Regulatory design & the online gambling black market: four determinant failures

Introduction

The online gambling black market is not merely a failure of enforcement – it is often the predictable result of regulatory design. Here we argue that better regulation is needed alongside enforcement to combat the black market.

Gambling has existed throughout history and continues to evolve in different forms. What distinguishes the present moment is the unprecedented pace at which online gambling is expanding globally. This growth has been driven by cross-border service provision, the emergence of new products – such as sweepstakes casinos and prediction markets – and the integration of disruptive technologies, including artificial intelligence.

This context requires a higher degree of regulatory dynamism from states, aimed at safeguarding public interests, ensuring market integrity, and protecting consumers. Regulation can no longer be conceived as static; rather, it must operate as an adaptive process in response to a constantly evolving digital market.

As an economic and social activity characterized by persistent demand, online gambling does not raise the question of whether it should exist, but how that demand should be effectively channeled through appropriate legal frameworks. Accordingly, regulatory debates increasingly focus on the quality of regulatory design and its ability to integrate – rather than exclude – existing demand.[1]

Comparative experience demonstrates that well-designed regulatory frameworks[2] can generate substantial public and economic benefits, including tax revenues, consumer protection, transaction traceability for anti-money laundering purposes, enhanced due diligence standards, foreign investment, and employment.

However, in practice, several jurisdictions have adopted regulatory approaches that fail to properly account for the impact of the black market. In many cases, these approaches inadvertently create incentives that foster its growth. This article identifies four regulatory failures that contribute to the persistence and expansion of the online gambling black market.

1. Regulatory inertia

Online gambling is neither a new nor a poorly understood activity. A passive regulatory stance is therefore neither coherent nor beneficial.

The regulation of remote gambling dates back more than three decades, including early frameworks such as Antigua and Barbuda’s Free Trade and Processing Zone Act of 1994, which introduced one of the first licensing systems for remote gaming.

In this context, regulatory inertia – whether intentional or not – is not a neutral position. It allows demand to be satisfied in the absence of a legal framework capable of channeling it effectively. As a result, at least two types of operators emerge: “internationally supervised operators,”[3] licensed in other jurisdictions and operating under regulatory standards, and “unsupervised operators,”[4] which lack effective authorization and oversight.

While the former incurs compliance costs, the latter operate without obligations relating to consumer protection, anti-money laundering controls, or taxation. This creates an uneven competitive environment in which unsupervised operators gain a structural advantage.

Over time, these operators develop business models that are incompatible with future regulatory frameworks, strengthening their incentives to remain outside the system and even to resist regulation. Consumers are exposed to increased risks, while the state loses potential tax revenues.

The Chilean experience illustrates this dynamic. A bill regulating online gambling, introduced in March 2022[5], remains under discussion more than four years later. In the meantime, the market has continued to expand through both supervised and unsupervised operators, amid legal disputes and enforcement actions[6]. This scenario demonstrates how regulatory inertia facilitates the consolidation of parallel markets prior to regulation.

2. Prohibition as a regulatory response

The prohibition of gambling – and particularly online gambling – remains a regulatory response in some countries. In Latin America, the paradigmatic case is Ecuador: following the popular referendum of May 7, 2011, promoted by then-President Rafael Correa, Article 236 of the Comprehensive Organic Criminal Code criminalizes the operation of casinos, gaming halls, betting houses, or any business engaged in gambling activities, punishing it with imprisonment of one to three years.

However, in an activity with persistent demand such as gambling, prohibition does not eliminate the conduct: it displaces it towards the black market. And when there is no authority with real enforcement capacity or effective legal instruments, prohibition becomes nothing more than a normative fiction.

In Ecuador, despite the prohibition of gambling activities – both land-based and remote – there is no specialized authority with sufficient powers to combat illegal supply. As a result, the availability of websites offering virtual slot machines and online casino games not only persists, but expands, demonstrating the limited effectiveness of the prohibition model and the missed benefits associated with a regulated market.

In practice, today all operators offering sports betting legally to the Ecuadorian market also include virtual slot machines, online casino games, or live casino games on their websites. And without an effective agency to enforce the prohibition, there is, in practice, no effective sanction for offering such products. The government recently tacitly accepted the status quo by announcing that sports betting and iGaming would be subject to VAT.[7]

The Ecuadorian case also presents a relevant particularity: the prohibition does not extend to all betting activities. Indeed, sports predictions are not classified as games of chance under Ecuadorian law and are therefore permitted. This situation was expressly recognized through Executive Decree 742, published on May 17, 2023[8], which authorizes their online exploitation. However, this partial legalization has not contained the expansion of illegal supply; on the contrary, it has incentivized it by introducing a structural regulatory inconsistency that weakens the effectiveness of prohibition. By allowing online sports predictions – which, from a substantive perspective, share essential elements with other gambling activities, such as plural participation, competition, and patrimonial exposure to an uncertain outcome – a normalization effect of online gambling is produced in the digital environment, eroding in practice the boundaries between what is permitted and what is prohibited.

Ultimately, when prohibition coexists with exceptions that replicate the same economic logic of gambling and, in addition, lacks real enforcement capacity, it not only fails in its purpose but ends up indirectly legitimizing the ecosystem it seeks to eradicate: the black market ceases to be an anomaly and becomes the rule. In practice, the average user does not distinguish between legal categories, but between functionally equivalent gambling experiences.

Likewise, the regulatory framework itself admits exceptions that relativize the prohibition of gambling, as certain non-profit entities – such as the Junta de Beneficencia de Guayaquil[9] – are legally authorized to operate such activities. These types of exceptions create incentives to structure mechanisms that, in practice, allow the formal prohibition to be circumvented, further weakening its effectiveness.

Finally, prohibition is also inefficient from an economic perspective for the state. As an unregulated activity, it prevents the establishment of a specific tax regime capable of capturing the fiscal revenues derived from its exploitation. Consequently, the costs associated with controlling and potentially repressing the activity must be financed through general taxation – such as income tax or value-added tax. In the absence of sufficient capacity to sustain such efforts, the foreseeable outcome is the consolidation of the black market, with the corresponding adverse effects for both the State and consumer protection.

3. Monopoly and restricted licensing

Some jurisdictions have moved away from prohibition and have chosen to allow online gambling. However, instead of liberalizing the market, they have opted to replace prohibition with monopoly models or artificially restricted access regimes, with an excessively limited number of licenses.

This model is often justified under a simplistic logic: it is easier to control one – or a few – than many. Underlying this premise is the equally mistaken idea that the size of the market can be contained by decree. However, in an activity characterized by persistent demand, such as gambling, this approach proves to be counterproductive.

When legal supply is limited, uncompetitive, or incapable of meeting demand, users do not stop gambling: they simply migrate to unauthorized operators. The outcome is predictable: monopoly does not eliminate the black market; it feeds it.

Additionally, licensing concentration systems increase the risks of corruption and reduce transparency. The artificial scarcity of authorizations significantly raises their economic value, creating incentives to obtain – and retain – them through undue influence. At the same time, the absence of competition eliminates cross-monitoring mechanisms among operators, that is, the indirect oversight that competitors themselves exercise in open markets.

In a monopolistic environment, there are no operators supervising each other, nor competitive pressure from consumers to discipline market behavior. The entire burden of control falls on the authority, weakening enforcement. Under these conditions, monopoly not only restricts legal supply, but also creates the perfect breeding ground for opacity, corruption, and the expansion of the black market.

Consider the case of Uruguay, for example. Pursuant to Articles 244 and 245 of Law 19535 of 2017, the Uruguayan legal framework subjects online gambling to a principle of illegality and authorizes measures such as the blocking of websites, payment methods, and advertising. However, the system itself provides for an exception: since 2020, legal supply has been channeled through a single operator authorized by the State, the Banca de Cubierta Colectiva de Quinielas, which operates the website supermatch.com.uy[10].

However, empirical evidence shows a different reality. When reviewing web traffic measurement platforms such as Semrush[11], it can be observed that Supermatch is not the only – nor necessarily the most visited – online gambling site accessible from Uruguay.

The paradox is evident: despite a restrictive legal framework and the existence of an authorized operator, a significant portion of demand is channeled toward unauthorized platforms. The State collects no taxes from this activity, and users lack an effective local authority to which they can turn in case of disputes. In other words, this model does not eliminate the black market nor succeed in capturing it; it simply tolerates it without generating public benefits.

4. Excessive or complex taxation

Tax policy plays a determining role in shaping the online gambling market and in the decisions of operators and players to remain within the regulated system. Disproportionate or excessively complex tax structures not only erode the competitiveness of the formal market, but ultimately undermine the very regulatory objectives they seek to achieve.

In various jurisdictions, online gambling operators face an overlapping set of tax burdens, including taxes on gross gaming revenue, on net income, on transactions, as well as licensing fees and fixed annual contributions. At the same time, players may be subject to taxes on deposits, wagers, and even on their winnings. This fragmented tax architecture often reflects legislative responses aimed at maximizing short-term revenue rather than a coherent, predictable fiscal design compatible with constitutional limits on the exercise of taxing powers, which in many cases has led to controversies resolved by constitutional courts.

However, beyond questions of constitutionality, from the perspective of market ordering, it can be asserted that irrational tax structures generate predictable economic effects: they displace activity towards informality. When the tax burden exceeds reasonable thresholds, the regulated market ceases to be competitive in comparison with unauthorized alternatives that operate without such burdens.

The Bolivian model constitutes an example that merits analysis. Through Law 060 of 2010, a scheme is established that combines a gambling tax applicable to the operator at a rate of 30 percent on gross revenue, together with a tax on player participation at a rate of 15 percent on the sale price – understood as the amount paid by the player to access the game. To this is added the application of general taxes such as income tax and value-added tax. The result is a cumulative tax burden that affects both supply and demand.

Subsequently, in 2021, through Regulatory Resolution 01-00001-21, the Gaming Control Authority approved the regulation for the granting of online gambling licenses.[12] However, more than four years after its entry into force, no licenses have been granted for the operation of online gambling in the country. While various factors may contribute to this situation, the tax burden undoubtedly constitutes a highly dissuasive element.

Empirical evidence consistently shows that as tax pressure on the sector increases, so does the attractiveness of unregulated alternatives[13]. In this sense, an excessive tax system does not eliminate the illegal market nor incentivize its migration into the regulated sector; on the contrary, it strengthens it. In economic terms, the consequence is clear: when the cost of legality exceeds its benefits, illegality ceases to be an anomaly and becomes a rational option.

Conclusion

Regulating online gambling is a complex and dynamic challenge. In many cases, frameworks designed to mitigate risks have inadvertently strengthened illegal markets.

The patterns identified in this article suggest that regulatory effectiveness depends not only on legislative intent, but also on proportionality, market understanding, fiscal coherence, and sustained institutional capacity. Addressing these factors is essential to ensure that regulation fulfills its core objectives: consumer protection, market integrity, and public benefit.

In this context, the black market should not be understood as an external anomaly, but as a direct reflection of regulatory shortcomings. When regulation fails to align with market realities or imposes disproportionate burdens, it does not eliminate the activity, it displaces it into spaces where the State loses control, revenue, and protective capacity.

Ultimately, the black market is not a failure of the market – it is, in many cases, a failure of regulation.

[1] See Ashima Jain Redefining “House Rules”: Legal Frameworks for Gambling in the Online Era https://journals.sagepub.com/doi/10.1089/glr2.2024.0022?icid=int.sj-abstract.similar-articles.3

[2] Illustrative examples include jurisdictions such as Malta (where the regulatory process for online gambling began in 2000, with more structured developments from 2004 under the supervision of the Malta Gaming Authority), the United Kingdom (with a regulatory framework in force since 2005 under the supervision of the UK Gambling Commission), and the State of New Jersey in the United States (with a regulatory framework implemented since 2013 under the supervision of the New Jersey Division of Gaming Enforcement). These jurisdictions have developed regulatory environments that combine market openness, consumer protection, and effective supervision mechanisms to channel demand toward authorized operators.

[3] This is the case, for example, of Malta, whose regulatory framework governs the provision of gaming services “from Malta,” thereby establishing a model that, in practice, allows licensed operators to offer their services on a cross-border basis, without prejudice to compliance with the laws of the jurisdictions where such services are made available.

[4] Typical characteristics of websites operated by “unsupervised operators” include the absence of verifiable information regarding gaming licenses, or the use of licenses that are either non-existent or issued by entities lacking effective supervisory authority; the unavailability of terms and conditions in the language of the target jurisdiction; the absence of a legal domicile enabling the filing of claims; the lack of identification of the operating entity; the unauthorized use of software or brands belonging to international game providers; and deficiencies in customer support systems.

[5] On March 1, 2022, then-President Sebastián Piñera submitted to the Chamber of Deputies Bill 14.838-03, titled “Law Regulating the Development of Online Betting Platforms.”

[6] By judgment dated September 29, 2025, the Third Chamber of the Supreme Court of Chile upheld a claim filed by Lotería de Concepción, in which Polla Chilena de Beneficencia S.A. participated as a supporting third party, ordering the blocking of the websites identified in the claim. In practice, however, this measure did not prevent the continuation of online gambling services through domains not covered by the action. The provision of remote gambling services is not expressly regulated under Chilean law, highlighting the need for a comprehensive legislative solution through the bill introduced in 2022. Under the current legal framework, the only legally authorized gambling activities are: (i) horse racing (Law 4.566), (ii) casinos authorized by the Superintendence of Casinos of Gambling (Law 19.995), which are expressly prohibited from offering online gambling under such law, (iii) Polla Chilena de Beneficencia (Law 18.851), and (iv) Lotería de Concepción (Law 18.568).

[7] https://www.igamingtoday.com/ecuador-tightens-grip-on-igaming-with-new-vat-rules/

[8] See www.imgl.org/publications/imgl-magazine-volume-3-no-1/online-gambling-taxes-in-peru-and-ecuador/

[9] The online sports betting and casino website bet593.ec is operated by the National Lottery, a branch of the Junta de Beneficencia de Guayaquil, a non-profit entity expressly authorized by law to conduct gambling activities. In recent years, however, other non-profit entities lacking specific legal authorization to engage in such activities have begun offering gambling services under the argument that the proceeds are allocated to charitable purposes. This practice further confirms that prohibition does not halt expansion.

[10] By Resolution No. 032/2020, dated January 15, 2020, the National Directorate of Lotteries and Quinielas of Uruguay determined that gambling activities conducted over the internet shall be organized by the National Directorate of Lotteries and Quinielas, and their administration shall be carried out by the Banca de Cubierta Colectiva de Quinielas.

[11] Semrush, “Top Gambling Websites in Uruguay,” accessed April 5, 2026, https://www.semrush.com/trending-websites/uy/gambling

[12] www.soloazar.com/en/category/analysis/bolivias-gambling-regulation-from-a-longtime-legal-gray-zone-to-potential-reform-in-2026

[13] Consider the recent experience of Netherlands where a sharp increase in gambling tax was one of the factors behind channelization falling below 50 percent https://kansspelautoriteit.nl/sites/default/files/2026-04/Jaarverslag%20Kansspelautoriteit%202025%20-%20Webversie_0.pdf

Carlos Fonseca Sarmiento is Managing Partner, Gaming Law SAC in Peru