India’s Betting-App Ban Will Stoke Money Laundering

(Bloomberg Opinion) — India has stunned its online gaming industryby moving legislation to ban real-money stakes. At first blush, the reasons for hitting the kill switch appear valid. Rising addiction, money laundering and financial frauds through these apps are all serious problems.

However, I wonder if policymakers have thought through the implications. All that prohibition ever does is to push users toward moonshine —in this caseoffshore casinos. They will takein wagersand payout winnings via crypto, giving a boost to illegal, two-way money flows.

With fantasy sports, putting real money behind players’ on-field performance has beenelevatedto a game of skill,at least in the eyeof the law. Add the usual suspects — pandemic ennui, the rise of work fromhome,and anexplosive growth inmobile entertainment — and the world’s most-populous nation was starting toemerge as a promisingonline-gamingmarket.Even a hefty 28% taxon depositsfailed to deter the popularity of apps such asDream11, Games24X7 and Mobile Premier League.

Yet, it still had a ways to go. The $3.8 billion domestic betting industry was nowhere near fulfilling the $100 billion of India’s gambling demand that leaks tooverseas sites each year, according to analysts’ estimates. A bulk of these betsare oncricket, especially during the two-month-long Indian Premier League. By deciding to gut the local industry, the government is saying goodbye to any hope of stanching the outflow. It’s also forswearing morethan $2 billion in annual tax revenue.

Some of the activity, and hence tax collection, will switch to physical venues, such as publicly traded Delta Corp.’s licensed casinosin the tourist destinationsof Goa and Sikkim. Those who gambletojust pass the time— as is increasingly the case for avast army of unemployed youth — mightswitch to social-gaming options fornon-monetary payoffs. Those in-app rewards will get bigger and more sophisticated now as morebrands and influencers latch on to them in the absence of other options.

E-sports, too, may get a leg up, thanks to the legitimacy accorded to themin the same lawthat’s seeking to ban online gambling.

The financialsystem might alsoheave a sigh of relief. The local cricket-bettingappswere beginningto strain banks’infrastructure by taking wagersin real time from rupee-denominateddeposit accounts. As I wroteduring this year’sIPL season,lendersthat hold the accounts of these legitimate money-gaming sites wereunder pressure from clients to not missany of the fundscoming their way.

All of that madness will end. However, new headaches will emerge. Those who got addictedto fantasy-sports betting when the government had no problem with it won’t just give up the habit. They will look for their fix elsewhere. Many international sites acceptplayers from India; they don’t even insist on rigorous “know your customer” checks. Just a username, email, and password are often enough. A customer who makes a deposit in Bitcoin or Etherand takes winnings the same way would bypass the banking system altogether.

India already has nearly 100 million crypto wallets. The money-laundering menace that the policymakers are trying to address could getworse. These offshore gambling proceeds will become a source of crypto liquidity for residentslooking to jump controls on capital outflows. Some of those transfers will be proceeds of illicitactivity; nearly all of themwill avoid detection. And then local lenders will complain that they are losing precious deposits without really knowing where they’re going.

The other unintended impact may be felt by kabaddi, a traditional sport popular across the subcontinent. Fantasy-sports apps, which have a self-interest in opening new areas to betting,have been some of the more aggressivesponsors of theannual Pro Kabaddi League, helpingto revive enthusiasm for the game over the past decade. Now someone else will have to step up to the plate.

Theban will come with a possible three-year jail term for operators in addition to fines. That, too, seems likeoverkill. It’s best to channel an overburdened law-enforcementsystemtowardreal scams, like when agang set up a fake Indian Premier Leaguetournament at a remote farm in Gujarat with laborers acting as players to hoodwinkRussian gamblers. According toa report in the Guardian, that “IPL” went all the way to quarter finals before the racket was busted.

Expect more such cases of serious fraud and criminality as precious policing andjudicial resources arewasted on shutting down online-betting shops that enjoyed legitimacy until recently. In that respect, too, the ban may resemble the US Prohibition Era.