While most of us are distracted watching the presidential election, the U.S. Treasury Department is quietly pushing through new rules that potentially will have devastating consequences for privacy and e-commerce.

It’s an understatement to say the Internet has done more to shape society over the last 10 years than any other technological innovation, transforming communications, business, and entertainment. The benefits generated by the technological revolution easily parallel those of the earlier industrial revolution. What’s important is that this explosion in growth occurred in an era relatively free of government interference. Unfortunately, that may not remain the case.

Regulatory incursions onto the Internet are becoming more frequent, threatening the open dynamic that has generated so much for consumers. Without vigilance, we face the prospect of turning the Internet into something akin to an electronic version of the Post Office rather than the engine of growth it has become.

This can be seen in Congress’ attempt to eliminate unlawful Internet gambling. Not only does the Unlawful Internet Gambling Enforcement Act of 2006 raise serious questions about privacy, but its vague definitions and poorly defined goals force banks and payment centers into a tight position.

They’re now required to serve as an arm of the government, monitoring private Internet transactions, and blocking those that are “illegal.” The problem is that the legislation never defined “unlawful Internet gambling,” leaving banks and payment centers to sort out that thorny issue for themselves. This generates a great deal of confusion, leaving consumers and Internet users facing the real prospect of perfectly legal activities being blocked simply due to uncertainty and caution on the part of banks and payment centers. For those processing these transactions, the ambiguity is compounded by compliance costs and the paperwork burden.

Despite the confusion surrounding the legislation, the Treasury Department is drafting a final rule it hopes to release in November to put the program in motion. But some in Congress are well aware of the burdens and complexities associated with this vague rule. Just last month, the House Financial Services Committee passed legislation introduced by Rep. Barney Frank (D-Mass.) that offers a simple solution.

The Payments System Protection Act makes clear that the law can be enforced against sports betting, which the courts already have said is illegal. But it also requires regulators to define exactly what “unlawful Internet gambling” is prior to issuing broader regulations. This would substantially reduce the uncertainty and compliance costs for banks and payment centers. The Senate recently followed suit with its own attempt to clarify the ambiguities in the 2006 Act.

Beyond correcting the economic burdens of the law, however, Americans ought to be concerned about the larger questions of the law’s impact on privacy and Internet freedom for the future. Once the federal government begins implementing guidelines for various types of online transactions, what is to prevent it from becoming more involved in every activity on the Internet? The Founding Fathers took great care constructing a government that would protect our endowed rights and liberties, not restrict and monitor them. Americans don’t want the government monitoring their private transactions, online or offline.

The Internet has proved to be a powerful and valuable force in our economy. Annual e-commerce retail sales in the United States reached $107 billion in 2006, a 22 percent jump over the previous year. Restrictive government mandates would only restrain such growth, not encourage it. Each new mandate also brings further government encroachment upon the rights and liberties guaranteed by the Constitution. It is precisely because it developed relatively free from government oversight that the Internet has become such a dynamic part of our economy.

Congress has acknowledged the potential downside of its foray onto the Internet with the 2006 Unlawful Internet Gambling Enforcement Act, and is working to correct its overreach. The Treasury Department should follow this lead, and not rush forward with sweeping government mandates that threaten the future growth and innovation on the Internet.

In a mark up of the Payments System Protection Act (H.R. 5767) in the House Committee on Financial Services on June 25, 2008, Rep. Bachus, citing research at McGill, claimed that one-third of college students who gambled online attempted suicide.

“This assertion, which is reportedly based upon our empirical research, is not predicated upon any factual evidence,” responded Derevensky in an interview with the Safe and Secure Internet Gambling Initiative. “None of the studies conducted with adolescents or college students, to the best of my knowledge, have looked at a connection between Internet wagering and suicide attempts.” Derevensky raised these same concerns in a letter sent last week to Reps. Bachus and Barney Frank (D-Mass.)

Derevensky believes there is an opportunity for Congress to better protect consumers in a regulated environment. “If Congress is serious about minimizing the threat posed by Internet gambling, it should look to create an environment where Internet gambling operators are required to put in place safeguards that protect against compulsive and underage gambling.”

Last week, a study conducted jointly by the University of Western Ontario and University of Nevada, Las Vegas called for the legalization and regulation of online gambling.

“Just as legalized commercial gambling in casinos allows for governments to regulate it, so, too, could the legalization of online gambling allow for better regulation and attempts to reduce the growth of problem gamblers,” said June Cotte, associate professor at the University of Western Ontario, as reported by Poker News.

Existing technology and security controls have already proven to be effective in addressing compulsive gambling. Safeguards currently available in the industry include the ability to control the amount of money wagered, set limits on amounts bet and amounts lost, restrict the duration that someone can play, identify and stop players whose gambling patterns seem out of the ordinary, and allow for consumers to be excluded from online gambling.

“It is disappointing that Rep. Bachus is using scare tactics and false claims in an attempt to justify why Congress should limit my ability to gamble online,” said Jeffrey Sandman, spokesman for the Safe and Secure Internet Gambling Initiative. “We are encouraged by the academic community’s support of Internet gambling regulation. They emphasize the important point that consumers will be better protected if there are safeguards put in place to combat underage and problem gambling.”

The Internet Gambling Regulation and Enforcement Act of 2007 (H.R. 2046), introduced by Rep. Frank, would establish an enforcement framework for licensed gambling operators to accept bets and wagers from individuals in the U.S. It includes a number of built-in consumer protections, including safeguards against compulsive and underage gambling, money laundering, fraud and identity theft. A companion piece of legislation that would ensure the collection of taxes on regulated Internet gambling activities, the Internet Gambling Regulation and Tax Enforcement Act of 2008 (H.R. 5523) was introduced by Congressman Jim McDermott (D-WA).

Additionally, Rep. McDermott introduced last week, the Investing in our Human Resources Act (H.R.6051), which would direct new revenue generated by regulated Internet gambling activities to be spent on job training for those in the declining sectors of the economy and educational assistance for foster care youth. The bill also includes provisions to encourage responsible Internet gambling behavior and an awareness of unsafe practices, something which has been praised by problem gambling advocates.

“Though I support the dedication of resources to raise awareness about problem gambling, I encourage Congress to also provide appropriate funding for research, treatment and the prevention of problem gambling,” added Derevensky.

Meanwhile, a new bill related to online gambling was introduced this week by U.S. Rep. James McDermott, D-Wash. H.R. 6501 amends the Social Security Act to establish a trust fund from the proceeds of taxing Internet gambling. The trust fund would be used to provide education, job training, public-transit subsidies and other services to individuals in foster care or in declining sectors of the economy. The bill was referred to the House Committee on Ways and Means and Committee on Education and Labor.

UIGEA, which bans gaming sites from accepting money transfers of any kind for bets deemed to be unlawful gambling, directs the U.S. Treasury Department and the Federal Reserve Board to create regulations that would require banks and processors to block payments to those sites.

Two critics of the UIGEA, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, and Rep. Ron Paul, R-Texas, senior committee member, on April 10 introduced H.R. 5767, which would have prohibited the Federal Reserve and Treasury Department from implementing the regulations called for in UIGEA. The bill was defeated in committee on June 25.

A bill offered as a substitute to H.R. 5767 also was defeated at the June 25 committee meeting. Dubbed the “Payments System Protection Act of 2008,” the bill would have prohibited implementation of UIGEA until the Treasury Secretary, the Federal Reserve, and the U.S. Attorney General jointly developed regulations defining the term “unlawful Internet gambling.” That bill was sponsored by Rep. Peter T. King, R-N.Y.

Banks, processors, the Fed, and the Treasury Department have said the regulations for implementing UIGEA are unworkable and will hurt the financial industry while having little impact on illegal online gambling (Digital Transactions News, April 21 and March 24). Critics say the regulations fail to define what constitutes unlawful Internet gambling, leaving it to each financial institution to reconcile conflicting state and federal laws and court decisions, as well as inconsistent Department of Justice interpretations, when determining whether to process a transaction. In addition, some of the information needed to determine whether a transaction is illegal is unavailable to banks.

It’s unclear how H.R. 6501, the bill that would tax Web-based gambling, would impact the UIGEA. McDermott did not return calls for comment. However, one UIGEA critic says the bill might gain more support than H.R. 5767 because taxes on gambling would be used for programs to help the disadvantaged.

“The Frank-Paul bill would stop the U.S. government from taking any further steps on regulations that would require all of the country’s financial institutions to block Internet Gambling payments,” said SSIGI spokesman Jeff Sandman. “It’s a bold move, but a necessary one, in light of the warnings from the Treasury and Federal Reserve that they did not know how to write regulations to solve the problems created by UIGEA. Further, witnesses representing a broad spectrum of the financial services community unanimously stated that the current ban on Internet gambling is dangerous to the payments system and ineffective in stopping people from using the Internet to play poker, make bets on horses, or engage in other types of wagering.”

The current Internet gambling ban creates significant additional burdens for U.S. financial institutions, which say that it is unfair to turn them into the Internet gambling police at a time when their undivided attention ought to be on the economy.

Testimony before Congress last week offered proof that financial services institutions would face serious regulatory burdens in attempting to enforce UIGEA and related regulations, which is unlikely to stop millions of Americans from gambling online.

Representatives from the Credit Union National Association, Financial Services Roundtable, American Bankers Association and Wells Fargo & Co. testified about the burden they would unnecessarily face before the House Committee on Financial Service’s Subcommittee on Domestic and International Monetary Policy, Trade, and Technology on April 2. The current UIGEA law is ambiguous and allows for multiple interpretations of what may or may not be illegal activities.

Their comments reflect the concerns echoed in the more than 200 comments submitted to the Department of the Treasury and Federal Reserve System.

Frank introduced legislation last year, the Internet Gambling Regulation and Enforcement Act (H.R. 2046), that would regulate Internet gambling. The bill would require licensed Internet gambling operators to put in place safeguards to protect against underage and compulsive gambling and ensure the integrity of financial transactions.

A companion piece of legislation to the Frank bill introduced by Rep. Jim McDermott (D-WA), the Internet Gambling Regulation and Tax Enforcement Act of 2008 (H.R. 5523), would ensure the collection of taxes on regulated Internet gambling activities. According to a tax revenue analysis prepared by PricewaterhouseCoopers, taxation of regulated Internet gambling is expected to generate between $8.7 billion to $42.8 billion in federal revenues over its first 10 years.