Why is online poker illegal in the U.S.?

Last fall a bill passed through Congress that caused poker sites such as Partypoker.com to turn around all of its U.S. customers--why?? And more importantly, will it be illegal forever?

Short History of Online Poker

Free online poker was first played over the IRC chat network in the late 1990s. Planet Poker was the first online cardroom to offer real money games in early 2000. ParadisePoker.com grew to become the internet’s largest online cardroom, and was acquired by Sportingbet PLC in October of 2004 for $340 million. Today, "Online Poker" is the single most searched term on the Internet.

Unlawful Internet Gambling Enforcement Act (UIGEA)

On October 13, 2006, the Safe Port Act was signed into law. Attached to the Act was a provision that deemed any online bet or wager illegal if the bet was unlawful under any law in the State at which it was initiated or received. This outlawed financial transactions between online casinos and American banks and credit card companies. Accordingly, many poker rooms stopped taking deposits from U.S. customers and their stock prices crashed. Sportingbet sold all of its US-facing sportsbetting and casino businesses to a group of investors for $1, and an assumption of $13 million in debts.

HR 2046 -- Internet Gambling Regulation and Enforcement Act of 2007

This bill was introduced into Congress on April 26, 2007 by Rep. Barney Frank (D-MA). It argues that internet gambling is a $13 billion industry worldwide, and licensing and regulating gambling in the U.S. would provide an increase in tax revenues. The bill establishes the steps required to receive an internet gambling license, arguing that through this procedure the U.S. could reduce underage gambling, compulsive gambling, and money laundering.

Will this bill pass?

Poker Players Alliance (PPA), an interest group for poker players, has formed to help support this bill. The group has 500,000+ members, and recently announced that former Republican Senator Alfonse D'Amato is the new chairman of the board. Through the website group members have the ability to send a letter to their representative congressman to support HR 2046. Last year, PPA spent $560,000 in direct lobbying efforts, a 100 percent over what was spent in 2005.

There has also been an increase in international pressure, as UIGEA is viewed as anticompetitive. In March of 2007, the World Trade Organization “ruled that America's online gambling ban has unfairly closed U.S. markets to offshore casinos.” The U.S. tried to argue that the act was needed to protect ‘American morals.’ However, the WTO noted that online horse betting was granted an exemption from UIGEA. This ruling opens the door for online gaming countries such as Antigua and Barbuda to file lawsuits against the U.S.

Finally, Academia has also begun to investigate whether poker should be classified as gambling at all. The Wall Street Journal recently published an article on May 5 entitled “Harvard Ponders Just What It Takes To Excel At Poker.” Harvard University Law School Professor Charles Nesson invited a group of poker professionals, game theorists, law students and gambling lobbyists to, as Nesson put it, “legitimate poker.” One of the attendees, Jay Kadane, has pitched to sponsors a project to show statistically that poker is a game of skill. University of Chicago economist Steve Levitt has already begun a similar project entitled Pokernomics.

Legalizing poker could bring well needed tax revenues to U.S. states. Most likely, states that already allow poker (such as California) will be the first to allow poker. For poker to be legal, it will have to be permitted under the laws of the customer's place of residence and the operator's. It will be very interesting to see how tax revenues are shared between the operator's state and the customer's state.