Digitalisation of Casinos

from Casino Life Issue 145 Volume 17

Ambient Scent

By Jonathan Strock

hat exactly is money, or currency?

WWhat characteristics does it have? We are moving increasingly digital, so we need to consider these questions. First of all, what is its function? According to the Bank of England, money has three main roles:

1) It is a unit of measure. It allows people and companies to value goods and services, and also to evaluate what they owe and are owed by others, 2) It is a means of payment, for the aforementioned goods and services, and

3) It is a means of storing value, allowing for a way of saving until needed.

As a simplification, there are two main kinds of money. The first is “central bank money” which, as can be guessed from its name, is the responsibility of the central bank, and is generally used by the general

public as cash, though commercial banks also have access to this type of money. The second type is “commercial bank money” which is the deposits made by the public: This type of money is created when commercial banks make loans.

A central bank is generally government-run. It has a de facto monopoly and has control over the production (printing) and distribution of money in the national economy. It is also usually responsible for the regulation of commercial banks. A commercial bank is where most people do their banking. Commercial banks generate their revenue by providing loans and charging interest. The financing of these loans comes from customer deposits.

Money as a unit of measure is the remit of the central bank, which holds the assets that give the value to the currency. These are known as an anchor asset. Intervention on interest rates ensures stability in the currency, and ensures that inflation will be steady and low, and preserves confidence in the national money.

Commercial bank money is principally used as a means of payment and for storing value. This money, originally from bank deposits, is lent to the bank’s customers, who use it to purchase goods and services. The seller typically puts the money back in the bank. Some deposits are used for saving money. Commercial banks’ money requires both efficiency in the provision of services (loans) and public confidence in the ability to convert the money into cash in order to work. Loss of confidence can lead to hyperinflation, such as in Germany in the 1930s, or more recently in Zimbabwe or Venezuela where banknotes have been denominated in trillions.

Today, about 95 percent of money is held and used in the form of commercial bank money, and the rest is in cash. As recently as the Eighties, this figure was only about 65 percent. There is currently about £87 billion of cash in circulation in the UK, to emphasise the intrinsic trust in cash.

So, is Bitcoin a currency? Here we will use Bitcoin as a proxy for all cryptocurrencies. Even though they have different characteristics, they can be considered as similar for the purpose of this article. Bitcoin is generally referred to as a cryptocurrency, but does it have the characteristics that would allow it to be called a currency? The short but not very useful answer would be yes and no. It can fulfil the role of cash. It can be used to purchase things, though this ability is not universal. You cannot just go into any coffee shop or newsagents and buy a coffee or a newspaper with it. While there are more and more retail outlets that do accept Bitcoin or other cryptocurrencies, it is less than 1 percent of all outlets in the UK, and considerably less than that in most countries. It is more accepted online: There are quite a few online casinos and other gambling sites and apps that accept various cryptocurrencies, though their legality should first be verified before using their services.

Cryptocurrencies are better known as a means of payment on the Dark Web and have a reputation for facilitating illegal transactions. One of the key selling points of Bitcoin (like other cryptos) has always been its anonymity, allowing such Dark Web transactions without risk. The reality of this is slightly different: Bitcoin does not exist in a vacuum. In order to buy, sell and hold cryptocurrencies, it is required to have a wallet such as Coinbase, Mycelium or Trezor, and these, whilst being also anonymous – thanks to the publicly visible blockchain that is an integral part of Bitcoin – can be traced, rendering the anonymity purely theoretical. In the U.S. recently, the systems of Colonial Pipelines were hacked and the contents of their servers were encrypted, the hackers demanding a ransom of 75 Bitcoins ($4.4 million at the time). Although the hackers could not be traced, the FBI managed to follow transactions in and out of the cryptocurrency wallets and located, then seized, most of the ransom money. Interestingly, this identification and seizure by the FBI has led to the greatest loss of confidence in cryptocurrencies since their invention. People have come to understand that it is not enough to be anonymous. The entire system, including wallets, must also be able to be secure for the user in order to continue to trade without risk, so that blockchains are publicly accessible, and thus traceable. This is saying a lot about Bitcoins’ user base: Legal transactions would not be worried about this.

As seen above, money has three main functions. Bitcoin can be used as a means of payment, though the use is rather limited. However, what about the other two uses of money? First, as a unit of measure, for Bitcoin to fulfil this role, the currency needs to be stable – as can be seen from the highs and lows that Bitcoin has undergone in the last few months, it can be easily understood that it is not stable enough to be used as a unit of measure. The final function – that of storing value – is a possibility, but given the instability of the value of Bitcoin, using it simply as a means of saving is not recommended. It can, and indeed is, used as a means of speculation – though this is the opposite of stability – and seems to be the main use of cryptocurrency for legal activity. Notably, the UK bank NatWest has said that it will refuse to serve business customers who accept cryptocurrencies. As for loans, this would be a highly speculative adventure for anyone brave enough to open a money-lending business: don’t expect any high street banks to be interested in this.

So, is there a future for cryptocurrencies in casinos? As far as land-based casinos go, there does not seem to be much point. As seen above, Bitcoin is not used to save money, but could be used to buy and redeem chips. However, the main perceived advantage – that of anonymity – has no sense in a business where money laundering laws render any supposed anonymity obsolete, as identification will be established in other ways: either at the entry desk or inside the casino. This could of course change, but the tendency is to strengthen AML rather than loosening it, so this seems unlikely. It is interesting that El Salvador has recently made Bitcoin legal tender in the country, obliging businesses to accept it where possible, so this could be a first trial for the casino industry there.

The interest in cryptos has been one factor in governments looking into the possibilities that are offered by a state-run digital currency, and they seem convinced that this is the way forward in a twin pronged strategy: aggressively ban cryptos and allow, or even force, the use of governmental e-money. Many central banks are looking into digital currencies: Perhaps the most interesting of these, and the one that has the most potential for the casino industry being China, where there is talk of the digital Yuan becoming legal tender in Macau. This would, as a result, see it used inside casinos resorts, either alongside, or in replacement of, the Hong Kong dollar that is currently used, though it is a foreign currency in Macau. As we shall see, this will have a profound and lasting effect on gambling habits.

First of all, what is it?

Is it like Bitcoin? Well, they have common forefathers. However, Bitcoin and other cryptocurrencies are essentially decentralised, that is to say that they are not controlled by a single person or body, but by the stakeholding community in general, the opposite of the highly centralised digital Yuan, which is operated by China’s central bank, making it highly centralised and not anonymous.

How does it work? The central bank distributes the eMoney to commercial banks, who have the responsibility of distribution to customers – usually via an app, although other means are in development. This is one of the purposes of the current trials: to build a flexible but robust system. The digital and physical Yuan are interchangeable. The app, usually in the form of an electronic wallet on a smartphone, is used by

scanning QR codes, although other means of payment are possible.

It should be remembered that China has one of the most advanced cashless societies in the world. The Peoples Bank of China (PBOC), China’s central bank, has been leading developmental work on the digital currency, which the bank is currently trialling in five cities, with Macau on the list to be included in the trials shortly.

There are several main benefits of the system for the state. The first is that of making payments more efficient, through the introduction of a digital means of payment (so less risk of holding cash), which has no transaction fees. Another benefit is to reduce systemic risk, because a significant number of transactions in China are digital – over 84 percent of all transactions in 2020 (72 percent in the U.S.) and this sector is currently dominated by private entities, including WeChat which is owned by Tencent, and by Alipay, part of the Alibaba group. Should something happen to one of these companies, or both, the Chinese financial system could be put under considerable pressure, whereas a central bank-maintained currency would reduce or remove this risk.

A further advantage would be to increase competition, and reduce dependency on private companies and the terms that they can currently dictate to the market. Unlike Bitcoin, a government central bank would not need to be anonymous, and users’ transactions could be tracked in real time.

In China, gambling is illegal on the mainland and is limited to Macau for casinos, and Hong Kong for horse racing. Gambling in Macau is primarily by Chinese (mainland) residents. But gambling there is not quite as simple as it is in most other jurisdictions, because China has strict limits on the amount of money that can be taken out of the country (for money exchange and transfers, Macau is not part of the Chinese banking system and has its own currency – the Pataca). To add to this complexity, gambling in Macau is not done in the local currency, nor is it done in the Chinese Yuan: All gambling is in the Hong Kong Dollar. So any Yuan must first be converted to HKD to be played in Macau. Simple isn’t it?

Because of the limits on the use of the Yuan outside mainland China, most of the activity in Macau is organised through junkets, that is to say through a third party, who arranges for HKD to be available to the customer. The junket organiser will usually also pay for travelling expenses, hotels, etc., and in return receive a commission from the casino for every HKD played at the tables and slots. The junket operator then is paid by the customer, frequently back in mainland China.

Hong Kong Dollars are freely convertible, and it is often the case that once the gambling has stopped, the winnings, or the sums that remain, are often transferred elsewhere – to Hong Kong, for example – and do not return to mainland China. How much money escapes from China due to this ‘illicit’ nature is hard to estimate, but it is generally accepted that more money escapes than is lost in gross gaming revenue in the casinos of Macau, which can be over $40 billion USD in a good year. This, and corruption – though the two go hand in hand – is a great problem for the Chinese authorities who have tried many times to stem this capital flow: from crackdowns inside China, to using facial recognition on ATMs in Macau and many other methods besides.

A recent South China Morning Post article

Jonathan Strock

Today, about 95 percent of money is held and used in the

form of commercial bank money, and the rest is in cash. As recently as the Eighties, this figure was only about 65 percent. There is currently about £87 billion of cash in circulation in the UK, to “ emphasise the intrinsic trust in cash.”

reported that Mr. Ho Lat-Seng, the chief executive of Macau, had recently confirmed that Macau would be introducing legislation to authorise the use of the E-Yuan in the territory, and was looking to the Chinese central bank for a study of its feasibility.

It must be noted that the idea of using a digital currency inside a casino is highly tempting for the authorities. Operators have tried to lobby for the use of credit and debit cards inside casino floors – without luck in most jurisdictions – as regulators tend to believe that the risk of irresponsible gambling would be too high, as the temptation to swipe one’s card at the table or slot machine would be too much to resist. However, it may be said that this issue would be completely different with a digital currency.

Governments like Big Data as much as any of the internet giants. They would be very keen to be able to trace, in real time, every banknote in circulation. In effect, this is what they would be able to do with a digital currency: every transaction could be monitored as it happened.

This has obvious implications for anti-money laundering and the financing of anti-terrorism enforcement, as well as for casino operations. The casino floor would be able to go completely cashless, no more banknotes to be counted at the cage or at the tables, all funds would be used electronically by customers, both buying in, (which could be done directly at tables and machines) and cashing out too, reducing or perhaps eliminating most cash desk transactions, as well as dramatically reducing the opportunity for theft. Casinos worldwide are going cashless, from Genting Resorts World Las Vegas in the U.S. to Crown in Sydney, Australia. There, the government has imposed this cashless gaming floor because of perceived lax practices by the company, including uncontrolled junkets and alleged money laundering, as cited in the recently published Bergin report.

Junkets have been a thorn in the side of the Chinese authorities for some time, with an increase in the range and depth of actions against some of them. A digital currency in Macau casinos as the unique means of payment would go a long way to curtail the action of junkets, and with it reduce illicit activity considerably. Junket operators, not surprisingly, have been publicly claiming that the introduction of a digital currency in Macau would be a disaster for their business and for the casinos too, and they may have a point that VIP customers would no longer need the services of a junket, and that they might not play as often or as much if tracked by the Chinese government. That said, the increase in custom from the mass-market customers should be able to more than compensate for any VIP player losses.

This would lead to a healthier, more sustainable business model that would be in the interests of both the Chinese government and Macau casino operators. Should the Macau experiment prove to be the success that it looks likely to be, other countries will swiftly follow their example. This will benefit not just crossborder travellers and tourists, but will also benefit the local markets through better transparency, less tax evasion, and better adherence to other laws such as AML and terrorism financing, as all transactions, including prior ones could be traced easily and immediately through the public blockchain that is an essential part of digital currencies.

Digital wallets on smartphones will replace TITO, bill acceptors and cash, leaving the customer more in control, and safer from harm through built-in limits, all in all, a very positive advance for casinos, governments and clients. Furthermore, a digital currency may facilitate access to casinos from millennials who are essentially tech-driven when it comes to entertainment, something that has otherwise proved difficult. Digital currency is coming, it is just a question of when.