08 Apr 2019
How does blockchain work?
In a nutshell, blockchain technology allows us to replace the trust we place in an intermediary in asset transactions. With blockchain, peer-to-peer transactions can happen without passing through the trusted intermediary. In fact, they happen without any human intervention whatsoever. On the blockchain, transactions are verified by miners, which are powerful computers that solve complicated mathematical computations. To resolve such computations, miners consume a lot of energy, but as a compensation their owners receive some undistributed Bitcoin. Whoever invented Bitcoin, programmed it in a way that a total of 21 million Bitcoins can be distributed. At this stage, around 16.7 million Bitcoins were distributed. The rest will be distributed to miners as they solve the mathematical computations and verify the transactions happening on the blockchain.
All of this process is automated. The owners of these miners cannot interfere on whether a specific transaction should be verified or otherwise. All transactions are visible to everyone, but the log of the transactions is anonymous. They will be recorded on the blockchain forever and cannot be altered or deleted. No central entity controls it but rather it is democratically controlled by the community.
What I have described above, in simple terms, is how the Bitcoin blockchain functions. There are other blockchains out there. Each one has different characteristics, and some have different ways of how to verify the transaction. However, the principles remain the same.
How will blockchain disrupt the gambling industry?
As stated earlier, blockchain technology will disrupt quite a few industries and the gambling industry is potentially one of those that stands to gain significantly from the advantages of this technology. These include:
Malta, the blockchain island
As usual, Malta was one of the first movers in Europe in this space. On the 4th of July of 2018, the Maltese Parliament unanimously passed three bills that established the foundations of the Maltese Blockchain Regulatory Framework.
Through Virtual Financial Assets Act (the ‘VFA Act’) the Malta Financial Services Authority (the ‘MFSA’) is granted the powers to regulate Initial Coin Offerings (the ‘ICOs’), Exchanges and other cryptocurrency related services such as brokerage and investment advice. The VFA Act also grants the Minister powers to issue regulations and the MFSA powers to publish rules to regulate this space in a robust yet dynamic way.
The Malta Digital Innovation Authority Act (the ‘MDIA Act’) sets up the Malta Digital Innovation Authority (the ‘MDIA’). This newly set up authority will be regulating innovative technologies such as blockchain and artificial intelligence. It will also be co-ordinating communication and co-operation between national authorities in this space. The Innovative Technology Arrangements and Services Act (the ‘ITAS Act’) is the legislation that lays down the provisions for the accreditation of System Auditors by the MDIA as well as for the certification of technology arrangements. Such technology arrangements could be blockchain platforms as well as smart contracts.
The innovative feature of the Maltese framework lies mostly in the latter two pieces of legislation. The establishment of an authority on blockchain and AI as well as the introduction of standards legality, integrity, transparency, compliance and accountability is truly innovative in this space. Unlike other jurisdictions Malta did not just focus on cryptocurrencies, it also established a framework for the technology.
Along with this regulatory framework, the Malta Gaming Authority (the ‘MGA’) also published a set of guidelines that create the parameters for the establishment of a sandbox in relation to the use of blockchain and cryptocurrencies by Malta licensed gaming operators. The document sets the parameters for the:
As of 1 January, of this year, the MGA started accepting applications for use of cryptocurrencies by Licensees. As a rule, Licensees will be allowed to make use of cryptocurrencies that satisfy Maltese rules on Virtual Financial Assets (the ‘VFAs’), but subject in each case to the MGA’s evaluation of the VFA concerned and the Licensee’s preparedness. The MGA says that it will use a risk-based approach on a case-by-case basis, guided amongst others by the technology being used, security and resources available to the Licensee in question.
Until the first system auditors are accredited and the first certifications for innovative technology arrangements are issued by the MDIA, licensees will not be able to make use of DLT and smart contracts. Such DLTs and smart contracts will need to be certified before being deployed by the licensees.