Legal Guide to US Online Poker

online pokerOnline poker dates almost as far back as the internet itself. The game has achieved immense popularity in a short period of time and has helped spur the popularity of poker in this country. Now, two decades after its introduction, online poker is poised to enter into a historic period of expansion in this country as more states legalize and offer the product. Online poker has come a long way since its beginning and the proliferation of mobile devices enables the product to reach far beyond its beginnings.

History of Online Poker

Online poker lagged the development of other types of internet gaming. Sports betting as well as online casinos pre-dated poker by several years. It was not until 1998 when the first online poker site was launched after some more rudimentary attempts at introducing online poker. Planet Poker became the first mover in the space. Although it has receded from the list of top poker rooms, Planet Poker set many of the standards and norms that are still in place today including the size of the rake taken by casinos. After several unseemly incidents, including the collapse of Poker Spot, the industry began to take off in the new millennium. The launch of PokerStars and Party Poker helped drive unprecedented growth in the market as their popularity proved enduring. The two sites proved adept at marketing and soon signed up countless new customers. The industry was given a bigger boost when a player who won his entry online captured the World Series of Poker advancing the idea that success at poker was accessible to the average player. This soon spurred even more companies, including FullTilt Poker, to the marketplace.

How Online Poker Works

Online poker allows players to compete against each other using the poker software. Players join games by locating them in the casino lobby. Generally, both cash games and tournaments are offered. The software provides the connectivity that allows the players to see the cards and send commands to play the game. The software provides the information to a user’s computer or mobile device. However, instead of a dealer, online poker relies on a random number generator to assign cards. Now, some new varieties of online casino games actually feature live dealers. Online poker sites make money by charging a rake which is usually around five percent. Tournaments require an entry fee in addition to the buy-in. The major difference between online poker and the live version of the game is that online poker operates at a much quicker speed.

UIGEA

However, the halcyon days of the industry were about to end. In 2006, Congress passed the Unlawful Internet Gaming Enforcement Act. UIGEA went after the money flow that fueled online poker, making it illegal to process payments connected to online gambling. This drove many companies from the marketplace although several of the top companies remained operational in spite of UIGEA. Eventually, after several enforcement actions undertaken by the Department of Justice, it became more difficult for players to fund accounts and withdraw money.

Black Friday

Great_Seal_of_the_United_StatesA series of events in 2011 put an extreme damper on the online poker marketplace. First, several executives from FullTilt Poker were indicted and charged with violations of gambling and money laundering laws. They were also charged with defrauding players out of $300 million. Multiple other indictments were unsealed on the same day that charged company executives and payment processors with various crimes. In specific, the indictments alleged that online poker operators duped banks into processing payments in violation of UIGEA. The government seized the accounts belonging to the poker operators which included customer funds. The government also seized the domain names for PokerStars and FullTilt, but returned them once the two companies pledged to withdraw from the U.S. market. The indictments caused severe financial issues for the companies, such that they could no longer process withdrawals from customers. Black Friday had a predictably deleterious effect on these companies’ business. The companies that escaped indictment gained market share.

Move Toward Legalization

Black Friday, however, was not the end of online poker in this country. Shortly after Black Friday, states sought to fill the space legally with their own laws permitting online poker. Nevada was the first state to legalize online poker in June 2011 and issued the first licenses a year later. Soon after Nevada permitted online poker, Delaware followed suit, legalizing online poker under the auspices of the state lottery.

At the same time that some states were legalizing online poker, there was a federal effort to permit online poker. This push stalled amid concerns about states’ rights. At the heart of the matter is a tug-of-war between the federal government and the states, with each trying to preempt the other from regulating the market. In general, states want to have the ability to choose on their own whether to legalize and regulate gaming within its borders.

The Present and Future of Online Poker

The present and future for online poker in the U.S. looks brighter by the day. Nevada and Delaware were followed by New Jersey and Pennsylvania in legalizing online poker. The states’ casinos are now joined in partnership with the poker operators in offering the product, which combines the resources of the regulated land-based casinos with the expertise of the online poker operators. The increase in legal online poker venues has removed some of uncertainty for players and promises increased revenues in the industry. Players are now able to deposit and play with confidence knowing that their accounts cannot be seized and the venue cannot be closed.

The key to the expansion of the online poker market is the Multi-State Gaming Compact. This allows players in signatory states to compete against each other as opposed to players in one state only being allowed to compete against fellow residents. New Jersey has signed on to the agreement, adding a large population base. The impending addition of Pennsylvania will expand the total population pool of signatory states beyond 25 million. The growing common market will increase revenues within member states as online poker becomes more attractive in comparison with offshore entities.

Once momentum is established in the signatory states, it is likely that other states will want to legalize online poker. Several large states have had efforts to permit online poker that made some measure of progress before the bills ultimately failed. However, as online poker continues to gain in popularity, the revenue source for these states may become too big to forego. The key to further expansion of online poker is whether or not various stakeholders can cooperate in figuring out an equitable distribution of revenues and the participants in the marketplace. In several states, tribal casinos have blocked gaming expansion since it may threaten their hegemony over gambling in their respective states.

Beyond legalization, various new technological advances have made online poker more popular. A video platform named Twitch has facilitated connections and allowed top poker players to share tips and advice with players. Fans are able to watch live poker streams on Twitch. In addition, innovative content has made poker more accessible and understandable by average players.

Size of the Market

cashThe largest market for poker in the U.S. is California which currently does not have online poker. Card rooms that feature poker take in north of $1 billion in revenue every year and that does not even include revenues from tribal casinos.

With regard to the online poker states, New Jersey is clearly the largest market thus far. Online poker recently reached approximately $2 million in monthly revenues. Pennsylvania promises to be a sizable market once online poker is rolled out in the state.

At the time of Black Friday, the revenues from the U.S. online poker market approached $1 billion. The present pales in comparison to what the future offers. Total online gaming revenues in the U.S. are expected to surpass $4 billion by 2020 and a sizable part of that is online poker. There have been some estimates that a fully regulated online poker industry in the U.S. could yield revenues above $3 billion annually. Even if online poker is only legalized on the state level, the gaming agreement will serve to boost revenues.

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Sam Shefrin is the founder of Lineups.com, Inc. Before Lineups, he started Daily Fantasy Cafe, Inc. in 2014. Armed with a passion for sports and every Atlanta team, his journey continues with the goal of making Lineups a premier sports analytics destination. He has been quoted on Forbes.com for industry insight and his websites featured on NBATV, Yahoo! Sports, Fantasy Pros, Bleacher Report and SB Nation.