Australian research paper says “channelization” should be viewed as clear measure of regulatory success in the gaming industry

A new research paper from specialist Australian advisory firm Vanguard Overwatch argues that the success of any gambling regulatory system should be largely judged on how much gambling either remains within or moves into the licensed market.

This concept of channelization, it adds, should become the central policy question for governments rather than whether to regulate an industry at all.

The paper, written by Vanguard Overwatch Principal and founder of the annual Regulating the Game conference in Sydney, Paul Newson, takes specific aim at some of the policy decisions impacting the regulated gambling markets in Australia and New Zealand.

It argues that the goal of any government agency or regulatory body cannot be to eliminate demand, but to “minimize harm by regulating the legal market effectively and channelling consumers away from illegal operators.”

“Prohibition does not work,” the paper states. “The historical evidence across tobacco, alcohol and gambling consistently demonstrates that where legal supply is unavailable, over-frictional or uncompetitive, consumers do not stop consuming. They migrate to illegal supply.

“An effective legal market protects consumers, disrupts criminal enterprise and preserves the integrity of the regulatory perimeter. Taxation revenue is a secondary but material benefit.

“This paper argues that the central policy question is not whether to regulate, but whether a regulatory regime is calibrated well enough to keep the legal market credible, attractive and enforceable – the concept this paper calls channelization.”

Titled, The Price of Losing Control: Channelisation and Regulatory Failure in Online Gambling, the paper points to two contrasting approaches to the online gambling sector. While Australia still prohibits online casino and online poker, and has stubbornly maintained a ban on online in-play sports betting, New Zealand is in the process of introducing a newly regulated market for online casino operations.

On the Australian situation, the persisting prohibition of online in-play betting and online casino is, Newson argues, “under increasing pressure as offshore operators offer precisely those products to Australian consumers outside any regulatory perimeter.”

New Zealand’s argument in opting to regulate online casinos is that it is not creating a new gambling market but is simply looking to channel a market that already exists into the licensed space.

With licenses set to be issued later this year, Newson says a series of practical challenges facing New Zealand’s Department of Internal Affairs will ultimately determine whether the new regime succeeds in channelling consumers into a regulated market or simply adds a layer of licensing over a market that remains strategically porous.

“These challenges include: the cost and burden of licensing, which if set too high will deter legitimate operators and leave the field to offshore competitors; the scope and design of permissible product offerings, which if too restrictive will leave the legal market unable to compete; advertising and marketing restrictions, which if applied asymmetrically will undermine the visibility of the legal market; and enforcement capability, given that DIA has no established track record in online casino regulation,” the paper states.

Importantly, the paper does not support the notion that regulation by itself creates the black market, but rather that gamblers are attracted to illegal offshore sites when those sites offer a combination of product access, pricing advantages and lower-friction participation that the regulated market does not match.

Australia’s illicit tobacco industry, which now accounts for 80% of tobacco consumption due to the massive tobacco excise on the legal product, provides a case in point.

“Modern black markets do not emerge simply because demand exists,” Newson states. “They emerge when law, market design and enforcement fall out of alignment badly enough that illicit supply becomes the easier, more attractive or more profitable channel. Australia’s illicit tobacco crisis is now one of the clearest examples of that dynamic.

“A regime can continue to speak in the language of public protection while steadily losing practical control of supply, revenue and compliance to criminal enterprise. Gambling is not the same market, but the policy parallel is difficult to ignore.”

While the gambling issue is complicated by the rapid growth of cryptocurrency as a payment channel for illegal operators and the emergence of social media influencers as an unregulated promotional pathway, the paper offers a series of practical recommendations for governments and regulators to consider.

These recommendations call for a more systematic approach to tackling black-market gambling, with real-time monitoring, clear enforcement commitments and stronger action against alternative payment channels such as cryptocurrency.

They also advocate greater enforcement capacity, accountability across the commercial ecosystem supporting illegal operators, transparency around their suppliers, and regular reviews of the drivers of illegal gambling and the impact of product prohibitions – at the same time cautioning against using the black market as a blanket argument against consumer protection.