Do Cryptocurrencies, NFTs Undermine Gambling's ESG Goals?

May 12, 2022
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Should a gambling industry keen to score points on environmental, social and governance (ESG) concerns steer clear of cryptocurrency and non-fungible tokens (NFTs), given the climate costs, fraud and wild gyrations in trading associated with both?

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Should a gambling industry keen to score points on environmental, social and governance (ESG) concerns steer clear of cryptocurrency and non-fungible tokens (NFTs), given the climate cost, fraud and wild gyrations in trading associated with both?

ESG is a tool to evaluate significant corporate risks and identify opportunities.

It is becoming both an investor focus and a regulatory requirement, and most listed gambling companies have already filed ESG reports.

Typical is Entain promising to be “carbon-neutral” by 2035 and to deliver 100 percent of revenue from regulated markets by next year, while DraftKings is promising to plant 1m trees.

But cryptocurrencies are raising ESG warning flags due to their energy load and NFTs seem to have outsized environmental costs too.

Bitcoin alone uses only slightly less electricity than Poland, the 25th biggest world user of energy, and more than Norway or Sweden, according to the Cambridge (University) Bitcoin Electricity Consumption Index.

The gambling industry “needs to protect against reputational damage, and this would seem to be a relatively high-risk area”, said Steven Myers, a former Genting executive who heads Praxis Consulting, an ESG advisory firm.

Gambling stocks are considered “sin” stocks by many and cryptocurrency in general is distrusted by the public at large, he said.

“Crypto probably does not belong in an ESG compatible portfolio,” said Andrew Robinson and Jacqueline Curran of Kennedys law firm. “Until Bitcoin cleans up its act, or less energy intensive coin use becomes more mainstream, a company or investor engaging in crypto-related activities risks damaging their ESG credibility and reputation.”

In some ways, cryptocurrency and NFTs have hit the mainstream, with investors clamouring for ways to put crypto into their portfolios, or even retirement accounts, while the NBA, NFL and Major League Baseball all have officially endorsed NFT projects

But both cryptocurrency and NFTs are rife with fraud: Ponzi schemes; investor rug pulls; and so-called wash trading to inflate values.

Then there is outright theft: either by bots or fiendishly complicated incidents with names such as “re-entrancy attacks”.

Just in the past week, Sportemon Go NFT company ceased trading, despite Premier League player endorsements and sponsorships of Scottish Premiership football clubs, and the US Justice Department indicted the chief executive of Mining Capital Coin on charges of organising a $62m cryptocurrency mining and investment fraud scheme.

This week, the industry seems to be in turmoil, as a cryptocurrency that was supposed to be pegged to the US dollar, Terra USD, crashed to as low as 30 cents on Wednesday (May 11).

NFTs are “the wild, wild west right now”, said FBI agent Ricky Alwine, speaking at a recent Nevada Bankers Association webinar. The FBI is “seeing a flood of NFT theft come in”, he said.

In January, OpenSea NFT marketplace said 80 percent of the NFTs created using its free minting tools were fraud, spam or trademark violations.

For gambling, an industry trying to build trust, “trading on a platform completely out of their control is a risk too far”, said Corey Padveen of t2 Marketing International data analysis firm.

But Katie Lever, chief legal officer for Lottery.com, said the cryptocurrency industry is getting unfairly painted with broad brush strokes, similar to the early days of the online gambling industry.

“There are good players and there are bad players,” she said, speaking at the ICE London 2022 conference. What is important, she said, is “to ensure they are going to be regulated”.

Listed gambling companies are split on use of NFTs, although most are avoiding cryptocurrency so far.

The big exception is DraftKings, which not only says it is planning to “enable crypto payments”, but it also makes and sells NFTs, as well as runs a marketplace for fans.

NFT bidders can choose from the “Tiger Woods Iconic Fist Pumps Collection”, “Naomi Osaka Manga Collection” or the “Saw Chapter 1 Collection”, based on the horror film series.

One buyer who paid $9,100 three weeks ago for a “Tony Hawk Signed Magic Dance Skateboard” almost immediately put it up for sale for $420,000.69, a price at which it remained for sale on Wednesday.

A month ago, another buyer paid $5,000 for “Gold TourneyToons: Surprise Comeback”, and has so far been unable to find a purchaser at a $5m selling price.

DraftKings offers its own NFTs not as investments but as “digital collectibles or memorabilia” that make fans “feel like they're part of the sports experience and connected to their favourite athletes”, spokesman Parker Winslow said.

It offers a marketplace so customers can buy and sell NFTs “with the confidence they are dealing with a reputable site and reputable content providers”, he said.

Entain, parent of Ladbrokes, bwin and Coral, is planning some NFT projects with Theta Labs, as part of its £100m Ennovate projects.

But it has “not progressed” any cryptocurrency plans, as it is keeping the area “under review”, said Jay Dossetter, Entain’s head of ESG.

“It is an area fraught with concerns,” he said.

Stockholm-listed Kindred Group, with its Unibet brand, said it currently has no crypto or NFT projects, as did Flutter Entertainment.

Regulators in Pennsylvania and Nevada have said their licensees currently have no NFT projects.

Last May, Flutter’s FanDuel unit held an NBA contest with NFTs as a prize, but that was probably a “one-off from a sponsorship”, a spokesman said.

“We were just testing the waters,” said spokesman Kevin Hennessy. “We haven’t done much since.”

Both the Entain and the DraftKings NFT projects are designed to use Polygon, a blockchain project that uses lower-impact “proof of stake” technology.

That is the same process planned by Meta for a series of NFT collectibles it intends for Instagram and Facebook.

Still, in February, the World Wildlife Federation cancelled plans to offer “environmentally friendly” NFTs on Polygon, after critics pointed out it depends indirectly on the energy-inefficient Ethereum chain.

Cryptocurrency gambling itself, as opposed to simply accepting crypto for payments, is mostly a black-market phenomenon.

There may be hundreds of cryptocurrency gambling websites worldwide, but the overwhelming majority operate outside the law, or with licences not recognised in Europe or the US.

There may only be two licensed cryptocurrency gambling websites in all of the European Union, both licensed in Malta as part of what it calls a “sandbox” arrangement: ComeOn’s Co-Gaming and Virtue Gaming poker and bingo site.

All the unlicensed, illegal activity means the legitimate gambling industry may not rush to adopt cryptocurrency, according to Padveen of t2 Marketing.

“It’s going to be a slow burn,” he said. “Bad actors are slowing that process.”

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