Ron Mendelson
Ron Mendelson is the Director of Costa-Rica based business and financial consultancy firm, Fast Offshore.More articles by Ron Mendelson

Payment services, blockchain and mitigating risk

11 December 2019
By Ron Mendelson

Payment services are an integral part of any online gambling enterprise and regulators worldwide are increasing their requirements for legal liability and responsibility for such providers, particularly in iGaming.

The concept of payment services is not a new one. In fact, since the dawn of time, merchants would hire third parties to store their products in a warehouse. This party then issued bearer-demand notes which would then be used by the merchant to trade in return for other goods and services. Similar in a way to traditional currency, bearer demand notes used to be backed by the equivalent of their value in gold.

As payments evolved over time, so to did the methods of service providers. Before the introduction of electronic payment methods in the 1970s, it was possible to make point-of-sale transactions via a manual verification of card details using the magnetic strip on the back of the card.

By 1994, the first online casinos appeared, but these ventures were not so popular, due to the fact that winners had to wait for a check to arrive in the mail, rather than an electronic or instant digital payment. But, by the 2000s, payment services had evolved even further as cloud-based payments services came into existent, facilitating mobile points of sale.

It was in fact a Curacao-based company, ePassporte, that was the first to sell virtual Visa and Visa Electron cards that could be used in real time online and at POS merchants. Unfortunately, their venture was ill-fated and operations were suspended by Visa in 2010.

In due course, service providers linked up with merchants to provide software-as-a-service (SaaS), allowing advanced payment services via electronic portals, otherwise known as payment gateways. By 2005, a Dutch company called iDEAL allowed ‘live’ payments between customers, merchants, and their banks. It also facilitated recurring payments without needing the merchant to store sensitive information about their customers. SaaS also enabled companies to conduct live risk analysis transactions as well as to conduct AML risk calculations, based on the origin of the payment.

Combining SaaS services with mobile POS meant that digital and cardless wallets were created. By combining these innovations with cryptocurrency, the need for merchants to hold traditional accounts connected to any banking entity was removed, as was the need to any kind of actual cash to be required. After all, crypto has its own value and most is limited to a fixed amount, therefore resembling gold, rather than traditional fiat currency.

Challenges for payment providers
As methods of payment have become more advanced, so to have methods of laundering money, particularly in high-risk industries like iGaming. Companies that offer online gaming, usually operate as cross-border, international structures that make it difficult to apply the compliance of one jurisdiction. This difficulty in maintaining compliance results in a higher risk of money laundering and increased risk for payment providers.

In iGaming, money laundering typically takes place in three stages- the placing of illicit funds in a financial system such as a betting account, the placing of small bets, and then the withdrawal of funds, therefore cleaning the money through a legitimate financial institution. Due to the large volume of betting transactions, it can be incredibly difficult to trace money laundering in iGaming and some providers even inadvertently provide white label, turnkey solutions to money launderers without even realizing it.

In 2018, the Maltese government enacted a significant overhaul of its online gambling regulations, inspired by a desire to increase Malta’s competitiveness and to enhance customer protection. In the same year, they also introduced three new crypto bills that established a regulatory framework for cryptocurrency, Blockchain, and distributed ledger technology. These acts contained a number of rules that businesses must follow to ensure legitimacy and the prevention of abuse.

Measures like this, if properly implemented have the power to prove useful in the fight against money laundering in iGaming and payment services.

Blockchain technology in particular can be used to record bets, wins, losses, payments and other kinds of transactions in an immutable fashion allowing participants to verify and audit in an independent manner. This database can be managed autonomously using a peer-to-peer network as well as a distributed timestamping server.

If this technology is adopted by payment providers, it has a number of benefits- regulatory clarity, lack of human error, integrity, reduced possibility of fraud and money laundering, lower costs, and increased autonomy.

The payment services industry is destined to pivot towards new technologies, and while this may be uncharted regulatory territory except in Malta, further automation through the use of DLT and blockchain is inevitable.

If managed correctly and implemented effectively, it could provide significant risk-reducing benefits for payment providers and the iGaming industry.

Ron Mendelson is the Director of Costa-Rica based business and financial consultancy firm, Fast Offshore. With over two decades of experience in corporate services, iGaming, international business, finance, licensing and legal matters, he advises a number of international clients on their business needs in the Americas, Europe, and beyond.

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