away a preliminaryobjection. Some proponents of a ban on Internet gambling argue thatif prohibition will not work then neither will any scheme ofregulation.(1)Such anargument fundamentally misunderstands a basic principle ofgovernance, however: Regulations can succeed evenwhere prohibition fails if they offer benefits that exceed theirburdens. That is why people do not illegally shoot craps inLas Vegas alleys. In the case of Internet gambling, the benefits ofwinning an official stamp of approval might convince an onlinecasino to submit to regulation, even if that same casino couldeasily flout a total ban on its business. Exactly how muchregulation will the Internet gambling industry tolerate? In alllikelihood, not very much--but only practical experience can settlethat question.

Internet Technology Renders ProhibitionFutile

The very architecture of the Internet renders gamblingprohibition futile. In contrast to telephone communications, whichtypically travel over circuit switched networks, Internetcommunications use packet switching. Each Internet message getsbroken into discrete packets, which travel over various andunpredictable routes until received and reassembled at themessage's destination. In other words, sending a message over theInternet is a bit like corresponding with someone by writing aletter, chopping it up, and mailing each piece separately to thesame address. The recipient can piece it together but anyonesnooping on your correspondence has a tougher go of it.

Understanding Internet communications as akinto the postal system clarifies why gambling prohibition just willnot work. Imagine telling the postal service that it musthenceforth crack down on all letters conveying information used inillegal gambling. It would rightly object that it already has itshands full just delivering the mail and that it lacks the equipmentand personnel to snoop through every letter. It would furthermorenote that it could not always tell which messages relate to illegalactivities. People use "bet" and "wager" in everyday conversationswhereas gamblers often speak in code. Meanwhile, customers of themail service will strongly object to having the postal service pawthrough their correspondence.

Nor can prohibitionists expect the postal service to simply stopdelivering mail to and from certain addresses associated withillegal gambling. The postal service will again object to theburdens of implementing such a program. Citizens will again objectto law enforcement officials spying on private correspondence. Moreimportantly, though, trying to cut off certainaddresses will simply fail to stop gambling. Gamblers willrely on P.O. boxes, which they can change at a moment's notice, andsimply drop off outgoing correspondence with no return address.

All these considerations apply with equal or greater force toInternet gambling. Compared to the postal system,the Internet makes it easier to encrypt messages, to changeaddresses, and to send and receive messages anonymously.Internet service providers would thus find it impossible todiscriminate between illicit gaming information and other Internettraffic. Furthermore, in contrast to the quasi-public andmonolithic postal system, the Internet relies onthousands of separate and wholly private service providers to carryout its deliveries. All of them would stridently object tothe burdens of enforcing a ban on Internet traffic. More than a fewwould simply refuse to cooperate.

Does that sound like a pessimistic account? To the contrary, itmerely describes the current situation. Astechnological innovation continues to drive the development ofInternet communications, law enforcement officials will fallfarther and farther behind illegal gamblers.

Given these technological constraints, prohibiting Internetgambling plainly will not work as intended. As an unintended sideeffect, however, prohibition would sorelycompromise the cost, efficiency, and security of Internetcommunications. Given the inevitable failure of technicalfixes, legalizing Internet gambling offers the only viablesolution.

Internet Gambling Can Escape DomesticProhibitions

Outlawing Internet gaming services domesticallywill simply push the business overseas. Federal lawenforcement agents admit that they cannot stop overseas gamingoperations. "International Internet gambling? We can't do anythingabout it," Department of Justice spokesman John Russell said,"That's the bottom line."(2) Even Sen. Jon Kylhas confessed that "this would be a very difficult kind of activityto regulate because we don't have jurisdiction over the peopleabroad who are doing it."(3)

Both practical and legal barriers prevent anydomestic ban on Internet gambling from having internationaleffect. Because the Internet provides instant access tooverseas sites, any domestic prohibition on the offer of gamingservices will have to cover the whole planet to work. American lawenforcement agents can--and recently did--arrest local citizensaccused of running Internet gambling businesses, but smartoperators will quickly learn to set up abroad and staythere.(4)

Gaming services can find ample shelteroverseas. A growing number of countries, includingAustralia, New Zealand, Antigua, and Costa Rica, have decided tolegalize and license Internet gaming services.(5) Principles of international law, which protect eachcountry's sovereignty, bar the United States from extraditing itscitizens merely for violating domestic anti-gambling laws.(6) Furthermore, the Sixth Amendment of theConstitution's Bill of Rights prohibits the criminal prosecution ofthose who remain overseas while operating Internet gamblingsites.(7) Law enforcement officials in theUnited States can thus neither arrest nor sentence anyone whooffers Internet gambling services from a safe harbor abroad.

The Powerful Demand for InternetGambling

Americans love to gamble. Having alreadyembraced traditional games of chance, they will almost certainlyextend a warm welcome to Internet gambling. At least 56% ofAmericans gambled in 1995.(8) Few Americansregard it as immoral; A 1993 survey found that only 25% ofnon-gamblers cited moral or religious reasons.(9) By current estimates, Americans will wager morethan $600 billion in 1998--nearly $2,400 for every man, woman, andchild.(10) About $100 billion of that sum willgo toward illegal bets, demonstrating that Americans already pay little heed to anti-gamblinglaws.(11)

Regardless of its legality, Americans havealready shown that they support the nascent Internet gamblingindustry. Analysts calculate that of the $1 billion inrevenues that Internet gambling generated in 1997, about $600million came from the United States.(12)Online casinos will have worldwide revenues of some $7.9 billion bythe year 2001, $3.5 billion of it coming from U.S.consumers.(13) Because the Internet offersbettors instant access to overseas gambling sites and relativesafety from prosecution, online gambling will growregardless of what prohibitionists want.

Soon, though, the prohibitionists will have more than consumerdemand to worry about. Law enforcement agents have seized the mediaspotlight by telling scary stories and demanding new powers tocrush Internet gambling. As the futility of prohibition becomesmore and more evident, however, cooler heads in state revenuedepartments will begin to see Internet gambling as a huge new cashcow. Prohibition merely assures that Internet gamblers will shiptheir money to places like Antigua, New Zealand, and Australia.State governors and legislatures will soon demand a share of thatbounty. The same political forces that have led tothe widespread legalization of lottery, casino, and riverboatgambling will thus eventually lead to the legalization of Internetgambling.

Indeed, this trend towards the legalization ofInternet gambling has already started. Initially, Sen. Kyl'sInternet Gambling Prohibition Act of 1997 banned every sort ofonline commercial contest, everywhere in the United States, foreveryone involved.(14) Facing a storm ofobjections, he recently drafted an amendment to the bill that wouldallow a variety of types of online gambling, such as interstateoff-track bet pooling and intrastate parimutuel and lotterybets.(15) Rep. Bob Goodlatte once defended hisown bill to prohibit Internet gambling with the claim that existinglaws "have been turned on their head" by the Internet because "[n]olonger do people have to leave the comfort of their homes" toaccess casinos.(16) In fact, however,nine states already allow their citizens to accessprofessional gaming services at home via telecommunicationsdevices.(17) Legalized Internetgambling, far from revolutionizing American culture, will come as anatural extension of current social and technological trends.

The Benefits of InternetGambling

I have set forth a number of reasons why attempts to prohibitInternet gambling will inevitably fail and give way tolegalization. Mere futility hardly suffices to bar bad publicpolicy, however. Allow me, then, to adduce some reasons why weshould welcome the legalization of Internet gambling.

Internet gambling will encourage the privatesector to develop network capacity and commerce. Just asreal-world casinos have competed to build the most innovative andappealing environments, so too will Internet gaming servicescompete to offer the flashiest graphics and most sophisticated userinterfaces. That competition will, as a nice side-benefit, resultin broader bandwidth and better software for all sorts of Internetapplications.

Critics of real-world casinos fault them for luring consumersinto windowless caverns far from the real world, with gamblingtraps at every turn and free-flowing booze. Regardless of thevalidity of such criticisms, they certainly do not apply toInternet gambling. To the contrary, consumers who log on from homecomputers will find it impossible to escape phone calls, barkingdogs, and all the other distractions of the real world.Internet gambling thus offers a more wholesomeenvironment than its real-world counterpart.

Lastly, we should never forget that gamblers deserve all thebenefits that other consumers of entertainment servicesenjoy--including the benefits of competition. By giving consumerscheap and easy access to a variety of gaming opportunities,the Internet will bring competition to an industrythat has long enjoyed the shelter of highly restrictive licensingpractices. Gamblers will no longer have to fly to Las Vegasto play the slots, drive to the nearest authorized track to playthe horses, or even walk to the corner store to play the statelotto. Consumers can already play these and other games at home viathe many Internet web sites--over 50 and growing--that offergambling services.(18) Prohibiting Internet gambling will not make it inaccessible,whereas legalizing it will put the benefits of increasedcompetition within the rule of law.


Notes

1. See, for example, Sen. Jon Kyl'sanalysis of the issue: "On one hand, they say no way can youcontrol this, and then they turn around and say regulate it. Ithink they're being disingenuous." Joe Salkowski, Betting onthe Horses--Racing Lobbyists Jockey Past Proposed Internet GamblingBan, Arizona Daily Star, May 15, 1998, available at <http://dispatches.azstarnet.com/features/1998/0415.htm&gt; (quotingSen. Kyl).

2. Steven Crist, All Bets areOff, Sports Illustrated, Jan. 26, 1998, at 85.

3. Ted Koppel, The Odds ofStopping Gambling on the Internet, ABC Nightline, April 7,1998 (excerpt of videotaped statement by Kyl). Kyl continued hisanalysis by proposing a solution to this admitted problem: "So theway that our legislation is enforced is to simply pull the plug atthe point of entry into the United States." Id. Thisreveals a fundamental misunderstanding of how the Internet works,however. Thanks to packet switching, Internet traffic from a givencountry can enter the U.S. from any number of overseas sites. Tobar entry of Internet traffic from, say, Antigua, Kyl would have tobar all international communications.

4. See, Benjamin Weiser,14 Are Charged With Taking Sports Bets Over the Internet,New York Times, March 5, 1998, at A1. Weiser recounts the firstfederal crack-down on Internet gambling operators, and quotesAnthony Cabot, a gambling law expert in Las Vegas, Nevada: "You'renever going to see a shutdown," Cabot said. "[T]hose who are in theindustry are going to take much greater precaution in hiding theirownership if they are U.S. citizens." Id. at A1, A29.

5. See, Crist, AllBets are Off, at 92 (discussing plans of Australia and NewZealand to legalize and regulate Internet gambling); id.at 88 (discussing Antigua's licensing practices); Mary Ann Akers,On-line betting makes some rich, others edgy, WashingtonTimes, Jan. 27, 1998, at A1, A8 (discussing practices in CostaRica).

6. Gyneth McAllister, Expeditor ofInternational Investments for the Antiguan government, commented,"The issue for the United States should not be whether Internetgambling should exist in Antigua or not. Antigua is a sovereignstate and isn't their concern. We are no banana republic."Quoted in Crist, All Bets are Off, at 88.

7. U.S. Const., amend. VI: "Incriminal prosecutions, the accused shall enjoy the right . . . tobe confronted with the witnesses against him . . . ."

8. Kevin Heubusch, TakingChances on Casinos, American Demographics (May 1997),available at<http://www.marketingtools.com/Publications/AD/97_ad/9705_ad/AD970530.ht…;(quoting Roper Starch Worldwide Inc. survey).

9. Heubusch, Taking Chances onCasinos, (quoting Roper Starch Worldwide Inc. survey).

10. Crist, All Bets areOff, at 85. Note that this sum represents what Americangamblers risked on their bets ("handle" to gambling businesses)rather than what they lost (gambling businesses' grossrevenues).

11. Id.

12. Sebastian Sinclair, CasinoGambling and the Internet 8 (Christiansen/Cummings Associates,Inc., 1998) (estimating 1997 worldwide Internet casino revenues of$1,090.1 million, and combined U.S. and Canada market of $603.5million).

13. Id

14. Internet Gambling ProhibitionAct of 1997, S. 474 (Reported in Senate), 105th Cong., 1st Sess.(1997).

15. See, InternetGambling Prohibition Act of 1997, S. 474, 105th Cong., 1st Sess.(1997) (Draft amendment in the nature of a substitute, on file withthe author). See also, Salkowski, Betting on theHorses--Racing Lobbyists Jockey Past Proposed Internet GamblingBan.

16. 143 Congressional RecordE1633 (Sept. 3, 1997) (statement of Rep. Goodlatte uponintroduction of Internet Gambling Prohibition Act of 1997).

17. Sinclair, Casino Gambling andthe Internet 8, 21 n. 3.

18. Crist, All Bets areOff, at 85 ("In '96 only two on-line sites handled sportsbets; now there are at least 50."). See also, Mary AnnAkers, On-line betting makes some rich, others edgy,Washington Times, Jan. 27, 1998, at A1 (discussing generally thescope and operation of offshore gambling sites); Brett Pulley,With Technology, Island Bookies Skirt U.S. Law, New YorkTimes, Jan. 31, 1998, at A1 (same). U.S.C.A. § 1084(1997).

Tom W. Bell

National Gambling Impact Study Commission
Chicago, Illinois