Saturday, October 07, 2006

Last Saturday the United States Congress passed a port security bill that
carried an amendment banning Internet gambling. This was a huge mistake, not
because Internet gambling is a good thing (it was already illegal, in fact),
but because the new law is either unenforceable or -- if it can be
enforced -- will tear away the last shreds of financial privacy enjoyed by
U.S. citizens. The stocks of Internet gambling companies, primarily traded
in the UK, went into free-fall as their largest market was effectively taken
away. I don't own any of those shares, but I guarantee you they will fully
recover, which is part of what makes this situation so pathetically stupid.
Ironically, many of the senators who voted for this legislation may not have
even known the gambling bill was attached, since it didn't appear in the
officially published version of the port bill. But such ignorance is common
in Congress, along with a smug confidence that people and institutions can
be compelled to comply with laws, no matter how complex and arcane. The
amendment was a surprise late addition, pushed by Senate Majority Leader
Bill Frist, who has presidential ambitions and reportedly sees this battle
against Internet gambling as part of his eventual campaign platform.Only the
new law isn't really against Internet gambling at all, since it specifically
authorizes intrastate Internet gambling, imposing on the net the artificial
constraint of state boundaries. So the law that is supposed to end Internet
gambling for good will actually make the practice more common, though
evidently out of the hands of foreigners, which in this case includes not
just operators from the UK but, if you live in South Carolina as I do, it
also includes people from Florida and New York. Let a million local poker
hands be dealt. What the new law actually tries to control is the payment of
gambling debts through the U.S. banking system, making such practices
illegal (except, of course, for intrastate gambling, which probably means
your state lottery). Once President Bush signs the bill, your bank and
credit card companies will have 270 days to come up with a way to prohibit
you from using your own money to pay for gambling debts or -- though far
less likely-- to keep you from receiving your gambling profits. The law
covers not just credit card payments but also checks and electronic funds
transfers.

The most optimistic view of this law from the U.S. banking industry says
that controlling payment by checks and electronic transfers is simply
impossible and won't be enforced. Only credit card payments are seen by the
banks as being practical to limit. But what if Congress doesn't want to take
"no" for an answer? What if they are serious? Then the banks will have to
put systems in place to examine every payment transaction, no matter how
small, and determine if it is gambling related. And because there will
inevitably be attempts to get around the law, such examination would go
beyond simply identifying the payee to following the money further upstream
and downstream and examining it in the total context of your financial
activity: Is there a suspicious trend in these payments, which appear to
follow every NFL football game, for example?

If you bother to read U.S. currency, the notes say they are good for paying
"all debts, public and private," which is why Tony Soprano and the Cali
cocaine cartel liked $100 bills so much. Ironically, if the banks are
effective in controlling other gambling payment schemes, it may all come
back to paper money, which is almost impossible to trace.

Is the end here really worth the effort? The United States already has
strict, even draconian, controls over fund transfers that might potentially
be used to pay for terrorist activity. Buy a house or open a brokerage
account and see how deep an interest the bank takes in where the heck your
money is coming from. Now it is proposed that they apply the same diligence
to transactions as small as one dollar.

This is ridiculous, not just because it is an unwarranted invasion of
privacy, not just because we as consumers will ultimately have to pay for
the cost of snitching on ourselves, but because the system of regulation
ultimately won't work. With an Internet gambling market approaching $20
billion per year, there is a huge incentive for new enterprises to spring
into being specifically to get around this law. Frankly, it ought to be
easy.

Just off the top of my head I can think of several possible approaches to
subverting this new law. Working within the banking system it might be
possible to aggregate payments to make their individual origins less
obvious, especially if the aggregation involves some non-gambling money.
Remember, these restrictions are being placed on the U.S. banks, not their
foreign counterparts, so any bank in the Caymans or on the Isle of Man ought
to be able to chug through such aggregated payments without violating any
local laws. Another option, since intrastate gambling is authorized, is to
make interstate and international gambling debts effectively local by
creating thousands of local virtual bookies. All of these are old school
ideas that don't even need technology to implement. What if we bring to bear
the capabilities of Web 2.0 and create payment mashups by the dozen Ð little
PayPals that rise and set like the Sun?

Any random group of 535 nerds is smarter than the 535 members of the U.S.
Congress and able to circumvent ANY regulation if there is enough profit
incentive to do so. Well the U.S. Congress has just created such an
incentive where there was none before. And once these various payment
schemes start appearing, what's to say some of them can't be equally used to
finance terrorism? Of course they can be used for that purpose. Thanks a lot
Senator Frist.

Here's a law that purports to end Internet gambling but will instead enable
it, a law that is intended to make certain types of financial transactions
harder to do but will ultimately make them easier, a law that says nothing
about terrorism but will ultimately abet it, making us all less secure in
the process.

There is, to my knowledge, no center for Al-Qaida hacking, nor is terrorism
as an industry big enough to attract much third-party software development.
But ally the interests of terrorists and Internet gamblers who all want to
be paid, that's a $20 billion incentive to corrupt the world financial
system -- an incentive that didn't exist before last week.

And what will be our institutional response to these obvious flaws when they
come to light? More regulation of course! More scrutiny of financial
transactions, not less. But as we've seen in recent years, this greater
scrutiny often comes with lax or unequal enforcement, depending on your
campaign contributions.

Once again, Congress is proposing to regulate something it ought not to --
something that in any practical sense is probably beyond its power. And the
result will be only bad, not good. And Congress's response will probably be
even more regulation, not less. And all this to push one man's presidential
ambitions?