Affiliates in the firing line

Worrying regulatory trends on rev share, Georgia’s wager exclusions, new crypto rules warning +More

Compliance+More

Apr 11, 2023

Good morning, on today’s agenda:

Affiliates under regulatory pressure in the US.
Georgia gets tough.
Mind the gap: Bank regulator warns on new crypto rules.
The corridor of uncertainty (gambling ads on social media).

Pressure pressin’ down on me, Pressin’ down on you.

Affiliates under pressure

Regulators in several key states coming down hard on revenue share and CPA deals.

Collateral damage: Affiliates are the latest target in the ongoing war to rein in sports-betting marketing in the US.

Being an affiliate in the legal US market has always been a mixed bag. An affiliate can set up shop in some states with little effort.
In other states, there are hefty fees and mountains of paperwork.
And in states with structural monopolies, operators have informed affiliates their services aren’t required.

Wall of worry: The latest regulatory trend is the most worrying. It’s also unlikely to subside, given the scrutiny of advertising. Regulators in several key states have begun dictating how the operator-affiliate business relationship is structured, with Massachusetts regulators recently voting to prohibit revenue-sharing agreements.

Far from being a terrible outcome, the decision by the MGC is a massive win for the affiliate industry because, initially, Massachusetts prohibited both rev share and CPA deals.
New York has borrowed (but not officially adopted) the original language used in Massachusetts that prohibited rev share and CPA deals. The expected outcome is a ban on rev share.
Other states that are unfriendly to gambling affiliates are Connecticut and Illinois, with the former prohibiting CPA deals and the latter rev share.

Revenue sharing vs. CPA: CPA agreements are pure acquisition deals. An affiliate receives a fixed amount whenever a predetermined trigger (account creation, a deposit, placing the first bet) is met. Affiliates have more skin in the game with rev share deals as they receive a percentage of the customer’s losses.

Affiliates prefer CPA deals in the early days of a market when there is pent-up demand.
Most early-stage customers will have low lifetime values (LTV), but big operators are willing to pay large up-front commissions many multiples higher than the customer’s initial deposit.
The reason? A small percentage will have high LTVs and offset the customers who bet $20 and are never seen again.
Smaller operators tend to prefer rev share deals, because CPAs can have extremely high up-front costs.

Shopper’s paradise: Customers are also likely to open multiple accounts early when operators give away the store to attract customers. That means several CPA commissions for affiliates, whereas the number of accounts a customer opens is inconsequential with a rev share agreement – which is based on the customer’s betting activity.

As the market matures, affiliates prefer a shift towards rev share. With the low-hanging fruit plucked, the customers sent by affiliates will decrease but have a higher LTV.

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US notebook

Missouri misery: the OSB bill ran into trouble in the Missouri Senate last week as the pro-VLT camp ambushed the discussion with a filibuster that meant the proposal didn’t come to a vote.

Meanwhile, the anti-lobby also managed to attach various unworkable amendments including one that would see operators paying a $4 fee every time a customer logged on and made a bet.

Further reading: Missouri bill crashes into Senate roadblock.

(The other) Georgia gets tough

Georgia’s government has enacted a decree to ban swathes of its population from gambling as it seeks closer ties with the European Union.

Off limits: Under-25s, public sector employees, vulnerable individuals and the self-excluded are among about 1.5m now forbidden by law from placing wagers.

All forms of gambling advertising, from TV to online and public billboards have been banned, while taxes for existing businesses have risen.
Another wave of measures is expected to enter force soon, including a crackdown on casinos on boats and cruise ships.
The industry pays around $98m in taxes annually on a turnover of around $5bn, but the government is committed to tougher regulation.
Sports teams and athletes have spoken out against the increasingly draconian approach, as it has triggered the exit of deep-pocketed players such as Flutter in the last 12 months.

Road to the EU: The view from the government is that its chances of access to the EU will be improved by showing a commitment to consumer protection and taking a hardline approach to gambling as echoed elsewhere in the bloc.

Reform began in 2021 with an update to the Law of Georgia on Organizing Lotteries, Games of Chance and Prize Games, which excluded under-25s from casinos and the like, and has now entered force.
Leaders also capitalized on growing anti-gambling sentiment among the Georgian population to push through the changes, said Tbilisi-based lawyer Mery Togonidze of LTA.
“According to the initiators of the project, young people, as a vulnerable group, often unknowingly become addicted to gambling, thus, need special protection from the state,” she told C+M.
Responsibility for age verification falls on the operators and a fine of around $4,000 is issued for the first violation, which doubles for further repeats.

Landlubbers: Last year, the country approved measures to restrict online casino usage and, for operators, licenses can now only be held by those with land-based venues inside Georgia.

Under the new rules, Adjara Group, Crystalbet and Iveria are the only permitted operators.
Exclusive online-only licenses are currently being drawn up, however, and would cost operators €1.6m ($1.75m).
A separate proposal to introduce licenses for specific verticals, allowing operators to expand, is being drafted, with the annual fees for additional online casino, slots and betting licenses being €35,580.

New crypto rules warning

Europe’s brand spanking new plans to regulate crypto don’t go far enough, a senior figure at the European Central Bank (ECB) warns.

I see trouble up ahead: The incoming Markets in Crypto-Assets (MiCA) bill and wider capital requirements for traditional lenders “will not be sufficient on their own” to guard against the threat of more crypto meltdowns, according to Elizabeth McCaul, a supervisory board member of the ECB.

Noting that “MiCA will set out important safeguards to prevent incidents similar to the FTX case from occurring”, McCaul said in a blog post that “certain areas still need further strengthening”.
Although intended to close off risks that emerge as new crypto offerings appear in the spaces outside the sphere of traditional financial services supervision, gaps in the proposals remain, she said.
While FTX “grossly violated even the most basic practices of good governance and risk management”, there was “no consolidated oversight of the group’s vertical integration and its global activities in different jurisdictions,” McCaul said.
“‘Mind the gap’ is not just a warning for train passengers,” she added. “It is also a call to action for policymakers and supervisors to tread carefully when we know gaps exist, and to work to close the gaps in oversight that exist in the crypto-asset market.”

No escaping this: Taking a shot at Binance, the crypto world’s tallest poppy, McCaul said the offshore-based exchange needs to be supervised and should not be allowed to function without disclosing its legal status or who would be responsible come the end.

Binance “would probably not even meet the threshold to be classified as significant in the EU” under the MiCA proposals to regulate firms based on customer numbers.
This is despite the clear contagion threat should it implode, she said.
Instead, the requirement should apply to the group rather than single entities, which would wrap Binance and Binance.US (“separate entities” © Binance 2023) together and ensure they are not exempt from oversight.
Significant crypto-asset service providers “should be subject to both stricter requirements and enhanced supervision”, however “neither of the two is catered for by MiCA”.

Mysterious ways: Large players like FTX and Binance conduct their operations by leveraging a group structure, said McCaul, which causes problems for supervisors as there is often little clarity on which arms are linked and to what extent.

Conflicts of interest must be identified within the group and also among affiliated entities, she said.
FTX allowed its officially unofficial trading firm partner Alameda Research to effectively borrow limitless funds from its pool of customer cash, which authorities say hastened the demise of both entities.

Save the date: MiCA’s political outlines were agreed last June, but the Brussels legislative fudge machine has paused the agreement on a legal text. Under normal Parliament procedures the final vote on MiCA will take place on April 19.

Gambling ads on social

England cricket coach Brendan McCullum is at the center of a row in his native New Zealand after appearing in an ad for an offshore gambling company.

Howzat: New Zealand campaign group Problem Gambling Foundation (PGF) said they have “serious concerns” about the “aggressive” online marketing campaign for 22Bet, which is based out of Cyprus.

The ad features the former Blackcap sitting in a Ferrari, telling viewers to sign up for 22Bet with the line “Bet to play, bet to win”.
It is illegal for overseas bookmakers to advertise in New Zealand, but the ads have slipped through cover (that’s cricket slang for our American readers) as YouTube is an international platform.
Kiwi social media has been awash with complaints of the “annoying” and “repetitive” ads, and caused the PGF to file a complaint with the government.

It’s just not cricket: Speaking to 1News, PGF spokesperson Andree Froude called it “the most aggressive marketing I’ve ever seen”.

“People go onto this betting platform and they’re not actually covered by New Zealand law; it’s based in Cyprus, so they’re not actually protected,” she said.
As the ad plays on YouTube, it makes enforcement difficult, Froude said.
“Our concern was the aggressive advertising that happens on YouTube; they’re managing to circumnavigate our law by using YouTube… and appear to be using ghost accounts too.”
New Zealand’s gambling laws should be updated to factor in the rise of social media, Froude said.
“We also need an update of the gambling act because it’s now 20 years old; that doesn’t even account for the changes we’ve seen in technology.”

Caught out: Facebook has been chided for allowing an offshore slots operator to circumvent a broadcasting ad ban in Australia, despite multiple federal warnings dished out to the Curacao-licensed platform. It has led to calls for a review of gambling ads on social media in the country.

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LatAm notebook

Brazil: A draft proposal has been co-signed by President Lula da Silva and finance minister Fernando Haddad and submitted to the Attorney General’s office, according to local news sources.

The proposals include a 15% GGR tax and BR30m ($5.9m) licensing fee.

European notebook

GREF: Various signatory regulators from across Europe have issued a joint statement committing to ensuring safer gambling via working together to crackdown on illegal operators.

“This joint action will enable us to better identify and minimize illegal gambling activities, while acknowledging that each regulator remains free to define what amounts to illegal gambling and to use the enforcement tools provided by its own national regulatory framework,” the statement said.

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