Here’s why you shouldn’t bet on third-party bitcoin wallets

Photo credit: fdecomite/CC BY 2.0.

Your bitcoin wallet is your own personal bank. With it, you don’t need anyone to hold money for you. That’s important for various reasons. Here’s one: you can bet online as much as you want, with no payment processor stands in your way.

But is that really how it plays out?

In many countries, authorities don’t tolerate online gambling. They consider it addictive and a cause of financial mess in many lives. To enforce bans, regulators have always turned to payment processors.

For instance, in the United States, a financial service provider risks losing its license if it facilitates payments in and out of online casinos. At the least, the US national regulator Financial Crimes Enforcement Network (FinCEN), or the Department of Financial Services at the state level, can impose huge fines if such involvement is proved.

Being a peer-to-peer, anonymous, cross-border method made bitcoin difficult to regulate and tame.

When bitcoin came along in 2009, this blockade was breached. Being a peer-to-peer, anonymous, cross-border method made bitcoin difficult to regulate and tame. Gamblers could now easily place bets on offshore online casinos, and it was way cheaper, faster and private to do it.

As a result, online casinos accepting bitcoin mushroomed all over the internet, the earliest known being SatoshiDice. By 2014, reports were filtering through that online gambling was accounting for over 50 percent of all bitcoin transactions.

But seven years down the line, bitcoin doesn’t seem effectively able to bypass regulatory bans – at least not at the levels that many thought possible at the beginning. This is partly because – thanks to new laws – bitcoin companies, including wallet service providers, have come under regulatory purview.

You bet, you get a suspension

For instance, after New York’s Bitlicense coming into effect, bitcoin companies and startups were forced to adhere to Know Your Customer (KYC) and anti-money-laundering requirements. What’s more, having been recognized by the law, they needed to meet all other laws that affect money service businesses.

In particular, third-party bitcoin wallet services have to guard against facilitating online gambling transactions. The requirement to do this will land at the front desk of more companies as the wave of bitcoin regulation spreads around the world.

A few bitcoin users have already disclosed that they’ve had their services disrupted after using third-party wallets to place bets online.

For example, in August this year, cryptocurrency betting site Bitbet posted on the bitcoin subreddit that Coinbase was silently tracking how its customers spend the coins they purchased on the exchange.

“One of our users [was] threatened by Coinbase with account closure after he placed a bet on our site,” the post stated.

Bitcoin is decentralized; the companies around it are not