Despite a massive correction in the cryptocurrency market in recent months, the U.S. sports betting community is finally rounding the corner in its acceptance of virtual coins for wagering activities.

As crypto becomes intertwined with more facets of daily life, proponents of virtual currencies in sports betting argue that the transition will be a vital tool in pushing bettors away from the offshore market. Barstool Sportsbook, for instance, recently began accepting cryptocurrency deposits into player gaming wallets via a third-party payment provider.

The option is available at Barstool in two states, including Colorado, where Gov. Jared Polis has designed a litany of creative methods for utilizing virtual currencies. Polis, who is up for reelection in November, drew headlines earlier this year when his Democratic gubernatorial campaign became the first to accept donations in crypto.

After Polis signed the Digital Token Act earlier this year, Colorado will make history as the first state nationwide to accept cryptocurrencies for tax payments. Eventually, this crypto initiative could be broadened to enable the state to accept virtual currencies for other services, such as driver’s license and hunting license fees.

Colorado Gov. Jared Polis, who’s said the state will take tax payments in crypto, is now accepting donations in bitcoin, ethereum and even dogecoin @jaredpolis

— StateScoop (@State_Scoop) April 12, 2022

The adoption of cryptocurrency by online sportsbook operators sparked discussion at this month’s National Council of Legislators From Gaming States (NCLGS) summer meeting, where Colorado Division of Gaming Director Dan Hartman served on a panel addressing the subject. Hartman was joined on the panel by Howard Glaser, global head of gaming affairs for Light and Wonder, and Jed Nosal, a partner at the transatlantic law firm Womble Bond Dickinson.

“The value of what you’re doing in Colorado is that you’re providing some incentive for people to keep their bet in Colorado,” said Glaser. “If they are otherwise inclined to bet in crypto on an offshore sportsbook, you’re giving them some incentive to keep their money at home because it’s safer.”

Days later, a panel at the SBC Summit North America explored the impact of blockchain, artificial intelligence, and virtual reality on the gambling space. At its core, a blockchain is a decentralized network that allows data to be distributed on a peer-to-peer basis. In practical terms, think of the blockchain as the database that powers Bitcoin transactions, just as Napster enabled online users to download music in the early-2000s.

Aaron Avruskin, co-founder of Leverage Game Media, an NFT-focused company backed by Mark Cuban, joined the panel as a late addition, touting the “frictionless nature” of the blockchain for allowing users to conduct transactions at a dizzying pace. A frictionless market is defined as one that imposes little to no restraints on transactions.

“When it comes to sports betting, frictionless is better because you want your customer to access your product or service as quick as possible, and blockchain provides for that like nothing else in the space,” he said.

Consumer safeguards

In a comprehensive FAQ page outlining issues regarding crypto deposit acceptance, Barstool informed customers that they will be able to use Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and DASH cryptocurrencies to deposit into their Barstool sports betting accounts. As soon as a customer locks in an amount that he or she intends to deposit into the account, Barstool holds the cryptocurrency exchange rate for a 15-minute grace period. The policy protects customers from rapid fluctuations in exchange rates.

For instance, one Bitcoin traded at the equivalent of $21,352.40 in U.S. dollars at 11:50 a.m. ET on Wednesday before falling to $21,203.90 by 12 p.m. ET. Under the policy, the customer is locked into the rate at the moment they signal that they will make a deposit — 11:50 a.m., in this case.

From there, the amount deposited will be sent from a user’s personal cryptocurrency wallet to the crypto wallet maintained by Barstool. It is important to note that Barstool will only accept mobile gaming wallets funded with U.S. currency, enlisting a licensed cryptocurrency exchange to convert the crypto deposits into working funds, which appear into a bettor’s wallet as dollars. In addition, Barstool will not facilitate any withdrawals in cryptocurrency.

Strict licensing standards in Colorado assuage any concerns Hartman has from a consumer protection standpoint. Not only is Barstool a licensed entity, so is the payment processor, Hartman told Sports Handle following the panel. Although Hartman has not met directly with Polis on the gaming division’s policy regarding crypto, he has conversed with the state’s chief blockchain architect, Thaddeus Batt, a former technology officer at Denver-based software firm Spire Digital.

“He’s excited that I have other operators that are thinking about it,” Hartman told Sports Handle. “It kind of plays into where they are at. They want to see Colorado as the leader in crypto.”

Colorado is already a leader in Crypto with our first in the nation Chief Blockchain Architect, hosting ETHDenver and other blockchain hackathons. It was great to sit down with CNBC to discuss the initiatives Colorado is taking on cryptocurrencies.

— Governor Jared Polis (@GovofCO) February 17, 2022

Money laundering protections

Nearly a decade has passed since the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a March 2013 guidance on federal regulatory standards in regard to the treatment of virtual currencies. Although FinCEN’s guidance on cryptocurrency regulation has evolved somewhat, the memo still serves as a template for how the federal government examines cryptocurrency use for purposes of the Bank Secrecy Act, according to Nosal, the attorney from Womble Bond Dickinson.

Established in 1970, the Bank Secrecy Act is a federal law that requires financial institutions to assist government agencies in detecting and preventing money laundering. Under the 2013 guidance, FinCEN established that it will treat cryptocurrencies the same as any other currency when it comes to the Bank Secrecy Act, Nosal added.

The panel fielded a question on historical trends of the usage of cryptocurrencies for nefarious purposes. According to blockchain data platform Chainanalysis Inc., cyber criminals laundered more than $8.5 billion in cryptocurrency in 2021, representing a spike of approximately 30% from the previous year. Cryptocurrencies have also been linked to other illegal activity, including terrorist financing, narcotics smuggling, and kidnapping ransom payments, among others.

Across the nation, casinos must abide by robust Know Your Customer (KYC) protocols in order to properly identify the age and identity of their patrons. The protocols often conflict with the structure of obscure cryptocurrencies, which are cloaked in anonymity, do not involve intermediaries, and trade at a rapid pace, according to Nosal.

“That’s exactly the opposite of Know Your Customer,” Nosal said.

Moving forward, the need to balance a structure that is designed to be unregulated with strict regulations aimed at combating the nefarious activities associated with crypto transactions will be the primary challenge for the sports betting industry, Nosal said. Interestingly enough, former FinCEN Director Kenneth Blanco identified money laundering risks related to mobile sports wagering and cryptocurrency payment options as two priorities for gaming compliance officers in a 2019 speech at the 12th Annual Las Vegas Anti-Money Laundering Conference.

#FinCen is watching casinos with sports betting and cryptocurrency payment options for potential money laundering problems. In @Blaw Insight, @JennerBlockLLP attorneys break down FinCen director’s speech in Vegas & what it means for casino AML programs.

— Lisa Rockelli Gordon (@25lrock) September 17, 2019

“Sports betting and other mobile gaming services run through your casino are no different than other products and services,” Blanco said in the 2019 speech. “FinCEN expects that your casino or card club is monitoring your sports betting programs for potentially suspicious activity. This includes offering sports betting through a mobile app.”

At the time, Blanco instructed casinos to develop anti-money laundering (AML) programs tailored specifically to the risks posed by cryptocurrencies. He also urged casinos to conduct blockchain analytics as a risk mitigation tool for identifying potential AML concerns. Then, citing the rise of iGaming, FinCEN loosened some of its regulatory requirements last October for casino protocols regarding customer identification. While acknowledging the rapid growth of mobile sports betting, FinCEN provided casinos with alternatives to in-person identification verification measures under the guidance.

Other states

At present, Wyoming is the only state that has approved crypto as a funding mechanism for sports betting accounts within its statutes.

At the NCLGS conference in Boston, Wyoming Gaming Commission Executive Director Charles Moore gushed that the state is the most aggressive in the nation in utilizing crypto payments for gaming options. While Barstool allows deposits in crypto in Colorado and Virginia, regulators in those states approved the transfers only in cases when a sportsbook partners with a third-party processor, a key distinction.

In May, the Nevada legislature held a two-hour session on the implications of large-scale cryptocurrency adoption in the casino industry. There, Nevada Gaming Control Board (NGCB) executive Jim Barbee outlined a scenario where a bettor could lose money on a winning futures ticket placed in crypto if the value of the virtual currency plummets over the course of a season. Barbee serves as the chief of the NGCB’s technology division.

“You can actually win the wager and be paid in cryptocurrency, but if the value of the cryptocurrency has deflated, you could potentially lose money on that endeavor,” Barbee said, according to the Nevada Independent.

ZenSports, a peer-to-peer sports betting app, contains a platform that allows customers to wager against other bettors via cryptocurrency or fiat. While ZenSports received a Nevada license in 2021 for traditional sports betting, CEO Mark Thomas indicated that the company may seek approval for sports wagers placed in crypto. ZenSports’ licensing application in Tennessee is still pending.

Barstool accepting crypto deposits in Colorado, Virginia; New Jersey regulator cautious on gaming and crypto; No plans to allow crypto payments in Ontario market @GamblingComp

— Chris Sieroty (@sierotyfeatures) July 1, 2022

New Jersey, another leading gaming state, plans to remain cautious before approving any measures on crypto for gaming purposes. In Canada, the Ontario Alcohol and Gaming Commission (AGCO) has been more definitive in prohibiting cryptocurrency for funding sports betting accounts.

“No matter the approach, standardized, accessible, and, most importantly, safe deposit methods will be an important element to the proliferating iGaming and sports betting markets in the United States as well as Canada,” Ifrah Law contributor Jake Gray wrote in a piece on the subject. “Only time will tell whether cryptocurrency will become a part of regulated iGaming’s expansion.”

Bitcoin traded around $23,000 on Thursday morning, down more than 50% from its six-month high of $47,454.10 in March. (Bitcoin traded as high as $64,400 last November.) Nevertheless, investors who purchased the virtual currency five years ago can still make a considerable profit if they cash out at current levels. In August 2017, Bitcoin traded under $5,000.