Germany allows online gambling - if technology & law come together

• On July 1, 2021, the new German "Glücksspielstaatsvertrag" (State Treaty on Gambling) will come into force.
• Online gambling such as virtual slot machines, online casinos, and online poker will then be legal in Germany. The German Market will be opened up.
• Providers need a state permit to operate. Operation is subject to state supervision and complex legal restrictions.
• The permit process and operation require technology to be aligned with legal requirements. 

Gambling is a problematic issue in Germany, both politically and morally. This is especially true for online gambling. Until now, the responsible federal states have effectively banned it for private providers, closing off a market that is attractive to international providers. But this ban will change: on July 1, 2021, the new State Treaty on Gambling will come into force. With it, online slot machine games, online casinos, and online poker will become possible in Germany. But the rules are complex. This industry has a particular challenge: designing its technology to comply with the law even before applying for a permit. Plus, it must cooperate closely with the supervisory authorities. Providers who dovetail technology and law here from the outset have a great chance of conquering a desirable market - even from abroad - despite all the restrictions.

The industry in growth

Regardless of the reader's moral standpoint on online gambling, one thing is sure: the industry is booming internationally. Statista.com calculates that online casinos alone will turn over more than USD 266 billion worldwide in 2021. According to Statista.com, gross gaming revenues - i.e., the stakes placed by players that remain with the providers - will amount to around USD 40 billion. Around half of this is said to come from legal offerings in Europe. Large providers turn over billions annually. According to the industry website Casinoonline.de, the online gambling market in Europe grew by 28% in 2020, for which the COVID pandemic is certainly also responsible. 

The data on the German market is unclear, which is due to the previous de facto ban on online gambling in Germany. According to the gambling regulators of the German states, the permitted, regulated market in Germany (including state lotteries) had turned over 11 billion euros in 2018. What the black market has turned over can only be conjectured. No one knows exactly how many Germans play illegally or participate in online gambling on the American or Asian markets. 

The only clear thing is that Germany is still a developing country when it comes to online gambling - and thus offers the legal industry much potential.

The rules so far

The difficulty in the German market for domestic and foreign providers arose from the legal situation: the previous "State Treaty on Gaming" (GlüStV), which is valid until June 30, 2021, was almost insurmountable obstacle for the gambling industry. Section 4 (4) of the GlüStV fundamentally prohibits the organization and brokering public games of chance on the Internet. There was only a so-called experimentation clause, according to which individual federal states were allowed to permit the brokerage of lotteries and the organization of sports betting on the Internet under certain narrow conditions. But genuine online gambling - for example, in the form of online slot machine games, online casinos, or online poker, which is particularly popular in the USA - remained prohibited. 

In Germany, gambling is a difficult political issue. In addition to the moral disrepute of the industry, the goal of preventing addiction is also put forward. Without control by state actors or regulated providers, those who wager their money online can quickly put everything at risk. Gamblers can become addicted to the thrill of winning while at the same time betting all their possessions. But what if technical measures could counter this danger of addiction? What if, on the other hand, citizens were also free to gamble, at least within certain limits, and to pursue the gambling instinct that undoubtedly exists in humans, the desire to take risks? It became increasingly clear that the more the danger of addiction can be countered by technical and regulatory measures, the more the constitutionally guaranteed freedoms of potential private providers and participants also move into the centre of considerations. Finally, it was also argued, people gamble - should the black market continue to flourish instead of a regulated legal market?

However, there was also growing pressure on politicians to open up the market under strict regulation and technological progress. In addition, there was finally pressure from German case law: The Administrative Court of Kassel classified provisions of the current State Gambling Treaty as unconstitutional (decision of October 16, 2015, ref. 8 B 1028/15). The European Court of Justice classified certain aspects of criminal law as unconstitutional under European Union law (ECJ, judgment dated February 4, 2016 - C-336/14 (Ince v. Germany)). The European law aspect, in particular, was not to be underestimated. 

Consequently, the current legal situation was outdated for political, technological, and legal reasons. 

The new rules at a glance

The new Treaty will apply in Germany from July 1, 2021, after the federal parliaments have approved it of the German states. It now opens up the market and gives domestic and foreign providers the chance to make offers on the German market. In section 1, the Interstate Treaty continues to dedicate itself to preventing addiction, which remains decisive for all efforts of the German federal states and will therefore continue to focus on the interpretation and application of the Treaty. At the same time, however, a state-regulated and supervised gambling industry is intended to provide the population with limited opportunities to indulge their gambling urges and combat the black market.

What is gambling? The future challenging demarcation issues

The term "gambling" is defined in Section 3 (1) of the Treaty. A game of chance is deemed to exist if a fee is charged to acquire a chance to win in the course of a game, and the decision on the win depends entirely or predominantly on luck. According to the definition, this also includes betting since money is wagered on uncertain future events, especially sports betting. Likewise, according to Section 2 (1a) of the Treaty, games of chance offer virtual slot machines, online casino games, and online poker events. 

While the definitions should be evident initially, complicated demarcation issues could arise in practice in the future. Many games for cell phones contain elements of luck and rely on the "Pay2Win" principle. While this will often still lack the "acquisition of a chance to win," i.e., the possibility of turning what is won in the virtual game into money, this could change as the games continue to develop. Already today, for example, online gamers are counting large sums for certain virtual items. When does gambling begin? Legal developments remain unclear at this point.

Permit obligation for online gambling offers and requirements for the permit

According to Section 4 (1) of the new Treaty, public games of chance, thus also those on the Internet, may only be organized or brokered with the permission of the competent authority of the respective country. This is a prohibition subject to authorization - gambling remains prohibited unless the state has permitted it. This regulation is new now and opens up the market for providers.

What is essential for payment service providers here is that participating in payments for unauthorized gambling is also prohibited under this law and can have serious legal consequences (such as the withdrawal of permits or other measures by the authorities). Therefore, payment service providers must make sure that gambling providers on the Internet have the appropriate permission from the authorities.

Permission is only granted if specific requirements are met. In general, Section 4 (2) of the new Interstate Treaty stipulates that approval may not be granted if the gambling provider runs counter to the objectives of the Interstate Treaty. This regulation is initially a general rule that will only be subject to practical interpretation and application in practice in the future. For example, providers whose conduct gives cause for concern that they are promoting gambling addiction among their participants could lose their licenses. 

A drop of bitterness for the providers of online casinos: The federal states have a choice here, to continue to operate them themselves under a state monopoly or to grant a maximum of as many permits as there are casinos in the respective state. This regulation is due to political circumstances. Legally, it is not very welcome: it creates different structures in Germany in the field of online casinos. A genuine opening of the market lacks here. 

The special conditions for Internet gambling

Internet gambling is subject to extraordinary conditions. Anyone applying for a permit must first prove that the license is only for the self-distribution and brokerage of 

• lotteries, 
• the organization, brokerage, and self-distribution of sports betting and horse betting, or 
• the organization and self-distribution of online casino games, virtual slot machine games, and online poker. 

Moreover, the organization and brokering of other forms of public games of chance on the Internet are prohibited. The state legislatures have thus not opened up all forms of online gaming to the German market. The offer must fall under one of the cases mentioned above.

Furthermore, the provider must positively demonstrate compliance with the following conditions, among others:

• No access for minors to the offer through appropriate technical measures (identification and authentication, "KYC");
• Credit prohibition: no credits for players and no advertising on the site for third-party credits;
• No rapid repetition of the game: Technically, the game must be designed so that the game rounds are not repeated quickly. The background to this is that, in the view of the federal states, this would otherwise create particular incentives for addiction;
• Different forms of gambling may only be offered via the same Internet domain if an independent and graphically separate area is set up for each form of gambling (exception: sports and horse betting);
• Social concept: Organizers of online games of chance must develop a unique social concept to protect minors and players. The social concepts must outline the measures to prevent the socially harmful effects of gambling and how these are to be remedied. To some readers, it might seem like a strange approach on the part of the state to oblige a service provider to ensure that users do not overuse it. At first glance, this is alien to the concept of a market economy. Nevertheless, such obligations often exist to protect consumers. Cigarettes, for example, have also contained the well-known drastic warning about the consequences of smoking for years.

Special permission requirements for sports betting, online poker, and virtual slot machine games

Sports betting, online poker, and virtual slot machine games are subject to special requirements. The complex regulations can only be presented below in the overview. These include, for example, in the licensing procedure:

• Disclosure of ownership and shareholding relationships with the applicant;
• Proof of reliability and expertise: The provider and the responsible persons appointed by him (such as managing directors) must be demonstrably suitable to comply with the legal obligations (reliability) and to know the legal and technical requirements of the contract (expertise). This condition will mean very intensive checks and evidence in the administrative procedures and could be particularly challenging for foreign providers;
• Disclosure of where the funds for the operation of the offer come from, including proof of their legality;
• Statement and, if applicable, proof that organizers, contracted persons, and affiliates have not operated or are operating prohibited gambling in the past;
• Evidence of financial and technical capacity to operate online gambling in compliance with legal requirements;
• Transparency requirements: Transparent operation must be ensured for the supervisory authority so that government monitoring is guaranteed; this also includes, for providers not domiciled in Germany, appointing a receiving and representative agent in Germany;
• Separate accounting for payment transactions from Germany, including an account in the EU;
• Establishment of interfaces for real-time auditing of all gaming transactions by the supervisory authority;
• Proof of a security deposit in the form of an unlimited, directly enforceable bank guarantee of at least EUR 5 million or higher if requested by the licensing authority.

Even after permission has been granted, there are often obligations to inform the supervisory authority regularly (see § 4c of the agreement). This regulation will undoubtedly be a consulting-intensive set of duties for the providers and their employees, both before and after permission is granted. After all, legal violations of the contract rules and other provisions - such as data protection, tax law, or social security law - could lead to a subsequent loss of reliability. In that case, there will be procedures for revoking the issued permit. Therefore, it is essential to be fully prepared for the German requirements and ensure that these are also complied with within "daily business." 

Player account for online gambling and limit file

Organizers and brokers of public games of chance on the Internet must set up a provider-related player account for each player. Allowing players to participate in the game without a gaming account is not permitted. Each player may have only one gaming account with the same organizer or intermediary. To set up the gaming account, a player shall register with the organizer or intermediary with details of first name, last name, maiden name, date of birth, place of birth, and place of residence. Organizers and intermediaries with whom the registration is made shall verify the accuracy of the information. Suitable and reliable procedures shall carry out the verification. Individual reasonable and reliable procedures may be specified in the permit. Secure KYC processes are therefore necessary here.

This player account has an exceptional significance. Numerous other obligations of the providers for monitoring and information are linked to the account. But above all, players from Germany have a monthly limit according to the will of the legislator. According to Section 6c (1), this amounts to a maximum of 1,000.00 euros per month. They are not allowed to deposit more than that. And here comes a unique feature: the supervisory authority will set up a limit file to which all providers must report and join. Its purpose is to ensure that players do not exceed the limit, even across platforms. The establishment, operation, and transmission of the data are likely to give rise to many data protection issues in the future. It has already provoked fierce criticism from the industry. Because people gambling in the state-owned casinos can gamble with higher sums. Why shouldn't millionaires be able to spend more than 1,000.00 euro monthly? It is to be expected that this regulation will still be the subject of legal disputes.

Operating obligations

But even beyond this, providers still have special obligations in daily business, which cannot all be listed exhaustively here. These include:

• Random number generators used in games of chance on the Internet must be checked for proper functioning before they are used for the first time and at least once a year after that, at the provider's expense, by an expert body independent of the provider and to be determined by the competent licensing authority. The competent licensing authority must be informed of the results without delay.
• A comprehensive IT security concept shall be drawn up.
• It shall be prevented that a player plays in parallel with several providers on the Internet. To this end, a technical notification shall be sent to the supervisory authority that a player is "active" to compare data with other providers.
• Organizers of online casino games, online poker, and virtual slot machine games on the Internet, as well as organizers and brokers of sports betting on the Internet, must implement at their own expense an automated system based on scientific findings and using algorithms for the early detection of players at risk of gambling addiction and gambling addiction.

Special regulations for sports betting.

There are further special regulations for sports betting, section 21 of the Treaty. These cannot all be presented here conclusively. Of interest here, for example, is the prohibition on betting on the irregular behavior of an athlete, e.g., on a red card in a soccer match. Such a regulation would open the door to manipulation from the legislator's point of view. Live bets are permitted if they relate to the final result. But bets can also be placed on the next goal, but only in sports activities such as soccer or ice hockey, where few goals are scored. This is a very unusual and frequently criticized regulation because it leaves out sports such as handball. This also raises constitutional questions.

Special regulations for virtual slot machine games

Virtual slot machine games are also given special regulations in Section 22a of the Treaty. Virtual slot machine games that correspond to table games with bankers traditionally organized in casinos, particularly roulette, blackjack, or baccarat, are not permitted. The regulation has a political background and raises constitutional concerns of impermissible unequal treatment. 

The chances of winning must be random and equal opportunities must be opened up for every player. The game rules and the winning schedule must be easily accessible and described in a way that is easy for the player to understand. The probability of winning the maximum prize and the average payout rate per one euro of wagered money must be displayed to the player. 

The exciting thing is that virtual machines are not allowed to start "automatically." This means that the player must confirm each new round. The game must last at least five seconds.

Finally, the regulation of the maximum game stake is particularly criticized by the industry: This is only 1.00 Euro. A higher stake is not permitted. The legislator wants to protect thereby against addiction and bankruptcy. The sector holds against it; thereby, German participants would be excluded from the outset from high profits. And again: why should wealthy fellow-citizens generally be limited to such a low stake?

Special rules for online poker

Online poker is also given special rules (§ 22b of the Treaty). For example, only human players may compete against each other; CPU players are excluded. The assignment of a player to one of several virtual tables with the same game offer shall be random. A selection of the table by the player is not permitted.

Central supervisory authority

The new gaming agreement is accompanied by establishing a central supervisory authority in Saxony-Anhalt, which will gradually commence operations. It will also issue instructions to providers on the technical implementation of the requirements of the new State Gambling Treaty. 

Conclusion and recommendations

The new State Treaty on Gaming introduces a German gambling license. It will re-regulate and comprehensively regulate online gambling in Germany. Digital gambling providers who want to advertise with a gambling license Made in Germany must comply with the highest security and seriousness requirements. However, meeting the licensing requirements is only half the job. Providers must ensure that the requirements are met through effective self-regulation. 

Fieldfisher is happy to advise you on your online betting, Casino, gambling, or eSports betting platform in Germany.