(Bloomberg Opinion) -- India has stunned its online gaming industry by moving legislation to ban real-money stakes. At first blush, the reasons for hitting the kill switch appear valid. Rising addiction, money laundering and financial frauds through these apps are all serious problems.

However, I wonder if policymakers have thought through the implications. All that prohibition ever does is to push users toward moonshine — in this case offshore casinos. They will take in wagers and pay out winnings via crypto, giving a boost to illegal, two-way money flows.

With fantasy sports, putting real money behind players’ on-field performance has been elevated to a game of skill, at least in the eye of the law. Add the usual suspects — pandemic ennui, the rise of work from home, and an explosive growth in mobile entertainment — and the world’s most-populous nation was starting to emerge as a promising online-gaming market. Even a hefty 28% tax on deposits failed to deter the popularity of apps such as Dream11, Games24X7 and Mobile Premier League.

Yet, it still had a ways to go. The $3.8 billion domestic betting industry was nowhere near fulfilling the $100 billion of India’s gambling demand that leaks to overseas sites each year, according to analysts’ estimates. A bulk of these bets are on cricket, especially during the two-month-long Indian Premier League. By deciding to gut the local industry, the government is saying goodbye to any hope of stanching the outflow. It’s also forswearing more than $2 billion in annual tax revenue.

Some of the activity, and hence tax collection, will switch to physical venues, such as publicly traded Delta Corp.’s licensed casinos in the tourist destinations of Goa and Sikkim. Those who gamble to just pass the time — as is increasingly the case for a vast army of unemployed youth — might switch to social-gaming options for non-monetary payoffs. Those in-app rewards will get bigger and more sophisticated now as more brands and influencers latch on to them in the absence of other options.

E-sports, too, may get a leg up, thanks to the legitimacy accorded to them in the same law that’s seeking to ban online gambling.  

The financial system might also heave a sigh of relief. The local cricket-betting apps were beginning to strain banks’ infrastructure by taking wagers in real time from rupee-denominated deposit accounts. As I wrote during this year’s IPL season, lenders that hold the accounts of these legitimate money-gaming sites were under pressure from clients to not miss any of the funds coming their way. 

All of that madness will end. However, new headaches will emerge. Those who got addicted to fantasy-sports betting when the government had no problem with it won’t just give up the habit. They will look for their fix elsewhere. Many international sites accept players from India; they don’t even insist on rigorous “know your customer” checks. Just a username, email, and password are often enough. A customer who makes a deposit in Bitcoin or Ether and takes winnings the same way would bypass the banking system altogether.  

India already has nearly 100 million crypto wallets. The money-laundering menace that the policymakers are trying to address could get worse. These offshore gambling proceeds will become a source of crypto liquidity for residents looking to jump controls on capital outflows. Some of those transfers will be proceeds of illicit activity; nearly all of them will avoid detection. And then local lenders will complain that they are losing precious deposits without really knowing where they’re going. 

The other unintended impact may be felt by kabaddi, a traditional sport popular across the subcontinent. Fantasy-sports apps, which have a self-interest in opening new areas to betting, have been some of the more aggressive sponsors of the annual Pro Kabaddi League, helping to revive enthusiasm for the game over the past decade. Now someone else will have to step up to the plate. 

The ban will come with a possible three-year jail term for operators in addition to fines. That, too, seems like overkill. It’s best to channel an overburdened law-enforcement system toward real scams, like when a gang set up a fake Indian Premier League tournament at a remote farm in Gujarat with laborers acting as players to hoodwink Russian gamblers. According to a report in the Guardian, that “IPL” went all the way to quarter finals before the racket was busted.

Expect more such cases of serious fraud and criminality as precious policing and judicial resources are wasted on shutting down online-betting shops that enjoyed legitimacy until recently. In that respect, too, the ban may resemble the US Prohibition Era.

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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.

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