Are Sweepstakes Casinos a Real Threat to the iGaming Industry?

In recent months, many states have started showing concern about this growing online phenomenon called "social" or "sweepstakes" casinos. It would seem some of the concern is being driven by traditional iGaming operators that are losing business to this new form of "online gaming." This raises the question: "Are sweepstakes casinos a real threat to the iGaming industry?"

What Are Social and Sweepstakes Casinos?

It's imperative to state that there is a subtle difference between social and sweepstakes casinos. The difference matters because social casinos serve as the foundation of social casino gambling, while sweepstakes casinos serve as a subset of social casino gaming. They are seldom marketed as stand-alone casinos, instead being integrated with social casinos as an alternative form of casino play. Let's look at these two (2) online casino options in more depth.

What is a Social Casino?

In the term "social casino", the word social is the operative word. Imagine an online casino where players can play casino games for free while interacting on a social level with other players. That is exactly how one would define a social casino.

What sets a social casino apart from a traditional online casino is the gambling. On a social casino, players are given free tokens, often referred to as "gold tokens." Players are allowed to gamble with these tokens at will, but get nothing in return but more gold takens if they win. To be clear, gold tokens have no monetary value and cannot be redeemed for anything of value.

Note: Gold tokens are awarded to new players for signing up, with additional gold tokens awarded intermittently, usually daily. Also, gold tokens can be purchased with fiat cash but still have no monetary value.

What is a Sweepstakes Casino?

A sweepstakes casino is a subset of a social casino. What sets these two casinos apart is that sweepstakes casinos require the use of "sweeps" tokens. Unlike gold tokens, sweeps tokens do have a redemption value. In all cases, these tokens can be redeemed for prizes. Sometimes, that extends to cash prizes. Therein lies the problem that is drawing the ire of state lawmakers and traditional online casino operartors.

Note: Typically, a small number of sweeps tokens are awarded to players after registration. After that, said tokens must be earned via winnings or purchased for fiat cash. It's also worth noting that sweeps tokens are generally considered to be virtual currency. Sweeps tokens can be used for prize drawings or to win prizes for in-game achievements.

Why Are State Lawmakers Getting Nervous About Sweeps Casinos?

To be fair, no one seems to have a real issue with the social casino concept. There is nothing wrong with recreational casino enthusiasts getting together to play slots or table games for free. Where things take a turn for the worst with state lawmakers is at the point where tokens become a means of exchange for something of value. That makes it gambling.

Currently, the number of states that allow social casinos sits at about 40. An even smaller number of states permit access to sweepstakes casinos, maybe 30 or so. That number is very likely to get smaller in the coming months as legislation banning sweepstakes casinos is currently being considered in states like California, Maryland, New Jersey, and New York. There is likely more legislation coming soon.

There appear to be three main issues that are driving lawmakers to rethink the sweepstakes casino phenomenon.

1. It's impossible to get past the fact that sweepstakes casinos do permit gambling. That's a direct violation of the current laws in 43 states, excluding Connecticut, Delaware, Michigan, New Jersey, Pennsylvania, Rhode Island, and West Virginia.

2. The states in which online casino gambling is allowed may or may not be willing to issue iGaming licenses to sweepstakes casino operators. That's a potential nightmare.

3. The use of virtual currency has not yet been approved in the U.S. That presents a problem if sweeps tokens are counted as a form of virtual currency.

Are Sweepstakes Casinos a Real Threat to the iGaming Industry?

While state lawmakers are concerned about the influx of sweepstakes casinos, it's the traditional online casino operators that stand to lose the most. If a player can play similar or the same online casino games for free, why would they want to risk their hard-earned cash trying to beat a traditional iGaming site? The advantage goes to sweepstakes casinos.

In states like New Jersey and Pennsylvania, the competition for new players is fierce. That's to be expected when there as many as two dozen licensed operators vying for business. To get business, they have to offer lofty new player bonuses that could cost them a lot of money. Meanwhile, sweepstakes casinos only have to offer small increments of sweeps tokens to get patronage. The Advantage goes to sweepstakes casinos.

Another advantage held by sweepstakes casinos is their ability to offer an array of prizes. It's not unheard of for such casinos to offer prizes such as

• Gift cards for major box stores and credit card companies


• Branded merchandise such as gadgets, gaming systems, and sporting goods


• In-game rewards - additional tokens, extra lives, or bonus rounds


• Cash prizes - proof of age and identity may be required
  

Of course, each sweepstakes casino is going to create its own prize packages. It will be up to the players to select the casinos that are offering that which they value the most.

Note: Cash prize payouts may be subject to federal and state income taxes. That will usually be the case if a player redeems $600 or more in a single transaction. It will be up to the casino operators to issue IRS form W-2G to players who hit that threshold. It then falls on players to claim those winnings on their tax returns. Note: Losses can be used to offset reported winnings.

We would be remiss not to mention that sweepstakes casinos offer the social interaction feature. That's a big deal to online casino enthusiasts who like the idea of chatting with other players at a blackjack table or roulette wheel. You won't find this access in a traditional iGaming environment unless live casino games are available.

If traditional iGaming operators hold any advantage, it would be this: The amount a player can win by risking real cash could be unlimited. That's contrary to sweepstakes casinos that usually place a cap on how much a player can win per transaction, day, week, or month.

The answer to the titled question is YES, sweepstakes casinos are a legitimate threat to the welfare of the iGaming industry. It holds the potential of impacting jobs and of course, the financial bottom line.

Conclusion: If there is any doubt that sweepstakes casinos are finding themselves in the crosshairs of state lawmakers and vested licensed iGaming operators, one only has to consider the fact that many states are now revisiting this issue. At the state level, the primary concern is the ease of access to sweepstakes casinos, which opens the door to an influx of problem gambling issues.

As sweepstakes casino operators, the fight is the battle to stay alive in as many states as possible. They might do well to offer compromises, especially in the aforementioned seven (7) states where iGaming access is already legal. In those states, the right compromise might be to agree to secure the appropriate iGaming licenses.

In the coming months, this is an online gambling industry issue that warrants scrutiny. If sweepstakes casinos lose access to players in a bunch of states, it could spell the demise of said casinos.