The Rise of eSports and Betting: Opportunity and Pitfalls

By Brett Smiley | Published: October 5, 2017 at 10:39 am

As many sports betting enthusiasts know, you can bet on anything and for anything. In the world of eSports (electronic sports), that “for” includes “skin betting,” a form of wagering for virtual currency that just recently became legal and regulated in the Isle of Man, which is located between England and Ireland.

“To date, eSports betting and the gambling of virtual goods has largely been a grey market, with a lot of unregulated operators failing to protect their customer” said Scott Burton, chief executive of ESP.bet, per Casino.org. “With this license … I feel like we have taken the first step towards building a regulated marketplace that is safe for consumers, businesses, and investors.”

Traditional betting on the outcome of eSports contests also exists at some sportsbooks, including on the popular offshore book BetOnline.ag. eSports entities have taken substantial investment in the past few years from Amazon (which owns live streaming platform Twitch), Mark Cuban, and Shaquille O’Neal, among other professional athletes. Meanwhile, Las Vegas is angling to become a hub for eSports and its captive millennial audience, but numerous questions remain about monetization and regulation.

eSports betting, “skins,” match and in-game wagering will be components of eSports’ entry into the mainstream

In its recently-published October issue, the Gaming Law Review explored various aspects of the eSports and eSports betting puzzle, including “skin betting,” the potential eSports “gold mine,” game integrity, regulation and more. The articles are available online for free until November 2.

The remainder of this article is not intended a comprehensive eSports and betting overview, rather, as an entree to the burgeoning field. We’ve “asked” and answered some pressing questions and we point you to the relevant Gaming Law Review or other articles for further exploration.

What are the most popular eSports game for betting and what the heck is “skin betting”?

Currently the vast majority of betting occurs on Counter-Strike: Global Offensive (CS:GO), League of Legends and Defense of the Ancients 2. Typically teams of five square off and navigate maps in the multiplayer shooting/battle games. From an article titled “Skin Gambling: Have We Found the Millennial Goldmine or Imminent Trouble,” by Desirée Martinelli of the University of Mississippi School of Law (emphasis added):

“Virtual items have become the casino chips of the esports world, and skins have become one of the largest methods employed for gambling. So, what are skins exactly? They are virtual items, designed by video game companies, that change the appearance of in-game avatars, weapons, and equipment. In the real world, they would be akin to having a gun or knife that has a colorful design or camouflage finish. Skins are merely ornamental and have no effect on actual game play, but have become a token of status and are immensely valuable.

According to Martinelli, over 80% of all skins being wagered are from the game CS:GO. It’s this wagering that ESP.bet now offers with a license in Isle of Man.

Can “skins,” which are virtual currency, get converted into dollars or other traditional currencies?

CS:GO’s publisher, Valve, allows players to sell and buy skins in the Steam Community Market. Third parties such as OPSkins have also stepped into the market, offering ostensibly safer transactions by acting as an intermediary between buyers and sellers. OPSkins takes a commission for its part. Players can acquire skins as rewards through gameplay; by purchasing them through in-game stores; on a third-party platform such as OPSkins; and of course by winning them in a wagers through sites that can access players’ inventories. Then by extension, through acquisitions through betting and subsequent sales through sites like OPSkins, players can cash out for real money. So in effect, skins can and do become traditional currency.

So what about eSports betting in the United States?

Skins betting isn’t quite legal in the U.S. There are a number of laws including the Professional and Amateur Sports Act (PASPA) and the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), which theoretically could impact or curb skins betting. But not right now. Martinelli:

“This could change soon as eSports grow and the players gain recognition. New developments, such as colleges offering scholarships to esports gamers, Nevada legislation allowing betting on not just sporting events but also “other events,” and the U.S. Department of Homeland Security issuing “professional athlete” visas to esports players, may support an argument that PASPA does apply. Despite this likely possibility, PASPA currently “only comes into play if it is sports betting that is government operated, licensed, or authorized by law, as it is in Nevada.” Esports has not been formerly recognized by the federal government as a sport; thus, it is out of the reach of this regulation for now. Consequentially, skins will also remain out of reach until esports is defined in a different manner.”

Okay, so how about traditional “match” betting on these games?

Naturally, Nevada, the U.S. sports betting mecca and pioneer, is beginning to figure out eSports betting. The Gaming Law Review conducted a roundtable on eSports, gambling and regulation. Explains A.G. Burnett, the chairman of the Nevada Gaming Control Board in Reno, Nevada:

“In Nevada, what we have done up to this date is allow wagering in a sports betting type of fashion on certain esports events. In Nevada, we have a regulation called Regulation 22, and it essentially allows for sports wagers to occur in this state. It also allows for gaming licensees who have a sports betting license to be allowed to take wagers on what we call “other events.” And the “other event” has to meet certain criteria that satisfies us as regulators that it is going to be judged appropriately, it will be governed fairly, the results will be adequately determined and made available.”

“And the way that works is, an interested sportsbook licensee can petition the Gaming Control Board. We review the petition. They detail for us what the “other event” entails, who governs it, if there is any governing body, who will participate, who is organizing it. And if it meets our qualifications, we will allow wagers to occur on that. We post a notice on our website publicly so that not just the petitioning licensee can take wagers on that, but all licensees can take wagers on it so that it is fair. We have done that a couple of times. We, I think, as a state, are in a position where we are obviously very experienced with sports betting and wagering on all sporting events, and this was something that we looked at late last year with the Nevada Gaming Policy Committee. And after the sanctioning of the Gaming Policy Committee, the board began to allow wagers on those events.”

What are other challenges and how about a regulatory framework for eSports?

First and foremost there’s the issue monetization, which will come, but it’s not there yet. The primary revenue stream for eSports leagues is sponsorship and advertising. Media rights represents a relatively small fraction of the pie to date.

“Despite how big [eSports] seems, it’s also tiny in terms of revenue – very small,” Ari Evans, founder and CEO of the eSports broadcasting firm Maestro, told gamesindustry.biz. “A lot of companies and startups in this space are kinda having trouble figuring out how to monetize it. Most eSports leagues run at a loss.”

More from Hi-Rez Studio’s co-founder and COO Todd Harris:

“The skin gambling, I think, just illustrates how it’s very difficult to apply standards and regulation in the [eSports] industry. I think everyone involved with the industry feels like, for it to mature, there needs to be a bit more regulation, or at least consistency or expectation setting. But it’s not clear right now where that answer is going to come from, because the entities involved all have different motivations.”

And the root entities, the video game publishers, will want a say in what regulation occurs. But they don’t necessarily want betting. “The real issue we’re having right now is most publishers don’t want their game to be considered a gambling game,” said Robby Sirfus, eSports community director and event organizer with FiveGen,” per the Las Vegas Review-Journal.

What’s the potential scale of eSports and some of the regulatory challenges?

One of the articles published in the Gaming Law Review that addresses this is titled “The World’s Fastest-Growing Sports: Maximizing the Economic Success of Sports Whilst Balancing Regulatory Concerns and Ensuring Protection of Those Involved.” The authors, Ross Sylvester and Patrick Rennie, explain (emphasis added):

“In terms of viewing numbers, Newzoo [a market intelligence provider] has predicted that global audience figures in 2017 will reach 385 million, with Newzoo also showing that as many 21–35 year olds in the United States watch esports as baseball. Consequently, revenue derived from esports is expected to exceed $1.48 billion by 2020 and the biggest esports tournaments, namely the League of Legends and DotA 2 championships, will attract multi-million-dollar prize funds.”

That’s big money and thus the need for regulation and regulatory bodies. The potential problems for the games and betting on those contests resemble those faced by established leagues like Major League Baseball. Sylvester and Rennie write (emphasis added):

“One of the most significant challenges facing esports is the issue of regulation and integrity. As discussed, esports is a wide-ranging term and the concept of a single regime regulating all competitions and leagues across all video games poses a difficult challenge. Nevertheless, there is an increasing need for integrity issues to be dealt with at a holistic level. Some issues in live sports are also present in esports, such as match fixing and the use of drugs, but the online nature of esports raises its own integrity concerns when it comes to players cheating, using proxies, players losing on purpose, and the possibility of hardware and software advantage.

“These integrity issues need to be addressed to maintain the growing popularity of eSports and to ensure that the public has faith in the legitimacy of the product. Bookmakers currently offer numerous markets on esports events but, for this to be sustainable, people must be able to believe they are staking their money on a meritocratic event free from any machinations. If this is not the case, then punters will decrease and the appetite of bookmakers to offer markets on esports will wane.”

Given the magnitude of the opportunity for the publishers, streaming platforms and bookmakers, it seems likely that wider regulation will ensue to protect all parties.

“Las Vegas is going to be something special for eSports,” Carson Knuth, co-founder of LEET, a startup that has been operating esports tournaments at the Downtown Grand since January 2016, told the Review-Journal. “We’re all just finding where we fit into that ecosystem.”

For much more reading on the issues, check to the Gaming Law Review’s extensive coverage.