The prospect of capital controls seems to be on the increase, particularly in emerging markets, as central banks are becoming ever more unconventional in their efforts to stabilise the economies. It has been estimated that net capital outflows from emerging markets amounted to US$ 735 billion in 2015. Today’s European business generation have scant knowledge of how such controls work and this enables Governments to introduce controls against a background of ignorance.

Let me explain what they are, and what they will mean for your e-gaming business.

Capital controls are introduced when an economy is failing and the government has used all its resources to defend the currency, including its foreign exchange and gold reserves. There is an outflow of currency as investors see an uncertain future.

In the UK capital controls (exchange control) were introduced after the financial crisis in the 1930s. They remained until October 1979, after Mrs Thatcher came to power.

Countries such as Cyprus, Greece, Iceland, Argentina, Brazil, Venezuela, and China currently have controls in place or have imposed capital controls in recent times.

Capital controls give a government unprecedented control over an economy. During the period when they existed in the UK the following happened:
• At the time payments could be made to any sterling area country, such as the Commonwealth countries.
• On trade, companies had to first negotiate either to buy or sell goods with a supplier or buyer and then complete forms for approval with the government.
• Insurance companies could only write policies in GB£ to UK citizens. Policies to non-UK citizens could be written in their currency.
• Only banks could deal in gold unless it had an industrial purpose.
• Emigrants leaving the UK could take only £5,000 (£188,000 in today’s terms) of their assets per family to the new country of residence – in annual instalments over four years.
• Companies had to justify to government their investments abroad and only those investments that gave short-term reward were allowed.
• British residents travelling outside the sterling area could only take with them £50 spending money, £840 in today’s money. This gave rise to a boom in tourism to Malta, which in those days was part of the sterling area.
• British residents could not buy foreign property using foreign exchange unless they paid a premium.

The effect of capital controls for eGaming would depend of the severity of the controls, which would in essence reflect the state of the economy. In the European context, trade between Euro currency member states would probably be a copy of Britain’s Commonwealth sterling area, with exceptions to countries that have hit the buffers such as Greece and Cyprus. Nigeria has severe restrictions on the transference of money out of the country and it would be highly unlikely for those restrictions to be imposed on any major economy.
Severe restrictions would:

• Place monetary restrictions on travel to foreign markets.
• Prevent the repatriation of profits, or increase the cost to do so, making it not worthwhile.
• Increase costs through loans in foreign currency in those markets.
• Depending on the reporting limits for transactions, it could prevent large-spending foreign gamblers from making deposits.

Less severe restrictions would:
• Create more regulation and cost in administration.
• Restrict growth in foreign markets.
• Impose compliance oversight costs. Penalties for not observing the regulations are high.
• Prevent foreign investment into the country of domicile thus reducing business valuations.

Will it happen? In the European context it is unlikely. Brexit could possible cause a short term run on the GBP, but the currency has already fallen, so I think the downside risk is limited. The problem is with emerging markets, which is where the major growth over the next five years is likely to be for eGaming.

To be forewarned is to be forearmed.

If you see a fall in the currency followed by a depletion of the foreign exchange reserves in any market where you trade as an e-gaming business you next call should be to us!

by Warwick Bartlett