The Reid Bill

Obviously I’ve been closely following discussions of the “Reid Bill” that would pave the way for licensing of US-based online poker operations following a “blackout period” during which it would be unlawful to offer such games to American players. I have no inside knowledge of the issue myself, but I believe I am well-qualified to sort through the conflicting opinions on this legislation and reach the following tentative conclusions:

Prospects Are Bleak

The online poker language is not in the tax cuts bill that is going to the floor for a vote. Reid is talking about trying to attach it to something else, but this seriously hurts its prospects for passage. Many on 2+2 are relieved by that, but I am not so sure it is good news. The picture of an unregulated future painted by both the Poker Players Alliance (PPA) and others in the know is rather bleak.

The Status Quo is Bad and Getting Worse

This is the major point that the bill’s detractors largely fail to acknowledge. Things are not just fine as they are now. It may seem that way, especially if you are a small stakes player who hasn’t dealt with moving large sums of money, but the sites that still serve US players face major hurdles in doing so.

The Department of Justice, in shutting down the payment processors that move money back and forth between online poker sites and American players, has greatly increased the cost of doing business for the sites. Not only must they continue to find new and ever more shady (and presumably expensive, given the risks they are running) processors, but they must also eat the costs every time the DOJ seizes funds from a processor. Every time you hear about a processor getting shut down and tens of thousands of dollars seized, that is players’ money that the sites, to date, have always reimbursed in the interest of keeping business flowing. There may come a time when a site decides it is no longer worth it to keep reimbursing these funds and will simply send an e-mail to affected players: “Your withdrawal of $XXX has been seized by the US Department of Justice. If you wish to dispute this seizure, you can file Form DJ-889-7b in triplicate with the DOJ within 30 days of this notice. Thanks for playing at Cereus!”

If you aren’t aware of these payment processor complications, it’s because you have always dealt in small (<$2500) transactions and/or because the sites do their best to insulate you from these difficulties. No matter how bad things get for them and how much money they are putting up on your behalf, their incentive is still to convey the sense that all is well and you can continue to play worry-free. They are shouldering the risk themselves, and while they are certainly being well-compensated for that, there will eventually come a point at which the cost of doing business is simply too high.

So far, it’s only been money at risk, and the sites are making enough of that. Should the DOJ start indicting the individuals believed to own these sites, those individuals may lose their will to fight in a hurry. This is a particular risk for Full Tilt Poker, with its purported owners living high-profile lives in the United States.

My point is that there probably will not be much warning beyond what we’ve already seen. The sites have no incentive to hint at the complications they currently face, as this would only cost them business. Think Netteller. Everything will be fine until one day it isn’t.

Professional Poker Players Have No Bargaining Power

The PPA has done an admirable job of marshalling what influence it has. Some politicians are more honest about this than others, but the unpleasant reality is that nobody gives a shit whether you can make a living playing online poker. We are not in a position to dictate the terms under which online poker is licensed and regulated in the United States.

Those decisions will be made by interests and lobbies far more powerful than we. Whatever happens with online poker in the long-term will be the result of negotiation between social conservatives who generally oppose gaming and major US-based gaming organizations such as Harrah’s. Foreign sites like Poker Stars and Full Tilt Poker do not get a seat at the table, and those of us whose who earn a living at the virtual tables don’t either.

The influence of gaming companies, especially in Reid’s state of Nevada, is immense. They literally are the economy of that state, employing a tremendous proportion of the population and generating much of the state’s revenue. We are not in a position to dictate anything to them. The best we can hope to do is capitalize on the ways in which our interests align.

This Bill is the Best We Are Going to Get

Democrats lost a lot of ground in the mid-term elections, including control of the Senate House Finance Committee and the House of Representatives. This bill is far from ideal for the professional player, but there is no reason to think that we are in a position to hold out for something better. Even individual Republicans who themselves have no ideological objection to gaming still have trouble supporting it for fear of alienating socially conservative constituents. If this bill fails, then we will have to hope that Democrats rally in 2012 and bother to revist this issue, and even if all of that happens, they are still going to be beholden to the US-based gaming industry, which is still going to insist on preferential treatment.

Even to talk about our “holding out” for something better is naive, because the truth is that our consent isn’t needed or wanted. We aren’t in a position to block this legislation even if we wanted to. Whether we professionals like it or not is immaterial.

As an academic matter, should we like it? The “blackout period” is unfortunate but not unworkable. I sympathize with the many pros are not able to absorb 15 months’ of vastly diminished income, but in the long run it’s a price worth paying for licensed online poker that can be advertised on US television, funded by US banks, etc.

Is the “blackout period” a deal-breaker? Perhaps not. It seems that Senator Kyl, not the gaming companies, is the source of this provision (though he still opposes even this version of the bill). He is a powerful adversary and not an easy one to move, but there are powerful and monied interests on the other side of this issue as well. The best we can hope for is a last-minute compromise on this point, but even if it can’t be achieved, the impression I get is that a bill containing blackout language will be better than no bill at all.

Other provisions, such as the size of the tax on revenues, are generally considered to be more than reasonable. Considering how hard governments rake their lotteries, we may even be getting off easy on this point. Given the opportunity, would we want to trade the blackout period for far higher taxation? I wouldn’t think so, which is all the more reason to prefer this bill.

The prohibition on non-US players, once a US-based market gets up and running, is the part I find most puzzling. I suppose keeping everything domestic makes matters much simpler, but it also forfeits billions of dollars in potential revenue. From the perspective of the US government, revenue from non-citizens is far more valuable than revenue from citizens, and if anything about the bill changes in the next few years, I would expect it to be this.

What Can We Do About It?

At the legislative level, very little. Pardon my cynicism, but the major decisions will be made by interests far stronger than us. We may have some room at the margins to haggle with details (according to the PPA, they were able to do away with pernalites for players on illegal sites that appeared in an early draft of the bill), but we simply don’t have the influence to fight the US gaming industry on their core interests, which unfortunately do include getting a leg-up on their foreign competition.

There is speculation that, should this legislation pass, it may be possible to play on second-tier sites such as Bodog and Cereus during the blackout period. I would advise you to be very careful if you do so. The long-term prospects of these sites will not be good in a world where they must compete, without access to the US market, against not just Poker Stars and Full Tilt but also gaming giants like Harrah’s.

Their incentive will likely be to make what short-term profits they can before being driven out of business by some combination of the DOJ and their competition. When they decide to close up shop, it will likely be without warning, and they may well take your money down with them. This wouldn’t even have to entail outright theft, though I wouldn’t put that past them, either. An unexpected occurrence such as a major crackdown on their payment processors could render them suddenly illiquid. If you believe that Cereus keeps player deposits in a separate account that is not used for operating expenses, I have some real estate to sell you in Florida….

If you are a professional poker player in the United States, this legislation should be a wake-up call for you whether it passes or not. You need substantial savings. You need a back-up plan. You need to know where your money is and how safe it is there. Poker Stars and Full Tilt Poker are huge companies with solid long-term prospects that are not entirely dependent on the US market. Even if they stop serving US players, and even in the absence of legislation this is a realistic possiblity, especially for FTP, they are not likely to abscond with your money. The same cannot be said for smaller sites, especially those with a history of putting short-term profits above honest dealings with their customers.

There are no guarantees. As poker players, we ought to be accustomed to managing risk and making decisions with imperfect information. For my money, this legislation is the best bet we have. The next year or two may well be lean years for us, but if the eventual licensing and regulation of online poker in the US is handled well (this is also not a guarantee), then such a bill will be very good for us in the long-term.

In the absence of legislation, things will continue as usual for a few months, maybe even few years, but they will get very bad in the not-too-distant future. I fear that should that happen, we will all look back wistfully at this window of opportunity and regret that the “Reid Bill” didn’t pass. By then, we may be forced to settle for much worse legislation or even a worst-case scenario where the DOJ aggressively shuts down online poker sites serving US customers, seizes funds, and actively prosecutes players themselves.

Edit: Changed “Senate” to “House” with regard to which Finance Committee the Dems lose in January.