Wayne Brough

Technology is a driving force in society, for both businesses and consumers. Indeed, the cyberspace revolution promises gains on the order of those achieved in the earlier industrial revolution. The implications are profound, not just in terms of economics, but in terms of quality of life. The flow if information at the speed of light has empowered individuals across the globe, with the number of worldwide internet users fast approaching 1.5 billion. Unfortunately, these gains can be trampled by government—through censorship, taxation, or regulation.

The internet creates a thorny array of important questions for government. The taxation of internet transactions, access to the internet, and privacy are the stuff of numerous government hearings, commissions, and studies. The internet also poses a challenge to standard notions of regulation, because it does not follow traditional political boundaries. A case in point is the government’s efforts to stamp out illegal online gambling.

In 2006, Congress passed the “Unlawful Internet Gambling Enforcement Act,” calling for new regulations on banks and payment centers to block transactions for illegal online gambling. The problem is that the bill offered no definition of what constitutes illegal activity. Banks and credit card companies are not only required to comply with the law—they must also define the law. Should the law stand, banks and payment systems will be pressed into servitude as informants and enforcers, routinely monitoring transaction information about individual internet users, and blocking transactions with what may actually be legal online businesses. Given the sweeping ramifications for individual privacy, policymakers should pay close attention to the impact this has on internet freedom.

The law’s reach also goes well beyond cyberspace. Banks and payment systems such as credit card companies would be strapped with significant compliance costs and paperwork burdens in order to monitor transactions and identify those determined to be illegal gambling. To date, there has been no attempt to quantify the costs of the new mandate, or its impact on legitimate online businesses.

On Tuesday, September 16, the House Financial Services Committee will mark up legislation introduced by Chairman Barney Frank (D-Mass.) offering a simple solution. “The Payments System Protection Act of 2008” (H.R. 6870) makes clear that the law can be enforced against sports betting, which the courts have already said is illegal. It also requires the regulators to define exactly what “unlawful internet gambling” is prior to issuing broader regulations. This would substantially reduce the uncertainty and compliance burden for banks and payment centers.

Wayne Brough

Dr. Wayne Brough is the Chief Economist at FreedomWorks, a national grassroots organization dedicated to lower taxes, less government, and more freedom.