Skin betting from a Czech gambling law perspective

Significant faith is being placed by the Ministry of Finance into the proposed regulation of online gambling, as it is intended to become a stable and strong tax revenue stream for the Czech Republic.

What is the current system?

Whilst foreign gambling operators have not as yet been entitled to obtain a licence to gamble in the Czech Republic, many domestic entities, which are entitled to obtain a licence, do not do so but still continue to operate in the Czech gambling market.

This prosperous "grey market" is tolerated, at least for now, by the Czech Ministry of Finance, and by all accounts it is said to function well. To some extent, this is due to a lack of effective counter measures that could be applied to such "grey" operators, in addition to the fact that most of the grey operators actually possess some sort of governmental licence issued by a different EU or EEA member state. The currently in force Lotteries Act allows the Ministry of Finance to impose fines upon individuals gambling at these unlicensed gambling venues. However, such enforcement measure has, to our knowledge, been used only once.

Such a tolerant policy is very likely going to change with the new Gambling Act. It introduces new enforcement measures which will allow the Ministry of Finance to force the grey market participants to acquire a licence and thus pay gambling tax. More on this topic can be found in our previous article.

What is skin betting?

By way of a brief introduction – skin betting is an activity which most often refers to the act of placing a bet on the outcome of an online game (i.e. Counter Strike Global Offensive), where the bets themselves usually take the form of cosmetic or design elements used by players in the game. These items improve the look of in-game equipment, allowing the players to customise their game environment. Who wouldn't fancy a golden AK-47? These in-game "fashion statements" can be purchased, traded, transferred or wagered via certain websites. "Skins" are thus used by players almost in the same way as virtual currency; the only difference is that the skins acceptance network is not as wide. That being said, the number of websites facilitating skin betting is growing, such that the value of the skin betting market is estimated to be in the billions of US dollars.[1]

Does the new Gambling Act permit skin betting?

The new Gambling Act has been drafted to contain a general gambling definition, which reads as follows:

"Gambling is a game of chance, betting or a lottery upon which the participant wagers a bet, while no return on such bet is guaranteed and the winning or loss of which is entirely or partly subject to chance or unknown circumstance."[2]

In principle, it appears that skin betting would be caught by such broad criteria. Furthermore, in order for a gambling activity to be licensable, the Gambling Act requires the gambling activity to fit one of the predefined categories (e.g. technical game, lottery, or odds betting). Skin betting is likely to meet the requirements of odds betting which is defined as:

"a game in which a win is subject to guessing a betting event."[3]

But to what extent does the use of virtual goods/currency as a subject of betting cause legal issues?

On the one hand, the legislator's intention behind the Gambling Act was to design a broad definition of a "bet" and refrain from limiting the term only to money. The definition of bet reads as follows:

"Bet means a non-refundable consideration determined voluntarily by the bettor that will be compared to the outcome of gambling, including:

1. a difference of the offered price of the good or service and their normal price; the normal price is deemed to be a value determined according to the law regulating measurement [valuation] of assets; and
2. an amount in excess of the charge for a telephone call or for sending a text or multimedia message, under a contract between the gambling participant and the electronic communication provider."[4]

It is likely that skins would pass for "consideration", given how they are used by players.

On the other hand, the Gambling Act prohibits gambling operators from accepting non‑monetary deposits (i.e. bets).[5] The intention behind this restriction is to protect gamblers by preventing them from making hasty decisions with their property (i.e. real‑estate, cars, etc.).[6]

To determine what the phrase "non‑monetary deposit" means, one has to take a look at the term "money", which is unfortunately not explicitly defined by Czech legislation. Act No. 6/1993 Coll., on Czech National Bank, only provides that a "monetary unit" in the Czech Republic is to be taken as the Czech Crown.

It could be argued that skins meet the definition of "money", since they are exchangeable for goods and services. However, this argument would have to be acknowledged by the Ministry of Finance because it is the entity that grants gambling licences. To date, the Ministry of Finance has not published any official statement on virtual currencies, and their status thus remains undetermined.

The Czech National Bank, being one of the most influential authorities in the Czech Republic, has issued a statement on the exchange of virtual currencies - it does not consider them to amount to non‑cash payment means or electronic money under Act No. 284/2004 Coll., on Payment Systems[7] which would be considered as a monetary consideration. It seems, therefore, very unlikely that the Ministry of Finance would at this point consider skins as monetary considerations and issue a basic licence.

What does this mean in practice?

It therefore follows that if skin betting falls under the legal definition of gambling but cannot be a licensable activity then it must not be provided to Czech residents. Operators of such activities would not only risk being placed on the list of unlicensed online game providers, but they could also face severe fines, IP-blocking and payment blocking, and their revenues could also be subject to a high rate of tax. Although this tax rate would typically be 23%, it is envisaged that the continuously fluctuating value of skins would present difficulties in calculating and maintaining a fixed percentage.

It will be interesting to see how the Ministry of Finance will handle the tax calculation and whether they would eventually consider licensing virtual currency gambling. Given the Ministry's motive to increase tax revenue and the number and acceptance of virtual currencies, the licensing of virtual currency gambling and the subsequent development and regulation of skin betting in the Czech Republic may be inevitable in the long term.