Three years beyond the enactment of the prohibitive federal Unlawful Internet Gambling Enforcement Act (UIGEA) it appears to be only a matter of time before U.S.-based regulated online gambling becomes a reality. Precisely how this will manifest itself remains to be seen, but it has become increasingly evident that it will be driven by state-level initiatives.

The table for regulation has been set in Washington, D.C., by Congressman Barney Frank, who has refocused his efforts in opposition to prohibition to championing a bill that would regulate Internet gambling, and Senator Robert Menendez, whose legislation would legalize games of skill, most notably poker, on the Internet. And perhaps of most significance in the short term is Congressman Frank’s Reasonable Prudence in Regulation Act, which would push the looming December 1 deadline for UIGEA compliance back one year.

Among many variables plotting the course of the regulatory movement (the demands of compliance on financial institutions, the presence of more pressing matters on Capitol Hill, and the persistence of support for prohibition, to name a few) the state/federal dynamic could be the biggest factor.

Decisions made at the state level will have a major impact on the future of Internet gambling, and the foundation has been laid for two distinct routes: 1) participation in a federal plan; or 2) intrastate models established by state legislatures.

The Frank and Menendez bills both include opt-out clauses that give the states 90 days to decide whether they will participate in a federal regulatory scheme. This could be problematic because it gives the states very little time to pull the trigger on a policy with a complex array of implications, not to mention that many state legislatures have relatively short and infrequent sessions. Nevada’s Legislature, for example, only meets regularly in odd years.

The intrastate route could be taken either by opting out of a federal model or in the absence of federal regulation entirely. Some very interesting developments are already under way in this sphere, but before delving into them, it’s worth looking at some history.

The states were way ahead of Washington on the prohibition front. Prior to the passage of UIGEA, Illinois, Michigan, Indiana, Oregon, Wisconsin, Washington, Louisiana and Nevada already had laws in place banning some or all forms of remote electronic gambling. Incidentally, a handful of states - South Dakota, Illinois, Nevada and Louisiana - also passed laws authorizing certain forms of Internet gambling. Other states have opted to approve forms of interactive gambling that don’t appear to conflict with UIGEA or its precursor, the Interstate Wire Act of 1961. In particular, a handful of states have taken advantage of an amendment made in 2000 to the Interstate Horseracing Act that essentially includes the Internet as an approved medium for interstate off-track wagering.

A few state lotteries, meanwhile, offer an Internet subscription option, although no one seems to be coming out and referring to the online sales as “Internet gambling” (except for the credit card banks that are categorizing transactions for these services as gambling and consequently blocking them). At least four states - New Hampshire, New York, North Dakota and Virginia - have launched such programs since the passage of UIGEA, and at least two states - Florida and Georgia - have formally explored expanding their lotteries onto the Internet.

Finally, there is Illinois, which in May enacted legislation explicitly approving the sale of lottery tickets over the Internet, although implementation is pending federal approval.

As we progress further into the UIGEA era, the prospect of state-regulated Internet gambling becomes increasingly viable, and four states have emerged as potential leaders in the short term.

CALIFORNIA

For a while it appeared as though California, with its $25 billion budget deficit and history of regulated land-based poker, was a lock to become the first state to approve regulated Internet poker, but the inevitable opposition has slowed campaigns to achieve this.

The California movement was sprung by the coming and going of a bill introduced in 2008 by Assemblyman Lloyd Levine and its rebirth in January 2009. It was introduced as a study bill and transitioned in June 2008 into an implementation policy with a number of objectives, including: 1) limitation of licensure to current California-licensed gaming establishments and California tribes with gaming compacts; 2) assurance that Internet poker is offered in compliance with UIGEA; 3) location of wagering hubs within the state; 4) approval of only poker games already approved at land-based establishments; 5) a tax structure consistent with that of land-based card rooms; and 6) limitations on the amount of funds transferred within a 24-hour period.

The Levine policy was dropped again in September 2009, but additional proposals are in the works. The Morongo Band of Mission Indians, which operates several card clubs as well as one of the largest casinos in California, recently circulated a five-page draft bill that would approve an online poker room available to players within California. The Morongo Band would operate the site, while additional tribes and card rooms would be eligible to be members. The bill has not received legislative sponsorship.

Meanwhile, the California Nations Indian Gaming Association, of which the Morongo Band is a member, is supporting the concept of a joint venture between tribes and licensed card rooms to provide intrastate online poker.

A second group, the California Tribal Business Alliance, is not on board with the JV concept, however, and in August sent an opposition letter to the Legislature. Additionally, the Pechanga Band of Luiseño Indians, which is not a CTBA member, sent a letter to other tribes stating its opposition to all online poker initiatives and revealing the results of a survey it commissioned suggesting that only 36 percent of California voters support the legalization of online poker.

The next pitch could be heard from the Poker Voters of America, which has spent several months drafting a bill to set up an intrastate online poker network. While the details of this bill have yet to be revealed, the legislation appears to be intended as a palatable alternative to the Morongo proposal, which has been criticized for not adequately opening the field to competing operators.

The Poker Voters of America policy won’t likely materialize as formal legislation until the 2010 session.

NEVADA

Nevada is consumed at the moment by the monstrous challenge of rescuing a casino and hospitality industry that’s been walloped by a weak economy. But make no mistake, if California or any other state progresses with regulated Internet gambling, Nevada has to be considered a frontrunner for being the next state to act.

Nevada’s history dealing with Internet gambling goes back to 1997 when its Legislature passed a law prohibiting the facilitation of gambling using unapproved means of electronic communication. Then in 2001 it passed a groundbreaking bill that approved the establishment of a regulatory model for Internet gambling, but that effort was grounded by a combination of factors: the U.S. Department of Justice’s insistence that regulating online gambling in Nevada would not be in compliance with federal law; concerns that the mechanisms for assuring stringent regulatory standards were not sufficient; and the departure of then-Gaming Commissioner Brian Sandoval, who spearheaded the regulatory movement.

Looking ahead, any decision on Nevada’s Internet gambling policy will need to be acceptable to the American Gaming Association, whose membership appears to be divided on the issue. The party line in the ’90s was an absolute no to all forms of Internet gambling; however, the association has backed off that stance in recent years and has held a wait-and-see position for the better part of a decade.

Regardless of what path the regulation of interactive gambling takes, Nevada gaming interests will not be denied a piece of the action.

FLORIDA

Florida’s Legislature has passed a study bill, but as is the case in California the road to regulated Web gambling will not be an easy one.

The bill calls for a feasibility study of online poker, with the state Office of Program Policy Analysis & Government Accountability to make recommendations on whether it can be effectively regulated, and if so, how.

The study is under way and results are due by December 1.

GamblingCompliance.com recently quoted Marc Dunbar, a Tallahassee-based gaming attorney who lobbies on behalf of Gulfstream Park race track, as saying that legislators who happen to be online poker players are “well placed throughout our legislative leadership structure, and they no longer view Internet poker as a Wild West type of activity.”

Despite the potential for legislative support, however, the success of these efforts could hinge on the fate of a controversial agreement between Gov. Charlie Crist and the Seminole Indians. The deal would give the Seminoles exclusive rights to offer live blackjack and operate slot machines in their casinos while offering a number of concessions to pari-mutuel operators in south Florida. The original agreement was made without legislative approval and was consequently invalidated by the state Supreme Court. Crist then gained legislative approval to proceed; however, he negotiated a deal that critics say is not compliant with the legislation. The Legislature has not yet ratified the agreement, and in a letter to Crist, Senate President Jeffrey Atwater said the agreement probably won’t be reviewed before the end of the 2009 session.

The dismantling of the Seminole/Crist agreement would essentially make a strong statement against the concept of gambling expansion, and the online poker bill, albeit not directly related to the Seminole agreement, could be a short-term casualty.

ILLINOIS

Illinois isn’t widely considered a leader in the race for online gambling regulation, but while California and Florida capture headlines with online poker proposals, Illinois could make a huge splash by initiating lottery sales over the Internet. This would almost certainly create a domino effect among state lotteries, most of which would welcome the opportunity to sell online but are not willing to stick their necks out by being the first to do so.

Gaining legislative approval for Internet sales was a big step in Illinois, but there remains the very significant aforementioned hitch: Not unlike the situation with Nevada in 2001, Illinois will not proceed with any form of Internet gambling unless the Department of Justice says it is OK, and that is a long shot.

Considering the DoJ’s track record in this area one might speculate that Internet sales will only materialize if a lottery takes the initiative of moving forward without the federal stamp of approval. That could result in a standoff between state and federal government and a long battle to follow. An alternate course could be the privatization of state lotteries, in which case much of the envelope-pushing would lie with the private sector.

THE FEDERAL ROUTE

A number of obstacles can and will impede progress on the state level, and the federal government tops the list. However, while the DoJ’s reluctance to play nice could throw a wrench in the plans of larger states looking to initiate intrastate online gambling systems, smaller states could benefit from the roadblock. The federal interstate model could indeed be a better solution for states with smaller populations, smaller budgets and the consequent need to be part of a larger system with other states that are in the same boat. This is particularly the case when dealing with poker, which relies heavily on player liquidity.

For states like California, Nevada, Illinois and Florida, the threat of federal interjection looms, and history has shown that individual states are not keen on challenging the federal government in this area. If anything can change this, however, it is the states’ lingering economic crises and demands to find new means of raising revenue. And when one considers that traditional gambling operations are slumping across the board all over the country it is not unreasonable to suggest that a transition from careful consideration of online gambling to implementation is imminent.