Intrade & Unintended Consequences

Sad news today, which is that Intrade is going to be shutting down.  If you’ve been living under a rock, Intrade is a betting site that focuses on betting on current affairs.  So for example, during the election there were contracts on the relative probability of an Obama or Romney victory.  The wrinkle was that this betting was illegal under US law, so Intrade relocated to Ireland.  In order to get money in or out, Americans had to engage in some complicated shuttling of money over to the Irish banking system.

Why is Intrade shutting down?  Their shutdown notice is somewhat cagey, saying that “due to circumstances recently discovered, we must immediately cease trading activity.”  Those circumstances “may include financial irregularities”.  Almost certainly this means that there was a breakdown in fund segregation.  Like brokerage firms, online bookies are supposed to have “segregated” accounts, meaning that customer’s money is never ever ever touched for operational expenses.  That is, for example, a big part of the story of the fall of brokerage firm MF Global.  If I had to guess, judging from the tone of the letter, it sounds like someone was siphoning off customer funds – either to conceal losses in other parts of the business or as an embezzlement tactic.

It really does make the ban on Intrade look somewhat ridiculous – these sorts of things are much harder to do in the United States than in Ireland, although MF Global demonstrates that it does happen.  Under the guise of “protecting” Americans from better their own money for their own gain, the United States has ended up letting them put their money in totally unregulated speculation in an offshore banking haven.  Incidentally, the exact same thing has happened with online poker – under the guise of a nominal “ban” on online poker, the US ended up shuttling American consumers’ money into sites that turned out to be fraudulent.

The war on online gambling has some rough analogies to the War on Drugs, now that I think about it.  Criminalization doesn’t prevent the activity – instead it has the effect of setting up a regulatory Wild West.  Since regular peoples’ desire for both drugs and gambling is extremely strong and often compulsive, criminalization doesn’t really dent the flow of funds so much as allow regulatory agencies to abdicate responsibility.  Reasonable people vary widely on the war on drugs…but I think the Intrade failure strongly suggests that the War on Online Gambling has been lost and it might be time to turn in America’s surrender.

Also, it was remarkably short-sighted that Intrade didn’t run a contract on its own demise.

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