Fifty shades of grey markets, and all the other colours of the gambling rainbow

icon-author Petr Stehlik 📅 Updated 17 December, 2021 🕐 6min. 👁 8560
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Interested in opening an online casino but not sure where to start? The answer is in the question — by choosing where. Keep reading to learn about the types of gambling markets.

The first decision new gambling operators must make is choosing where to operate. Far from being a question of geography, the answer should take into consideration both one’s budget and the industry’s legal status in potential target markets. In this article, we’ll give you a brief introduction to the various types of gambling markets and highlight some of the pros and cons of each by providing examples.

Types of gambling markets

Gambling markets are primarily categorised according to the laws and regulations to which they are subjected — if any.

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Regulated markets

Jurisdictions that explicitly allow and regulate gambling, issuing local licenses, are known simply as regulated markets. This model was pioneered by European states and is rapidly spreading to key markets in other regions. Regulated markets tend to be the richest and most coveted by operators; however, local licenses often come with a steep price tag attached, and strict marketing regulations can make it difficult for newcomers to challenge established operators.

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Black markets

At the opposite end of the spectrum, we find black markets. These are jurisdictions that explicitly outlaw gambling — be it for political, cultural, or religious reasons. Countries may ban offline, online, or both forms of gambling. Most Muslim-majority countries across Asia and North Africa fall into this category, but they’re not alone. In Europe, for example, Albania implemented a comprehensive gambling ban in 2019 due to alleged connections between local operators and the criminal underworld.

In some cases, operators may be allowed to offer their services exclusively to foreigners. This is the case for countries heavily relying on tourism as a source of income, where casinos are generally allowed to operate within resorts. Recently, certain jurisdictions — particularly island nations — have begun issuing online licenses which specifically prevent holders from targeting local players, in a bid to syphon revenues from abroad.

Grey markets

Finally, there are grey — unregulated — markets. These are jurisdictions that don’t outright ban land-based and/or online gambling, but either lack comprehensive regulations and a licensing process or suffer from crippling loopholes in the existing laws.

While most rich markets have transitioned towards the local licensing model, smaller ones unable to support a robust regulatory or supervisory agency often wind up in grey market territory.

Grey markets are a solid starter option for industry newcomers, as they allow operators to offer their services without having to obtain local licenses or being subject to strict regulations. The main downside is a built-in instability, as they may be regulated at any time and lack a clear taxation regime.

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It’s important to keep in mind that a single jurisdiction may fall into more than one of these categories at the same time. This is due to the distinctions between offline and online gambling, and between casino gaming and sports betting. Many countries only regulate land-based gambling, leaving online “grey”. In other cases, casino gaming may be outright banned, while sports betting is legal and regulated.

The volatility of grey markets

As we mentioned, grey markets are a good springboard for recently new operators. Indeed, they can be a very interesting proposition for operators of any size, but they come with downsides that led some established brands to rethink their strategy.

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For example, leading sportsbook William Hill pulled out of 55 grey markets in 2014, citing “regulatory issues” as the main reason. The company immediately ceased all advertisement targeting these markets and stopped local players from depositing and wagering.

Grey markets’ volatility is, simply put, not worth the hassle for a company that gets most of its income from regulated markets to begin with.

SportPesa’s experience in Kenya is perhaps grey markets’ worst-case scenario, but one worth being aware of.

A bit of history: founded in Kenya in 2014, SportPesa is an operator that experienced a meteoric rise in its early years thanks to a gambling craze in its home market. It quickly grew to operate in five other countries — the United Kingdom, South Africa, Italy, Tanzania, and the Isle of Man (which hosts its global operations). These jurisdictions — unlike Kenya — issue local online licenses and have clear regulations and tax liabilities. In contrast, Kenya’s Betting Control and Licensing Board (BCLB) only issues licenses for land-based operators, while online gambling remains unregulated. And yet, the BCLB is known to require local operators to hold a license to offer their services online.

In mid-2019, the Kenyan government introduced a steep 20% tax on wagers, while the BCLB went on to revoke 27 licenses (including SportPesa’s). With profitability plummeting, SportPesa (and many others) suspended operations in the country later that year.

The tax hike was highly controversial. In 2020, it was first dropped, then reintroduced, in a matter of days; finally, it was reduced to 7.5% in July 2021.

These fluctuations can be ascribed to the Kenyan government’s mixed concerns. On one side there was the attempt to limit unregulated gambling’s ill-effects on society by kneecapping companies; on the other, the need to rake in enough gambling taxes to sustain the national budget.

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In 2020, SportPesa attempted to re-enter the Kenyan market by attaching its trade name to a second gaming firm. However, authorities took issue with it due to the brand’s involvement in a pending tax-related court case, and the BCLB ended up suspending the second gaming firm’s license just one day after SportPesa’s return. At the time of writing, SportPesa’s legal battles are still ongoing.

Again, this is the most extreme example of how volatile a grey market can be, and an offshore operator probably wouldn’t have been hit in the same way. Still, it’s important to keep in mind that the lack of clarity in regulations can at times create for operators more problems than opportunities.

Possibilities in newly regulated markets

In October 2021, the Netherlands opened its regulated online gambling market, ending a long-lasting ban. Revenues for the Dutch market are forecasted to slightly surpass the €500 million mark in its first year, rising to €2.27 billion by 2025. If the estimates turn out to be accurate, the Netherlands will become one of Europe’s largest markets.

The regulation of previously closed markets is a great opportunity for operators to quickly establish themselves in an untapped jurisdiction, provided they can acquire a license. And the Kansspelautoriteit (a.k.a. Netherlands Gambling Authority, or NGA) banned operators known to have targeted Dutch players in the past from applying for a license. These operators were blacklisted, mandated to stop targeting Dutch players, and inflicted a 33-months cooling-off period before regaining eligibility for a license.

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This example highlights one of grey markets’ main advantages: they may be volatile, but operators targeting them don’t suffer from repercussions in case of regulation. Rogue operators targeting black markets, on the other hand, risk both immediate legal consequences and to be denied future opportunities due to blacklisting.

Aside from the obvious issue of legality, this is why young operators lacking the resources to obtain a license in a rich, regulated jurisdiction would do well to focus on opportunities in grey markets.

How can Slotegrator help?

For new iGaming operators, the first steps are arguably the most difficult. Choosing the right market to enter is crucial, which is why we provide licensing and jurisdictional advisory services to help you in the process.


 

Petr Stehlik
Petr Stehlik
Lawyer
In 2016, I graduated from the Law Faculty of Charles University in Prague. The main area of law on which I focused both during and after my university studies is software law (and intellectual property in general). After graduating from the university, I briefly worked at a medium-sized law firm in Prague, but in 2018 I joined Slotegrator, where I have been working ever since and where I handle the company’s day-to-day legal matters.
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