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1 Skins betting & Blockchains: A brief overview Prepared for GambleAware, UK By Alexander Blaszczynski PhD & Sally Gainsbury PhD School of Psychology, The University of Sydney, Australia Executive Summary: In response to a request by the Research Committee, GambleAware has asked IROP to produce a brief paper on Skins betting & Blockchain. The purpose of the report is to provide an overview of the concept of Skins betting & Blockchain to inform the Committee as the nature, function and possible implications for gambling associated with these emergent forms of gambling. Skins refer to the graphic design of components used in online video games, notably virtual weapons, armour, equipment, and other aesthetic items used in first-person shooter games. Skins have no intrinsic value or confer any skill advantage to players. Their value resides in the capacity of the skin to personalise the aesthetic appeal of the avatar and associated components used by a player. Skins can be purchased, or won by betting on the outcome of an eSport event, lottery draw jackpot, casino-style game or another chance based-outcome. Skins can be won between a player and an operator, or by peer-to-peer transactions. In this capacity, skins betting can meet the operational definition of gambling. Skins can be exchanged for cash via third party online operators. Estimates are that around 3 million individuals wagered $2.3 billion worth of on skins on eSport events in 2015. A Google search purportedly revealed over 600,000 sites offering skins betting. In an unregulated environment, risks include the possibility that funds could be used to support other criminal activities and/or launder money. In the absence of regulatory compliance, there is no guarantee that games offered are fair and free from exploitative practices, or player knowledge of commissions paid to the operator for transactions. In cases of dispute or complaints, there are limited if any appeal bodies that can advocate on behalf of the player or impose penalties in case of breaches, match-fixing or exploitative practices. There are minimal if any age verification procedures applied to eliminate underage gambling. There are no requirements in an unregulated environment to adhere to responsible gambling practices or strategies such as self-assessment, signage and messaging encouraging players to gamble within affordable limits, self-exclusion options, or links to treatment services for those exhibiting addictive behaviours or related negative consequences. A Blockchain can be construed as “a technology that allows people who don’t know each other to trust a shared record of events”. This shared record or ledger is distributed to all participants in a network. These records are open and transparent with mass collaboration authenticating transactions. All users can trace the providence of each transaction made. The Blockchain protocols effectively remove the need for a third-party intermediary such as a bank to valid transactions. Each transaction is recorded permanently in a Block linked to all previous transaction effectively creating a chain of blocks (hence the term, Blockchain) that traces and authenticates every transaction associated with that block.

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Skinsbetting&Blockchains:Abriefoverview

PreparedforGambleAware,UK

By

AlexanderBlaszczynskiPhD&SallyGainsburyPhDSchoolofPsychology,TheUniversityofSydney,Australia

ExecutiveSummary:InresponsetoarequestbytheResearchCommittee,GambleAwarehasaskedIROPtoproduceabriefpaperonSkinsbetting&Blockchain.ThepurposeofthereportistoprovideanoverviewoftheconceptofSkinsbetting&BlockchaintoinformtheCommitteeasthenature,functionandpossibleimplicationsforgamblingassociatedwiththeseemergentformsofgambling.• Skinsrefertothegraphicdesignofcomponentsusedinonlinevideogames,notablyvirtual

weapons,armour,equipment,andotheraestheticitemsusedinfirst-personshootergames.• Skinshavenointrinsicvalueorconferanyskilladvantagetoplayers.Theirvalueresidesinthe

capacityoftheskintopersonalisetheaestheticappealoftheavatarandassociatedcomponentsusedbyaplayer.

• Skinscanbepurchased,orwonbybettingontheoutcomeofaneSportevent,lotterydrawjackpot,casino-stylegameoranotherchancebased-outcome.Skinscanbewonbetweenaplayerandanoperator,orbypeer-to-peertransactions.Inthiscapacity,skinsbettingcanmeettheoperationaldefinitionofgambling.

• Skinscanbeexchangedforcashviathirdpartyonlineoperators.• Estimatesarethataround3millionindividualswagered$2.3billionworthofonskinsoneSport

eventsin2015.• AGooglesearchpurportedlyrevealedover600,000sitesofferingskinsbetting.• Inanunregulatedenvironment,risksincludethepossibilitythatfundscouldbeusedtosupport

othercriminalactivitiesand/orlaundermoney.• Intheabsenceofregulatorycompliance,thereisnoguaranteethatgamesofferedarefairand

freefromexploitativepractices,orplayerknowledgeofcommissionspaidtotheoperatorfortransactions.

• Incasesofdisputeorcomplaints,therearelimitedifanyappealbodiesthatcanadvocateonbehalfoftheplayerorimposepenaltiesincaseofbreaches,match-fixingorexploitativepractices.

• Thereareminimalifanyageverificationproceduresappliedtoeliminateunderagegambling.• Therearenorequirementsinanunregulatedenvironmenttoadheretoresponsiblegambling

practicesorstrategiessuchasself-assessment,signageandmessagingencouragingplayerstogamblewithinaffordablelimits,self-exclusionoptions,orlinkstotreatmentservicesforthoseexhibitingaddictivebehavioursorrelatednegativeconsequences.

• ABlockchaincanbeconstruedas“atechnologythatallowspeoplewhodon’tknoweachothertotrustasharedrecordofevents”.Thissharedrecordorledgerisdistributedtoallparticipantsinanetwork.Theserecordsareopenandtransparentwithmasscollaborationauthenticatingtransactions.Alluserscantracetheprovidenceofeachtransactionmade.

• TheBlockchainprotocolseffectivelyremovetheneedforathird-partyintermediarysuchasabanktovalidtransactions.

• EachtransactionisrecordedpermanentlyinaBlocklinkedtoallprevioustransactioneffectivelycreatingachainofblocks(hencetheterm,Blockchain)thattracesandauthenticateseverytransactionassociatedwiththatblock.

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• ThearchitectureoftheBlockchainprotocolseffectivelypreventsfraud,alterationofrecords,orcracking(hacking)byunauthorizedusers.

• Byeliminatingintermediaries,andestablishingasecureandtrustedprotocol,speedy,costeffectiveandtrustedpeer-to-peertransactionsarepossible.Theuseofcryptocurrency(e.g.,Bitcoin)bypassestraditionalpaymentmethodsthroughfinancialinstitutions,i.e.,banks,creditcardsetc.

• TheopensourcenatureoftheprotocolenablesoperatorstodevelopSmartContracts.Thesearecodesthatrunwithouttherequirementsofexternalnetworkagents,thatis,thenoonecontrolsthegamenorcanitbetakendown.Smartcontractsself-execute,triggeringthereleaseofpaymentwhencertainconditionsarefulfilled).Thiseliminatestheneedforanintermediaryandallowspeer-to-peergamblingusingasmartcontractcode.

• GiventhestructureofBlockchainprotocols,thereisnoriskthatgamblingproductsandgamesareofferedarenotfair.Consumerscanverifyoutcomestherebyreducingtheneedforaregulatortoverifyandlicenseoperators.Itmaysubstantiallyreducedisreputableoffshoregamblingsitesthatdonotprovidefairproductsandpaycustomers,andreduceonlinegamblinglicensingorganisationsasthesemaynolongerbenecessaryorrequiredforconsumertrust

• BlockchainItispartofarapidlygrowingecosystemofadvancedtechnologiesthatwillplayafundamentalroleinthefutureofcommerceandsociety.

Tableofcontents:1.0SkinsBettingandGambling……………………………………………………………………………….3

1.1Whatareskins?……………………………………………………………………………………31.2Howareskinsexchangedandpurchased?…………………………………………..31.3Howextensiveisskinsbetting?……………………………………………………………61.4Is‘skinsbetting’‘gambling’?………………………………………………………………..71.5Whoengagesinskinsbetting?……………………………………………………………91.6Whataretheprimaryissues?……………………………………………………………..91.7Summary…….……………………………………………………………………………………….101.8References……………………………………………………………………………………………10

2.0Blockchain………………………………………………………………………………………………………..122.1Abriefoutlineofitsconceptandimplicationsforgambling………………..122.2Bitcoin…………………………………………………………………………………………………152.3Whataretheimplicationsforgambling?…………………………………………….162.4PotentialBlockchainopportunities……………………………………………………..182.5Summary……………………………………………………………………………………………182.6References………………………………………………………………………………………….19

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1.0SkinsBettingandGambling

1.1Whatareskins?

‘Skins’refertothecosmeticappearanceofcertaingraphiccomponentsusedbyplayersinvideogames,typicallyvirtualweapons,armour,equipment,andotheraestheticitemsusedinfirst-personshootergames.Playerscanexchange/tradeorpurchasethesevirtualitemsthatdifferincolourandgraphicaldesignfromthestandarditemusedinthegame.Forexample,abasicdesign(skin)canbereplacedatacostwithamoreelaborateand/orcolourfulone.

Skinstypicallydonotalteroraffordanyadditionalfunctionaladvantageorskilltotheplayerinplayingthegame.Thevalueoftheskins,therefore,isfoundinitscapacitytopersonalizeaplayer’savatar1usedinthegame.However,someskinsdoprovidetactical,ifnottechnical,advantages,forexample,acamouflageskinhelpsgunsblendintoajungleenvironment.

Theavailabilityanddemandforaskindeterminesitsworth.Rareitemsaresoughtmoreoftencomparedtothosereadilyavailable,andthereforeattracthigherstatusasacollectibleandconsequently,costvalue.

Skinscanbe:

(a)Usedduringplayandexchangedwithotherplayersaccordingtotheirvalue,or

(b)Depositedintotheplayer’sSteamaccountthatisoperatedbyValve.

1.2Howareskinsexchangedandpurchased?

ThevideogameCounter-Strike:GlobalOffensive(CS:GO)isapopularshootergameinwhichplayerscantradeandpurchaseskins.Participatingplayerscanacquireskinsbypurchasing,trading,winning,receivingaspartofapromotionalgive-away,orearningitthroughachievingthresholdtargets(e.g.,kills,assists,andcompletingobjectives).Ingame,skinsareobtainedbyfindingandopening“weaponcases”usingkeys,whichcanbeboughtfromthein-gamestore,foraroundUS$2.50UnopenedweaponcasescanalsobeacquiredviapurchaseortradefromtheSteamCommunityMarket.Theseareofferedassomewhatofalotteryor‘luckydip’giventhatthecontentsarenotknown.Usersbidonopenboxeswithoutanyoddsprovidedonwhatmaybeinside,thatis,thelikelihoodofanitemofloworhighvaluebeingobtained(Figure1).Onceobtained,skinscanbeboughtortradedforonthemarket(Figure2).

1Anavataristhevirtualrepresentationofapersonwithinavideogame

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Figure1CS:GOWeaponCaseforsaleonSteamCommunityMarket10-Jan-17

AlltransactionsonthemarketareconductedwithSteamWalletfunds2.AStreamaccountisanassociatedsitewhereplayerscandepositandexchange/tradeskinsamongeachother.SkinscanbepurchasedforrealmoneyontheValve-ownedsitebutcanonlybesoldtootherplayersforcreditpointswithinanin-gameembeddedtheSteamaccountsystem.Skinscanbesoldwithaccruedcreditsusedtopurchaseskinsofahighervalue.Inthiscontext,skinsaretransferredeffectivelyinabartertypesystemwherethereisnomonetaryexchangeorcash-outforrealmoney.ItisimpossibletowithdrawmoneyfromyourSteamWallet3.Valvemaintainsalimitof$500onSteamwalletfunds,andamaximumsalepriceof$400foranysingleitem.

2Valvetakesa15percentcutofallCS-GO-relatedpurchasesonthemarket3Otherwise,SteamwouldqualifyasabankinginstitutionandValvewouldbesubjecttorelatedregulations

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Figure2SteamCommunityMarketforCS:GO10-Jan-17

Subsequently,manytransactionsoccuroutsideoftheSteamMarket.Valve’sSteamAPIallowforthird-partyservicestointeractwithplayer’sSteamaccounts.Manywebsitesexisttofacilitatethis,suchasCSGOShopandOPSkins(Figure3),whichallowcustomerstocashoutfundsreceivedfromskinsalestoservicessuchasPayPal.Thesehavenopricemaximums.WebsitesusethefreelyavailableAPIprovidedbySteamtoallowskinstobetransferredtoathird-partysiteexternaltoSteam,andexchangedforcashtothevalueoftheskin.Thiscapacityconfersamonetaryvaluetotheskins.ThereareenoughplayerstradinginCS:GO’svirtualmarkettoestablishmeanpricesoverlongtimeperiods4.Consequentially,eachskincanberegardedashavingmonetaryvalueandrepresentingsomelevelofvalue,analogoustoacasinochiportoken.

4basedonthenumberofthesameitemavailableandthedemandforthese

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Figure3OPSKINSItemdatabase10-Jan-17

1.3Howextensiveisskinsbetting?

Theconceptofskinsbettingappearstohaveemergedin2013whentheoperatorofValveintroducedthesystemofonlineskinstrading.Simultaneously,eSportshasdramaticallyriseninpopularityandmanyplayersareinterestedinbettingontheseevents.UserscanbetwithskinsontheoutcomeofeSportsdirectlyfromtheirSteamaccounts,orusingsecondarysites.Subsequently,numerousthird-partywebsiteshavebeencreatedusingSteamAPItoallowpeopletogambleusingskins.UsingtheSteamAPI,skinscanbetransferredintoanaccountonspecificonlinegamblingsites.Theseallowplayerstouseskinsascurrencyforgambling,thatis,tobetontheoutcomeofevents,forexampleeSportsoutcome,lotterydrawjackpots,casino-stylegames,orskillgamesthatcontainelementsofchance.Skinscanbewonbetweenaplayerandtheoperatororonapeer-to-peeragreement.PlayerscansellskinswonontheSteamMarket,orviathird-partywebsitesforcash-value(e.g.,depositsintoaPayPalaccount).

InadditiontobettingoneSports,apopularformofskinsbettingispublicpots(Lahti,2016),whichispurelyodds-basedgamblingwithotherplayers.Playersdepositskinsintoasharedpotasashorttimelimitcountsdown,afterwhichnomorebetsareaccepted.Thesystemrandomlypicksawinner,thehigherthetotalvalueoftheskinsyoubet,thegreateryourchanceofwinningthepot(akintohavingmoreticketsinasweepstake).

Withinatimeframeoftwoyears,theEilersandKrejcikresearchagencyreportedthateSportsskinsbettingparticipationratesincreasedapproximately1,500%witharound3millionindividualswagering$2.3billionworthofonskinsoneSporteventsin2015(Brustein&Nevy-Williams,2016).Grove(2016)estimatedthattheglobalworthofskinsacrossallproductsreached$7.4billionin2016,andaccountedfor93%ofeSportstotalgamblinghandle.Fifteensiteswereconjecturedtogeneratethemajorityofexpenditure,witheSportscontributingtojustunderhalf(44%),followedbyJackpot(lottery-typegames)(26%),andRoulette(14%),oftheexpenditure.AGooglesearchpurportedlyrevealedover600,000sitesofferingskinsbetting(Edmonds,2016).Incontrast,

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BetCSGO.orglists54differentsitesonwhichskinscanbegambledonincludingjackpot,skill,matchbetting,fantasy,andskillgaming5.

Valvehasalsomadesubstantialrevenue,estimatedatover$500millioninJuly2016,associatedwithfeesleviedontransactions(Masters&Louchnikov,2016).Valvemakes5percentoffthesaleofanySteamMarketsale,but15percentofthesaleofitemsfromValvegameslikeCS:GO,Dota2,andTeamFortress.

AsearchofwebmetricsforCSGOLounge.complaceditsglobalrankas4,296and154inthegamescategory.TotalvisitshavesubstantiallydeclinedsinceJulyfromover30millionto8.4million.ThesiteannouncedthatitwouldnolongerallowplayersfromtheUnitedKingdomtoaccessthesitesbettingfeature.CSGOLoungeisthelargestskinbettingwebsiteintheworldandisestimatedtohaveprocessedmorethan90millionskinsinbettinghandleonCS:GOmatchesinthefirsthalfof2016(Green,2016).

CS:GOBigprovidesindicatorsofbettingwithskinsinthepast24hours,with$347,094wononJanuary10,2017.CSGOFast.comtracked28643uniqueplayersonJanuary10,2017offering7056gamesandthelargestwinof$2433.Thetoprankedplayerhad352wins,atotalof$101156.

1.4Is‘skinsbetting’‘gambling’?

Theconceptofgamblingincorporatesthefollowingelements:

• Anagreementbetweenoneormoreparties.• Tostakeanitemofvalueontheoutcomeofanevent.• Thatiswhollyorpartlydeterminedbychance.• Fortheprofitorgainofonepartyovertheother/s.

TheUKGamblingAct(2005)setsouttheparametersdefiningtheconceptofgambling,definingthetermunderbetting,gamingandparticipationinlotteries.Theseareoperationallydefinedinsection9,section6,andsection14oftheAct,respectively.

Whereskinsaretradedbetweenplayerspurelyonthebasisofpurchasesorexchangewithinthesite,theactivitycanbeconsideredasnon-gambling.Skinsarenotdistributedaccordingtotheoutcomeofachanceevent,orcashedinforrealmoney.However,thereareseveralelementsofgamblingassociatedwithskins.Skinscanbeconstruedashavingrealvaluegiventhefactthatthesecanbecashed-outforrealmoneyviathirdpartyoperators.

Thefirstisthemechanismofobtainingskins,throughthecrateandkeymechanism.Thisoperatesonavariable-ratereinforcementschedule,inthesamewayasaslotmachine.Itintroducestheabilitytogeneratein-gamerevenuethatisintegratedwithincoregameplay.Thatis,playerscomeacrossaweaponscasethattheypaymoneytopurchase(profitsreceivedwhollybyValve),withoutknowingthecontents(chance).Furthermore,playershavenowayofknowingthelikelihood(odds)thattheywillobtainanitemofloworhighvalue.Thisisakintoplayingaslotmachinewithnoinformationontheoddsofwinningthemaximumprize,orevenwhatthepossibleprizesare.Unlikeaslotmachine,playerscannotlose,allweaponscasesobtainanitem.Akeyquestioniswhethertheoutcome–skins–areconsideredtobeanitemofvalue.

Thereissomeprecedentforpreventingthismechanismwithinvideogames.In2012,Japan’sConsumerAffairsAgencyruledthatthismechanism(“kompugacha”,afeaturewhichallowsplayerstopurchaseentriesintomultipleelectronicdrawstowinspecialitems)wasillegalasitwasinviolationofadvertisinglaws(Gainsbury,King,Delfabbro,Hing,Russell,Blaszczynski,&Derevensky,

5http://betcsgo.org/10-Jan-2017

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2015).Eachdrawcostsmoneyandtheprobabilitiesofwinningareunknowntoplayers.However,althoughbannedduetomisleadingconsumers,itwasnotidentifiedasaformofgambling.

Thesecond,andmoreconcerningaspectisgamblingwithskinsusedforcurrency.Inrespecttoskins,itcanreasonablybearguedthataspectsofskinsbettingcontainalltherequisitecharacteristicsthatmakeitfallwithinthedomainofgambling.Thereisanagreementbetweentheplayerandoneormoreotherstostakeanitemofvalue(skinsthatcanultimatelybeexchangedforrealmoney),oneventsthatarepartlydeterminedbychance(theprocessbywhichaplayerwinsaskin;outcomeofeSportseventwherechanceplaysapart,orroulette,lotteryorcointosswhollygovernedbychance),fortheadvantageorgainofoneparty.

Steamaccountrulesstatethat“SteamWalletfundsdonotconstituteapersonalpropertyright,havenovalueoutsideSteamandcanonlybeusedtopurchaseSubscriptionsandrelatedcontentviaSteam(includingbutnotlimitedtogamesandotherapplicationsofferedthroughtheSteamStore,orinaSteamSubscriptionMarketplace)andHardware.SteamWalletfundshavenocashvalueandarenotexchangeableforcash.”6Thus,claimingthatbettingwithskinsdoesnotconstitutegambling.However,bynotpubliclyintervening,ValveallowedgamblingtobecomeaninseparableaspectofCS:GO’sculture(Lahti,2016).Furthermore,bymakingitsAPIfreelyavailable,Valvewerecomplicitinthedevelopmentofthird-partygamblingandcash-outsites.Bychargingatransactionfee,Valveprofitedmonetarilyfromthefunctioningofthesites.ValvealsoprovidedsponsoredValvelinks,allowinguserstolinktheirSteamaccountstothird-partygamblingsites.

Grove(2016)notedthatinlightofrecentevents,potentiallitigationandmovesbyValveinmid-2016toissuenoticestoaround40third-partysitesrequestingcessationoftheiractivitiesorclosingtheirsite,thereisaneedtorevisethepredictedlevelofexpenditureonskinsbettingoverthenextfewyears.Valve’sactionswereinresponsetoinstructionsfromtheWashingtonStateGamblingCommissionissuedinlate2016,coupledwiththreatsofforfeitureofassetsandcriminalproceedingsforfailuretosodo(Green,2016).TheWashingtonStateGamblingCommissioner,ChrisStearnsdescribedskinsbettingonsportsas“alarge,unregulatedblackmarketforgambling".Therehavebeeninconsistentdecisionsincourtrulingsregardingtheweightgiventothird-partysitesofferingmoneyforvirtualgoodswhensiteprovidingthevirtualgoodsdonotallowcash-outsystems(Lahti,2016).CourtsintheUKandtheNetherlandsuphelddecisionsthatvirtualchipsanditemshavemonetaryvalueandthattheftoftheseisaviolationofthelaw(Charif,2011;MorganStanley,2012).LegaldecisionsintheUShavelargelynotawardeddecisionsbasedonsecondarymarketsforvirtualitems(Lahti,2016).

Thecontroversiessurroundingskinsbettingrelatesto:

• Itscurrentunregulatedstatus,allegationsthatitconstitutesanillegalgamblingbusiness.• ScrutinybytheUKGamblingCommissionastowhetheritbreachesrequirementtobe

licencedasagamblingproduct.• PotentialtransgressionofthelegislationenactedintheUnitedStatesofAmerica,notably

theUnlawfulInternetGamblingEnforcementAct,IllegalGamblingBusinessActandtheWireAct.

• Incidentsofcelebritiespromotingbutfailingtodiscloseownershipofsites(Edmonds,2016).

6http://store.steampowered.com/subscriber_agreement/10-Jan-17

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1.5Whoengagesinskinsbetting?

Esportsisapopularformofentertainment,althoughthereisrelativelylittlereliableresearchabouttheusers.ThereisaclearmajorityofmalesintheeSportscommunity,estimatedattwo-thirds.Youngadultsarethedominateage(24to27yearsofage)(Zalik,2015).

CS:GOisthefourthmostpopularmassivelymultiplayeronlinegame(MMO),althoughoneofthemostrecent(releasedin2012).Anestimated3millionplayersusethegameeverymonthwithmorethan250millionhoursofgameplay(Paul,2016).TheCS:GOsiteranksamongthetop700sitesgloballyattractingaround38millionvisitors.AnalysesofSteamdataindicatethatUKplayersmakeupapproximatelyfourpercentofallCS:GOplayers,rankingseventhoutofallcountries(Imgur,2016).Dota2hasaround15millionuniqueplayerswithroughlyonemillionplayerssigningineachday.Estimatesfrom2017indicatethatCS:GOisthemostpopulargamecurrentlyintheUK(Steamspy,2016).Todate,thereisminimalifanydataavailableonthecharacteristicsofplayersintermsofsocio-demographicfeatures,degreeofinvolvement,percapitaexpenditureandnegativeimpactassociatedwithskinsbetting.

1.6Whataretheprimaryissues?

Thereareseveralsignificantconcernstoregulatorsandcommunitymembersregardingskinsbetting.Incontrasttomostformsofonlinegambling,skinsbettingremainsunregulatedandunlicensed.Therefore,sitesoperateunderlimitedifanyconstraintsincreasingtheriskordegreetowhich:

1. Operatorsbecomeexposedtothepossibilityofallocatingfundstosupportothercriminalactivitiesand/orlaundermoney.Thereisnoprobityorregularcomplianceandmonitoringcheckstoguaranteeindustrystandardsaremetimposedonoperators.Thiscontrastswithstringentassessmentsandreportingproceduresasrequiredbyoperatorsinastrictlyregulatedmarket.

2. Relatedtotheabove,intheabsenceofregulatorycompliance,thereisnoguaranteethatgamesofferedarefairandfreefromexploitativepractices,orplayerknowledgeofcommissionspaidtotheoperatorfortransactions.Restrictionsonadvertisingandinducementsareabsentallowingoperatorstomakemisleadingclaimsorbonusoffersthatarenottransparentorfullyexplained.Probabilities(odds)associatedwithevents(lotteries,roulette,coins)arenotpublicized.Incasesofdisputeorcomplaints,therearelimitedifanyappealbodiesthatcanadvocateonbehalfoftheplayerorimposepenaltiesincaseofbreaches,match-fixingorexploitativepractices.Inessence,consumerprotectionisminimal.

3. GivenpurportedhighratesofunderageparticipationinvideogamingandexposuretoeSports,thereareminimalifanyageverificationproceduresappliedtoeliminateunderagegambling.Under-ageplayersarenotpreventedfromaccessingthird-partysitestocashoutthevalueofskins.Inapollofover10,000playersinReddit’sGlobalOffensivecommunityin2015,42percentofrespondentssaidthatwereundertheageof18.7

4. Therearenorequirementsinanunregulatedenvironmenttoadheretoresponsiblegamblingpracticesorstrategiessuchasself-assessment,signageandmessagingencouragingplayerstogamblewithinaffordablelimits,self-exclusionoptions,orlinksto

7https://www.reddit.com/r/GlobalOffensive/comments/33hudc/survey_how_old_is_the_average_csgo_player/?st=iqbaqw86&sh=fa0b0516

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treatmentservicesforthoseexhibitingaddictivebehavioursorrelatednegativeconsequences.Skinsbettingsharescharacteristicswithotherformsofgamblingthatarehighlyassociatedwithexcessivegambling;rapid,continuousspeedofplay,instantfeedbackonoutcomes,andunrestrictedexpenditurelimits.

1.7Summary:

Skinsbettinghaswitnessedasignificantgrowthoverarelativelyshortperiodfollowingitsintroductionin2013.Currently,skinbettingoperatesoutsideanyregulatoryframeworkcomparabletothatimposedononlinegamblingindustryoperators.Thishasraisedconcernsaboutpotentialinvolvementbyoperatorsincriminalactivitiesandmoneylaundering,exploitativeadvertisingandinducementoffers,unfairgames,underagegambling,andlackofresponsiblegamblingandconsumerprotectionoptions.

Althoughdemonstratedtobepopular,thesocio-demographicsofparticipantsandthepotentialnegativeimpactsofexcessiveskinbettingbehaviourremainsunknown,operatorsarefacingseriouschallengesfromregulatoryagencies.Thesethreats,originatinginallegationsofillegalgamblingbusinessesandoperatingwithoutauthorisedlicenses,haveresultedintheclosureofanumberofthird-partysitesofferingskinsbettingopportunitiesandcash-outfacilities.Thefutureofskinsbettinginitscurrentformatisunderthreatandfalterunderincreasingpressuretocomplywithregulatoryrequirements.

Accordingly,theextenttowhichskinsbettingisatransientphenomenonwhosepopularityandlevelofparticipationwilldeclineinresponsetoeSportsindustryconcernsandtighteningupoflicencingandregulatoryrequirementsisyettobedetermined.

1.8ReferencesBrustein,J.,&Nevy-Williams,E.(2016).Virtualweaponsareturningteengamblersintoserious

gamblers.URL:https://www.bloomberg.com/features/2016-virtual-guns-counterstrike-gambling/.

Campbell,C.92016).WashingtonGamblingCommissiondemandsendtoValveCS:GOskingambling.URL:http://www.polygon.com/2016/10/5/13176244/washington-gambling-commission-demands-end-to-valve-cs-go-skin.

Charif, M. (2011). Show me the money: Social games, virtual currency and gambling. iGamingBusiness,March.

Edmonds,T.(2016).Examiningskinsbettingfromagamblinglawperspective.WorldOnlineGamblingReport,145:3-6.

Gainsbury,S.,King,D.,Delfabbro,P.,Hing,N.,Russell,A.,Blaszczynski,A.,Derevensky,J.(2015).Theuseofsocialmediaingambling.GamblingResearchAustralia.URL:http://www.gamblingresearch.org.au/resources/d06679ec-3577-4cb0-867c-594ce741dbf6/grasocialmediareport.pdf.

GamblingCommission(2016).Virtualcurrencies,eSports,andsocialgaming–Discussionpaper.URL:http://www.gamblingcommission.gov.uk/PDF/consultations/Virtual-currencies-eSports-and-social-gaming-discussion-paper-August-2016.pdf.

Green,W.(2016).CSGOLoungeTolimitskinbetting,saysitwillacquirelicense.URL:http://www.esportsbettingreport.com/csgolounge-limit-skin-betting-valve-get-license/.

Grove,C.(2016).Understandingskingambling.LasVegas:Narus.URL:http://www.esportsbettingreport.com/wp-content/uploads/2016/07/A-Guide-To-Skin-Gambling.pdf.

Lahti,E.(2016).CS:GO’scontroversialskingambling,explained.URL:http://www.pcgamer.com/csgo-skin-gambling/.

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Masters,T.,&Louchnikov,A.(2016).Valve’sskingamblingbanandhowitaffectstheeSportsindustry.URL:http://esportsobserver.com/valves-skin-gambling-ban-and-how-it-affects-the-esports-industry/.

MorganStanley(2012).Socialgambling:Clickheretoplay.MorganStanleyResearch.

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2.0Blockchain:2.1AbriefoutlineofitsconceptandimplicationsforgamblingAccordingtotheBankofEngland,aBlockchainis“atechnologythatallowspeoplewhodon’tknoweachothertotrustasharedrecordofevents”.Thissharedrecord(ledger)isdistributedtoallparticipantsinanetworkwhousetheircomputerstovalidatetransactions,thusremovingtheneedforathirdpartytointermediate.Blockchainshavetheirorigincirca1981followingattemptstointroduceadigitalpaymentsystemusingdigitalcurrenciestobetransactedontheInternet(Tappscott&Tappscott,2016).Althoughinitialsuccessandacceptanceratesremainedrelativelylow,theconceptwasrevitalisedin2008inresponsetotheglobalfinancialcrisis.TheshiftininterestwasgeneratedbyanewprotocoldevelopedbySatoshiNakatmoto8thatallowedpeer-to-peertransferofcryptocurrency(e.g.,Bitcoin),contracts,agreements,andbusinesstransactionsthatensuredintegrity,security,privacy,andtransparency(Iansiti&Lakhani,2017).AsoutlinedbyTappscottandTappscott(2016),thisprotocol,layeredontheInternet,effectivelyremovedtherelianceontrustedthirdpartiestomonitor,confirm,andmaintainpermanentrecordsofthevaliditytransactions.Bywayofillustration,currentonlinebankingtransactionsrequireathirdparty(thebank)toauthenticateandtransferfundsfromonepartytoanother.Thisprocedureguaranteesthatanindividualisunabletospend/transactaquantumoffiatcurrency(physicalmoney)morethanonce;e.g.,theindividualpaysbycreditcard,thebankdeductsthatmoneyfromtherelevantaccountandtransfersittoathirdparty.Transactionsarerejectediftwoseparateblocksreceiveinputsfromthesamecryptocurrency(Ross,2015).Nakatomo’sprotocolwasdesignedtomaintainapermanenttraceablerecordbetweentwopartiesthatistransparentandopentopublicscrutinywithouttheneedofamiddlemantoauthenticatetransactions.HowdoesBlockchainoperate?Cryptocurrenciesarenotsaveddirectlytoafilerecordedinanonlineserverordepository.Rather,thevalueofthecurrencyislocatedinablockthatislinkedtoformaBlockchain,hencetheterm.Eachtransactionformsapermanentencryptedtimestampedrecordinablockwithinapublicallydistributedledger.Thisblockcontainsallinformationrelativetoalltransactionsprecedingthelatesttransactionstogiveachainoftransactionsthatcannotbealtered(Figure4).LedgersaredistributedacrosstheInternetwithnocentraldatabasetocrack(atermoftenmistakenlyreferredtoas‘hack’or‘hacking’)makingitsafefromfraudoralteration(Figure5,Figure6).Alluserscantracetheprovidenceofatransaction.Theprotocol,bypassingtheneedforthirdparty(middleman)authentication,allowsspeedytransferofcurrencies(almostinstantaneousreconciliationofaccounts),lowercostinmaintainingrecords,security,andtheeliminationofcentraldatabasesorsystemopentofailure,theftorcorrupt.Althoughthetechnologyissomewhatcomplex,theprotocolorBlockchainsystemisfoundedingeneralprinciples(fromTappscott&Tappscott,2016):1. Networkintegrity:Blockchainsrepresentagloballedgerwherealltransactionsaretime-

stamped,validatedagainstpriorblocks(transactionrecords)inthechainpertainingtothattransactions,arepublicallyaccessibletherebyprecludinghiddentransactions,andupdatedeverytenminutes.Thereisnocentraldatabasebutdistributedacrossmultiplenetwork

8Theidentityofthecurrency’sfounderremainsamysterydespiteattemptstoverifythem

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computersguaranteeingthenetwork’sintegrity.Theendeffectistoestablishapublicallyacceptedtrustedsystem.

2. Distributedpower:Thereisnocentralorsinglepointofcontrolinapeer-to-peersystem.Itissteepedinaframeworkofmasscollaborationwhereeveryonecanobserveandacceptthevalidityoftransactions.

3. Valueasincentive:TheBlockchain,bynatureofitspublicdomainandsupport,ensuresthatthereiscollaborationinmaintainingvalueofthecryptocurrencyanditssystem.Thenotionofself-interest,accordingtoNakatmoto,wassufficienttomaintaintheviabilityofthesystem.Therearealsofinancialincentivesinthatthesystemeliminatescostsassociatedwiththirdpartyfees.

4. Security:Thedistributednatureofthesystemdoesnotlenditselftocrackingorcorruption.Thesystemhasnocentralrepositoryofdata,andanyattempttoalterorcorruptwouldrequirebreachingaseriesofencryptedblocksformingthatchain,adifficultifnotimpossibletasktoachievewithoutmassivecomputationalpowerandtime.

5. Privacy:Thesystemdoesnotrequirepersonaldatatobetransferredacrosstransactions.Theidentificationandverificationlayersarekeptdistinctfromthetransactionlayer.Transactionsarereferredacrossencryptedaddressesthatdonotrequirepersonaldetailstobesentinparallel.AnequivalentanalogyistheTCP/IPaddressthatidentifiesanetworklocationbutcontainsnopersonaldata.

6. Rightspreserved:Allownershiprightsaretransparentandenforceable.Thisenablesrightstobeidentifiedandtraced,includingintellectualproperty.

7. Inclusion:Thesystemisopenandaccessibletoeveryoneglobally.Thereisnoneedtouseintermediarieswithtransactionsabletobeeffectedoveranyonlinedevice.

Blockchaintransactionscanbeusedacrossarangeoffinancial,contractual,andintellectualpropertydomainsgiventhateachblockrepresentsapermanentrecordonwhatcanbeconsideredaglobalvirtualledgeropentopublicscrutiny.

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Figure4HowaBlockchainworks(http://technofaq.org/posts/2016/08/blockchain-what-is-it-and-how-can-we-use-it/)

Figure5Paymentprocesses:Currentvs.Blockchain(Bitcoin)(http://traxpay.com/2015/09/banking-on-the-blockchain-part-1/)

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2.2BitcoinTheprimarycryptocurrency,Bitcoin,isnotoriouslyvolatile.Atthetimeofwriting,oneBitcoinequals696.77BritishPounds.Thecurrencyhasenduredaseriesoffallsbuthasbeenincreasingsincemid-2016(Figure7).ThevalueofBitcoinisrelatedtosimilarfactorsasothercurrencymarketssuchastheavailabilityofmoneysupplyaswellaseconomicandpoliticalfactors(suchasBrexit,USelectionoutcome,andvalueoftheChineseyuan)(JuniperResearch,2016).Bitcoinscanbepurchasedanonymouslyastransactionsaretiedto‘wallets’ratherthanindividuals.Thisenhancesprivacy,butmayreducetheabilityforidentityverificationofconsumers.However,identifieswithinaBlockchainareuniqueandcanbesettorequireahighlevelofassurancethatusersareaccuratelyidentified(Deloitte,2016).

Figure6Howabitcointransactionisprocessed(TheEconomist,2015)(http://www.economist.com/news/special-report/21650295-or-it-next-big-thing)

UKresidentscanpurchaseBitcoinsthroughnumerousonlineexchangesusingbankpayments(althoughsomebanksarereluctanttoserviceBitcoincompanies),creditordebitcards(Figure8)(Coindesk,2016).Inmostcases,consumersneedtoregisterandprovideproofofresidencyandidentity.BitcoinATMsarealsoavailableintheUK.Peer-to-peerplatformsalsoallowindividualstobuy,sell,ortradebitcoinandaltcoins.SomeretailoutletssellBitcoinvouchers.Bitcoincanbestoredinelectronicorhardwarewallets.VentureScanner.comestimatesthattherearenowover800newventuresintheglobalBitcoin‘ecosystem’,whichincludenovelandinnovativecompanies,aswellastraditionalcompaniesengagingwiththisconcept(ReportedbyDeloitteSee:https://www.venturescanner.com/)

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Figure7Bitcoinprice(£)

Figure8RegionalshareofBitcointransactionvalue,2016($92.4bn)

2.3Whataretheimplicationsforgambling?Apeer-to-peersystemhasthecapacitytoformadecentralizedgamblingplatform(Davies,2016).Forexample,VDicealeaderinthisdomainofgambling,usestheEthereumBlockchaintooffergame

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codes(SmartContracts)thatresideonthenetworkandeliminatethirdpartyfinancialinstitutiontotransferfunds.SmartContractsarecodesthatrunwithouttherequirementsofexternalnetworkagents,thatis,thenoonecontrolsthegamenorcanitbetakendown(Davies,2016).Smartcontractscanself-execute,forexample,triggeringthereleaseofpaymentwhencertainconditionsarefulfilled(Figure9).Thistakesoutthemiddle-man(operator)andallowspeer-to-peergamblingusingasmartcontractcode.Blockchainallowsthegame/codetoexistontheEthereumnetworkwhereitcannotbecontrolledoraltered.

Figure9UsingtheBitcoinBlockchainforsmartcontracts

TheadvantageforthegamblingindustryistheabilityforBlockchainstoprovideanefficientandreliableauthenticationoftransactionsinatimelyandcosteffectivetechnologyarchitecture. AsnotedbyHuber(2016),“Onblockchain’sdecentralizedsystem,whichisbuiltbyacoordinatednetworkofindependentnodes,noparticularindividualorentitycanhaveacentralizedadvantageatanystageofthegamblingprocess.Gamblingcompaniescanuseblockchaintoassureusersthattheyarecompletelyincapableofknowingtheresultofanoutcome–suchasthedealingofaparticularcard–inadvance.Byremovingtheentireconceptofcentralization,andbyputtingtheverificationofbetsinthehandsofthenetworkofnodes,therequirementforathird-partypointoftrustautomaticallybecomesredundant”.Asuserscanverifytheintegrityofgamesandgamblingproductsthemselves,thisremovestheneedforregulatorstoperformthisfunction.Thismayrepresentacompetitiveadvantageforonlinegamblingsitesasconsumersarenotreliantonverificationofproductfairnessbyathird-party.Theuseofdigitalcurrencybypassesrestrictionsonpaymentmethods.Forexample,intheUnitedStatesofAmerica,paymentstoonlinegamblingsitesarenotpermittedfrombankingproviders(Nyairo,2015).Digitalcurrencydoesnotinvolvebankingprovidersandthuscanbeusedforonlinegambling.Currently,thereareseveralstart-upgroupsadvancingthetransformationalshiftfromtraditionaltoBlockchain-basedsystemingambling,forexample,AugurinCalifornia,FirstbloodintheUSA,andPlayChineseonlinecasinooperator,andagenciesinMalta,IsleofManandAlderneyadvocatingfortheintroductionofBlockchaingambling.Thereareover100bitcoin-basedcasinoscurrentlyoperatingalthoughtheindustryisyettofullyadoptandacceptdistributedledgertechnology(TotallyGaming,2016)withsignificantimplicationsforinvestmentsalreadyallocatedtoland-basedvenues.Giventheopensourceplatform,softwaredevelopershavethecapacitytowritetheirownversionsofsmartcontractgamecodes(Kastelein,2016).

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TheopenandtransparentnatureofBlockchainhasadvantagesforregulators.AsAndréWilsenach,previouslyoftheAlderneyGamblingControlCommissionstated,“shared,digitalized,decentralized”informationinablockchain-basedledgersystemwouldprovideregulatorswithsignificantlyeasieraccesstoimportantdata”(Huber,2016).AsAyre(2106)stated:“Withtheblockchaindocumentingeveryfinancialtransaction,spinofaroulettewheelandrollofthedice,gamblerscanactastheirownregulators,withanyexamplesofshadybehavioronfulldisplayforalltheworldtoseeandmarketforcespunishinganyoperatorstupidenoughtothinktheycangetawaywithit.”2.4PotentialBlockchainopportunities:

• Reducedofriskoferrorandtimetakenforerrorchecking–makingpayments,transfersandgamblingactivityoutcomesmoreaccurateandrapid.

• Reducedriskoffraudandinvalidtransactionsasrecordscannotbealtered.• Noneedforcurrencyexchangeandassociatedfees–allowsonlinegamblingsitestoaccept

playersfromanycountry,consumerscanengagewithanyinternationalonlinegamblingsiteswithoutcurrency-relatedfees.

• Nolimitationssetbyfinancialinstitutionsongamblingtransactions–mayreducetheneedforconsumerstorelyonlessreputablethird-partypaymentproviders.

• Norisksthatgamblingsiteswillnothonourpayoutsoraccountwithdrawals–mayreducetheneedforaffiliatesandinformationsites/forumsthatverifyonlinegamblingsites.

• Noriskthatgamblingproductsandgamesarenotfair–consumerscanverifyoutcomes,mayreducetheneedforaregulatortoverifyandlicenseoperators;maysubstantiallyreducedisreputableoffshoregamblingsitesthatdonotprovidefairproductsandpaycustomers;mayreduceonlinegamblinglicensingorganisationsasthesemaynolongerbenecessaryorrequiredforconsumertrust.

• Peer-to-peergamblingcanbeverifiedwithautomatedpayments–mayreducetheneedforconsumerstouselicensedcommercialgamblingsitesforpeer-to-peergamblingactivities(e.g.,poker,bettingexchanges).Thiscouldbetransformative,e.g.,socialbettingsitesbecomingactivebettingsitesandpokergamesbeingwidelyavailablewithknownandunknownassociates.Othergamblingactivitiesmayincreaseinpopularity,suchasbettingonacoin-tossandlotterydraws,allpossiblethroughsmartcontractsensuringpaymentstothewinningparties.

• Noabilitytobetwithcredit–accountsmusthavefundsbeforegamblecanbeallowed.• Reducedcosts,includingforfacilitatingandverifyingtransactions–mayreducecostsfor

consumers.• Adistributedledgerincreasestransparency–mayincreaseconsumerconfidenceand

subsequentuptakeofblockchaingambling.Alsomayincreaseefficiencyforoperatorsandregulatorsasdataisstandardizedacrosstheindustry,processesareconductedwithintegrityandrecordsareverifiedinnearreal-time.

• ABlockchain-basedregistrycouldremoveduplicationofeffortinconductingidentityverificationandenableencryptedupdatestobedeliveredtoallrelevantpartiesinnearreal-time.

• Aledgerwouldprovideahistoricalrecordofalltransactionsforcustomers.• Subjecttodataprotectionregulation,datacouldbeanalysedtodetectirregularactivity,

whichmayindicatematchfixing,moneylaunderingorothercriminalactivity.

2.5SummaryThecurrentrequirementtoinvolvethirdpartiesinonlinetransactionsmaybefundamentallyalteredbyBlockchaintechnology.IansiteandLakhani(2017)notethattheBlockchaintechnologyhasthecapacitytoexertamajorinfluenceofeconomic,financial,andsocialsystemsandinteractionsbutapplyamoretemperedpredictionofitsadoption.Theseauthorsreflectonthenumberofdecades

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since1972requiredfortheInternettotransitionfromalocalsingleusergroup-orientedresourcetoaglobalvirtualcommunicationsystemthatisnowfunctioningfullyindependentlyofanyoneoperator,server,oragency.Initiallylackofunderstandingandknowledgeofitscapacity,privacyconcerns,andsecurityissuesrepresentedseriouschallengesandbarrierstowidespreadacceptance.Thirtyyearshence,theInternethasbecomeanintegral,essential,andcommonplaceresourcetoeverydaycommerceandsocialexchanges.Relativelyslowuptakesoftechnologyarenotunusual.Similarshiftsareoccurringwithvirtualreality,althoughheadmounteddisplayswereavailableinthe1960s,newtechnologyandadoptionareseeingarapidincreaseintherelevanceofthistechnology.Ithasbeenarguedthata“killerapp”mayresultinabreakthroughandtippingpoint,likethewidespreadadoptionofaugmentedrealityfollowingthehugelypopularappPokémonGO.IansiteandLakhani(2017)havesimilarlyestimatedthatitwilltakeasignificantpassageoftimeandpopularacceptanceforBlockchaintoevolveintoauniversallyadoptedplatformreplacingtraditionalcommerceandfinance.Theseauthorssuggestaquadrantormatrixdescribingthepotentialpathoftransitionfromsingleuse,tolocalizationofusewithinadefinedcommunity,tobroaderandincreasingpublicusage,tofinaltransformationandwidespreadadoption.Settingasidethecomplexitiesandtimeframeforatransformationaladoption,theseauthorsconcludethatBlockchaintechnologywillemergeovertimetoaffectamultitudeofsocial,financial,andcommercialactivitiesincludinggamblingasabusinessactivity.Blockchainisnotjustaboutcryptocurrenciesandfasterpeer-to-peerpayouts.Itispartofarapidlygrowingecosystemofadvancedtechnologiesthatwillplayafundamentalroleinthefutureofcommerceandsociety.Accordingly,itispredictedthatBlockchainwillformastrongfoundationforgamblingopportunitiesandtransactionsthatwillinsomewayimpactregulators,eithergeneratingnovelapproachestoregulatoryandcomplianceissues,orthroughmasscollaboration,eliminatetheneedforregulatorsinaself-governingsystem.2.6References:Ayre,C(2106).CrystalBalls:CalvinAyre’spredictionsfor2017.URL:

http://calvinayre.com/2016/12/28/business/calvin-ayre-has-crystal-balls/.Retrieved15January2017.

Coindesk(2016).HowtobuyBitcoinintheUK.URL:http://www.coindesk.com/information/buy-bitcoin-uk/.Retrieved16January2017.

Davies,J.(2016).HowBlockchainisdecentralisinggambling.Techinasia.https://www.techinasia.com/talk/blockchain-decentralizing-gambling.Retrieved15January2015.

Deloitte.(2016).Blockchain:Enigma,paradox,opportunity.Deloitte.London,UK.Huber,S.(2016).Gamblingindustry,HowBlockchaincanmakeitmoretransparent.Fintech.URL:

http://fintechnews.ch/blockchain_bitcoin/transparent-gambling-blockchain-gambling-industry-how-blockchain-can-make-it-more-transparent/3844/.Retrieved15January2017.

Iansiti,M.,&Lakhani,K.R.(2017).ThetruthaboutBlockchain.HarvardBusinessReview.URL:https://hbr.org/2017/01/the-truth-about-blockchain.Retrieved15January2017.

Imgur,2016).http://imgur.com/a/iglkX.Retrieved16January2017.JuniperResearch(2016).Blockchainreaction:Whitepaper.JuniperResearch.Hampshire,UK.Kastelein,R.(2016).Onlinegamblingindustryworthsome$40billionfiringupforBlockchain.

BlockchainNews.URL:http://www.the-blockchain.com/2016/11/26/online-gambling-industry-worth-40-billion-firing-blockchain/.Retrieved15January2017.

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Nyairo,D.(2015).WhatifonlinecasinoswerebuiltontheBlockchainitself?BitcoinGambling.URL:https://www.bitcoingg.com/online-casinos-built-blockchain-instead/.Retrieved15January2017.

Paul,J.(2016).Bythenumbers:Mostpopularonlinegamesrightnow.URL:https://nowloading.co/posts/3916216.Retrieved16January2017.

Ross,S.(2105).Howdoesablockchainpreventdouble-spendingofBitcoins?Investopedia.URL:http://www.investopedia.com/ask/answers/061915/how-does-block-chain-prevent-doublespending-bitcoins.aspRetrieved15January2017.

Steamspy.(2016).http://steamspy.com/country/.Retrieved16January2017.Tappscott,D.,&Tappscott,A.(2016).Blockchainrevolution:HowthetechnologybehindBitcoinis

changingmoney,businessandtheworld.London:Penguin.TotallyGaming(2016).Insight:WhyBlockchainscouldbeawinnerforthegamblingindustry.UTR:

http://totallygaming.com/news/lottery/insight-why-blockchain-could-be-winner-gambling-industry.Retrieved15January2017.

Zalik,D.(2015).SurveyingThescene:ExaminingthedemographicsofeSports.URL:http://www.esportsbets.com/998/who-makes-up-esports-community/.Retrieved16January2017.