Monday, July 11, 2016

Counter Strike: Gambling Operations

"In chaos theory, there's a concept known as sensitive dependence on initial conditions. Most people call it the butterfly effect. In EVE, we call it the sandbox."

Among the interesting developments in EVE Online is the growth of online gaming sites utilizing in-game currency and virtual goods. I don't think that popular sites like EveBet and I Want ISK really worry about real world gambling laws. After all, the money wagered is internet spaceship bucks and not convertible to real world currency without violating the EVE Online End User License Agreement and Terms of Service. No need to worry about lawyers or governments intervening, right?

The times are changing, and EveBet and IWI are small fish in the multi-billion dollar industry known as "skin betting". According to Chris Grove, the publisher of eSports Betting Report and a partner at Narus Advisors, skin betting "refers to betting sites that allow betting using in-game items. Skin betting sites span various genres and products, including: match betting, roulette, lotteries, raffles, coin flips, slots, and blackjack." 

From eSports Betting Report
In a recent report, Narus Advisors and Eilers & Krejcik Gaming estimated the total amount wagered on skin gambling sites in 2016 at $7.4 billion USD. The big game involved in skin betting is Counter Strike: Global Operations. According to Grove:
"CS:GO is the dominant title in the skin betting vertical, accounting for some 85% of activity. Remember, skin betting is not a single product but rather a class of products, so betting skins doesn’t necessarily involve betting on CS:GO. To put it another way, market share speaks only to the estimated market share in terms of use of items from a particular game at skin betting site."
While huge in the context of the New Eden economy, CCP's real money trading (RMT) policies keep EVE's gambling organizations from approaching the staggering numbers posted by the CS:GO gambling sites. First, an explanation of how sanctioned real money trading works in EVE Online.

CCP utilizes the existing market mechanics for selling items within the game universe to allow players to spend real world money and obtain EVE's virtual currency, the Interstellar Kredit, or ISK. Players can purchase virtual items from CCP's cash shop, or game time (known as the 30-Day License Extension, or PLEX) from CCP's website or from an authorized PLEX reseller, and trade the items/game time for in-game currency. CCP does not permit players to convert virtual goods into real world currency and offers no mechanism to do so. While the system allows the use of in-game currency for items with real world value, such as game time, account services, and even convention tickets, those players found selling virtual currency and/or goods for real world currency have all of their accounts terminated.

Valve, the co-developer of CS:GO, created a different model. Unlike EVE, CS:GO is a buy-to-play game supported by a cash shop. The cash shop is based on cosmetic items, specifically weapons skins. Players can obtain loot crates containing skins either as drops in the game or by purchasing them on the market. To open the crates requires keys that originate in the CS:GO in-game cash shop.

At this point, Valve's policies diverge greatly from CCP's. Where CCP bans those caught selling virtual goods for real world currency, Valve allows both thriving primary and secondary cash RMT markets. The primary market is located on the Steam marketplace that allows players to exchange skins & other virtual items for Steam funds. Players can use money in their Steam wallets to purchase games, DLC, or any other offering on the site.

On the secondary market, Valve allows players to trade items between themselves for real world currency. The above video shows how the process works on one of the most popular sites, OPSkins. These secondary RMT market sites even use Steam technology and APIs to operate. Utilizing a third party site like OPSkins allows a player to transfer real world cash into PayPal.

Now, back to my point of how CCP's sanctioned RMT strategy inhibits the growth of EVE's gambling scene. The possible rewards from New Eden's gambling sites, even those with real world value, only appeals to EVE players. Compare that pool of a maximum of 200,000 players to that of CS:GO, a game that boasts an average concurrent user figure of 380,000 players. According to a Bloomberg report published in April, an estimated 3 million people wagered $2.3 billion USD on CS:GO eSports matches skins betting in 2015. Bloomberg also noted that within two years of the introduction of weapon skins, the number of people playing CS:GO increased by 1500%.

If skins gambling and allowing players to extract real money out of CS:GO helped that game financially, why doesn't CCP follow suit? The Bloomberg report gives a possible explanation:
"In a handful of cases, judges have ruled that activities carried out entirely with virtual goods within video games shouldn’t be considered gambling, because they have no connection to the real world. 'Even in the Internet age, there is a crucial distinction between that which is pretend and that which is real and true,' U.S. District Judge James Bredar wrote in October, dismissing a suit against mobile gaming company Machine Zone. 'The laws of California and Maryland do not trifle with play money.'

"Like the companies that have successfully defended themselves in court, other prominent game makers, including Zynga, Riot, and Activision Blizzard, have been aggressive about keeping virtual currencies separate from real ones. Valve has not: Its software enables an explicit connection between in-game goods and off-line cash." [hyperlink added]
That "explicit connection between in-game goods and off-line cash" left Valve open to legal action. On 23 June, Michael McLeod filed a class-action lawsuit in Connecticut against Valve alleging that the company is complicit in the activities of CS:GO gambling sites. The 31-page document is fascinating reading and lists why video game makers are wary of mixing the real and virtual economies. Here are a few choice passages:
5. Defendant Valve knowingly allowed, supported, and/or sponsored illegal gambling by allowing millions of Americans to link their individual Steam accounts to third-party websites such as CSGO Lounge (“Lounge”), CSGO Diamonds (“Diamonds”), and OPSkins (collectively, “unnamed co-conspirators”). Counter-Strike players can purchase CS:GO Skins (“Skins”), weapons with different textures that can be used during gameplay of Counter-Strike, through Steam, Valve’s online marketplace. These Skins can then easily be traded and used as collateral for bets placed on Lounge and/or Diamonds through linked Steam accounts. In the eSports gambling economy, skins are like casino chips that have monetary value outside the game itself because of the ability to convert them directly into cash.

9. In sum, Valve owns the league, sells the casino chips, and receives a piece of thecasino’s income stream through foreign websites in order to maintain the charade that Valve is not promoting and profiting from online gambling, like a modern-day Captain Renault from Casablanca. That most of the people in the CS:GO gambling economy are teenagers and under 21 makes Valve’s and the other Defendants’ actions even more unconscionable.

22. When items are bought and sold on the Steam Marketplace, Valve Steam takes a 5% cut on all total sales, and an additional percentage depending on the game the item is related to. If a sale is related to CS:GO, Steam takes an additional 10%, resulting in a 15% fee in all marketplace sales related to CS:GO. 

23. The creation of Skins was a deliberate attempt by Valve to increase its sales and  profits by adding an element of gambling to its products. And it worked: as a result of the gambling ecosystem, explained in depth below, that grew up around CS:GO Skins, the number of players on CS:GO increased more than 1,500 percent, and CS:GO became the subject of televised and monetized eSports. Valve has sold more than 21 million copies of CS:GO, earned more than $567 million in total revenue from sales of CS:GO alone, and earned a percentage of gambling proceeds on CS:GO through various websites and third parties.
The above is interesting background information. The fascinating parts of the lawsuit are the claims of violations of the Racketeer Influenced and Corrupt Organizations Act. I'll leave the validity of those claims to the judge and jury, but the document also explains why the plaintiff believes gambling laws were broken. As EVE players this year showed an interest the relevant laws on betting in video games, I'll list the rationale why Valve and CS:GO gambling sites violated those laws. I'll also include the paragraph that may explain why CCP may want to show caution in which third-party developers are allowed to use SSO:
101. Independently and collectively, Valve and the unnamed co-conspirators in this Count are responsible for the growth of the illegal enterprise to become a multi-billion dollar  business by providing legitimacy to what was, in fact, an illegal activity. The mere act of allowing Plaintiff, and other members of the Class, to sign into Steam through Lounge, OPSkins and Diamonds bolstered the credibility of the illegal enterprises in the eyes of unsuspecting  bettors.

102. Valve and the unnamed co-conspirators all committed a Predicate Act under RICO, violation 18 U.S.C. § 1955, which provides in relevant part: (a) Whoever conducts, finances, manages, supervises, directs, or owns all or part of an illegal gambling business shall be fined under this title or imprisoned not more than five years, or both. (b) As used in this section —

i. “Illegal gambling business” means a gambling business which—is a violation of the law of a State or political subdivision in which it is conducted; involves five or more persons who conduct, finance, manage, supervise, direct, or own all or part of such business; and has been or remains in substantially continuous operation for a  period in excess of thirty days or has a gross revenue of $2,000 in any single day.
(4) “gambling” includes but is not limited to pool-selling, bookmaking, maintaining slot machines, roulette wheels or dice tables, and conducting lotteries,  policy, bolita or numbers games, or selling chances therein. 
(6) “State” means any State of the United States, the District of Columbia,
the Commonwealth of Puerto Rico, and any territory or possession of the United States.

103. Valve, Lounge, OPSkins and Diamonds are illegal gambling businesses because they meet all three elements of 18 U.S.C. § 1955(b)(1-3).
Remember, I am quoting from the lawsuit, which is the plaintiff's arguments. Don't take the document as totally true until the case is tried and decided in the plaintiff's favor.

Even with the lodging of the McLeod lawsuit, I doubt CS:GO gambling activity would have hit the mainstream press without the discovery of the alleged fraud committed by YouTubers Trevor “Tmartn” Martin and Tom “Syndicate” Cassel. The two not only are part-owners of a CS:GO gambling site, CSGO Lotto, but also promoted the site on their YouTube channels without disclosing their relationship to the business.

The h3h3Productions exposé

Forbes' Paul Tassi summed up why the pair is facing possible sanctions by the U.S. government's Federal Trade Commission.
"The argument made by Martin and Cassel is that they never kept their involvement with CS:GO Lotto a secret, they just didn’t publicize it. Unfortunately, that may not be good enough for the FTC, which requires conspicuous disclosure on digital advertising, which clearly was not the case in Martin and Cassel’s videos which show them winning big and encouraging their (often very young) followers to gamble using the site as well. Another aspect of this is that many are accusing Cassel and Martin of rigging their own site to show them winning big, implying that their audiences could do the same. At least one YouTuber, Lewis 'PsiSyndicate' Stewart, has come forward and admitted that two of his 'big win' videos with 1.5 million total views were in fact rigged, and he was paid to promote the skin-gambling site. This is the reason you see the legally mandated 'results not typical' disclaimer on ads for betting sites like DraftKings or FanDuel, a disclaimer these videos lacked, along with disclosure."
The reason the incident may receive government attention is that Cassel has fallen afoul of the FTC's guidelines for product placement in social media, online videos, television, and streaming in the past. In August 2015, Gamasutra reported that Cassell failed to disclose his financial ties with 3BlackDot in the development of Dead Realm. With multiple offenses, the FTC could choose to make an example of Cassel, especially when underage gambling is involved in a presidential election year.

I am not a lawyer, so I figure I should get the views of one who works in areas of the law related to video games and eSports. Ryan Morrison, also known as VideoGameAttorney on Twitter and Reddit, frequently answers questions from indie game developers on Reddit as well as deals with eSports issues, including representing top tier players. He, along with lawyers Bryce Blum of IME Law and Jeff Ifrah of Ifrah Law, answered questions during an Ask Us Anything on Reddit last Tuesday. I pulled some of Morrison's responses and listed them below.

Q. That lawsuit against valve doesn't really have any legal ground does it?

Morrison: I don't think the lawsuit against Valve will go anywhere, but it definitely has legal ground. While I expect it to settle quickly and not see a courtroom, keep the following in mind:

  • Valve owns every single skin that exists. You don't buy skins, you buy a license to use the skins.
  • Valve has been reported as helping to actually run these websites (specifically CSGO Lounge according to Bloomberg article)
  • Valve allows you to buy and sell skins on their own market, and allows unregulated gambling websites to use their API to operate with ease.

So if you own every skin, help run the websites that gamble them, and then turn those skins into quick and easy cash...that's a recipe that some folks may call "not wonderful."

Q. Isn't the "helping run them" a backing less argument though? I'm no lawyer so I could be way off the mark, but isn't valves involvement summed up as "this is valve game and valve neither stops nor helps it"? Like, as far as I know, valve doesn't go out of their way to support or help these sites, could you shed some light on whether or not this impacts the overall response you just gave?

Morrison: It's been reported that Valve employees are in a skype group with some of these site owners to help them run it. That's not neutral involvement.

To be clear, I have not seen or heard these groups personally. Reporters I have spoken with and have been interviewed have named the same people in the same Skype groups. Different reporters claiming the same info and having spoken to the same people in those's enough for me to believe they are more hands on than most think.

Q. Is it necessary for the government to come out and regulate the skin gambling community and add some legislation before pursuing any legal action? Won't the owners just be able to shut down when that happens and from there on just walk away non nonchalantly with bags of money?

Morrison: No, there are already crimes being committed. Unregulated and underage gambling are serious issues, and these sites permit both.

Q. Is there actually a chance Tmartn,Syndicate and JoshOG will be punished for what they did or do you think they will get away with nothing but a tarnished reputation?

Morrison: It's not a chance. It's going to happen...

I think civil is a definite, as I've received over 75 emails from people wanting to sue TMartn specifically (they are in his videos, losing to him). They used to think it was a cool video to have. Now it's proof of fraud (in their minds). So if my firm doesn't lead that litigation, another firm will.

As for criminal, there are far fewer stories more "juicy" than stealing millions of dollars from children. Some DA in some state will view this as a great career growth opportunity or, more ideally, actually be a good person and want to stop this insanity. Either way, I think that's going to happen as well.

And hell, why not throw in another FTC fine as well :)

Q. Tmartn and syndicate mentioned they "Talked" to the Florida attorney general in a video of theirs to confirm that their 'business' was legal, but /u/videogameattorney is adamant that these sites are NOT legal. How can there be two differing ideas like this if both are looking at it through the eyes of the law?

Morrison: I don't believe they spoke with anyone. I also don't believe any attorney general would look at the actual facts and say it's legal. We shall see!

At the beginning of this post, I asked whether EVE Online gambling websites had anything to fear from roving bands of marauding lawyers or packs of government regulators. If sites like Evebet and I WANT ISK operated in a vacuum, I believe the answer is no. Evebet, IWI, and all the other sites are just too small for real world actors to bother with. But the EVE gambling sites don't operate in a vacuum. Actions in other games, such as Counter Strike: Global Operations, can have ripple effects that effect sites around the world. So we shall have to sit back and watch the fate of some CS:GO gambling sites.

Edit: 13 July 2016 - The 3 million people who bet $2.3 billion in 2015 did so on all skins betting, not just on CS:GO.

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