"You could say we are the Kazaa of online gambling," says John O’Malia of BetBug, the peer-to-peer betting exchange site.

The comparison is loaded. Kazaa, the website that allows surfers to swap music tracks, has proven hugely popular and claims around 100 million users. But it is also tied up in a global tangle of lawsuits with the record industry and has been branded an "engine of copyright piracy to a degree of magnitude never before seen".

Online gambling sites face their own legal hurdle. Despite the exploding popularity of internet betting, the global jackpot is theoretically offline to the digital croupiers.

The United States legal system has pitted its formidable weight against the tide of gambling sites. The US Justice Department has threatened to charge media outlets who take advertising dollars from gambling sites with aiding and abetting violations of the Wire Act. In one case, an entrepreneur was imprisoned for running a website from the Caribbean that allowed American punters to bet.

Meanwhile Las Vegas – America’s fastest growing city – attests to America’s insatiable appetite for a flutter. Research suggests that when Americans gamble, they table more than their European peers. While a British better is satisfied with a £5 punt, an American prefers a $50 stake - about five times as much.

Eyeing this prize, Mr O’Malia is pushing hard what he sees as BetBug’s unique selling point. Unlike other betting exchanges, which require punters to bet through a site, BetBug clients download special software once and then bet directly among themselves.

"Because BetBug’s peer-to-peer software connects gamblers directly with one another, the company cannot be considered a middleman and therefore sidesteps the Wire Act," Mr O'Malia says.

"We are the only legal online option for American betters."

Mr O’Malia concedes that the argument is yet to be tested. That there is a market despite of the legal question seems assured. According to www.Casinocitytaimes.com, more than 1 million Americans already play poker online every day – all of them illegally. The appetite for sports betting is thought to be equally robust.

BetBug is backing its case with a marketing budget, booking radio spots and entering talks with television broadcasters.

"I guess our case will only really be tested if we are pursued by the Justice Department," says Mr O’Malia. "We’re confident we’d win, but that’s a route we’re keen to avoid if possible."

BetBug, like established betting exchanges such as Betfair, relies on a critical mass of users to provide the liquidity essential for its business model. It claims to have racked up nearly 1,000 users in the US since its launch last summer. The company, which is based in Canada, expects to turnover $1 million this month.

Mr O’Malia, who spends much of his time in London, must now hope that the platform follows the Kazaa precedent and emulates to some extent the music site’s "degree of magnitude". BetBug is already making money through referral fees from payp2p.com – the company that manages the flow of money from losers to winners and takes a 5 per cent stake from each bet, capped at $20.

Even so, industry experts are not quite sure what to make of BetBug. One asked why, if the company is so sure of its legal standing, it is domiciled in Canada and not America. The company has also gone quiet – for the time being – on a once-mooted stock market float on London's AIM exchange.

Another analyst pointed out that BetBug requires users to download a nine-megabyte file, and that many potential clients, especially those who bet from work – a significant market in itself – are unlikely to opt in to the process.

It is also argued that betting exchanges don’t sit easily with American betting tastes. It is generally accepted that sites such as Betfair, the market leader, attract sophisticated customers looking for better value than that offered in the high street’s bookmakers. In America there are no local bookies and, according to some analysts, punters are more interested in evens propositions than value.

"That’s why we’ve thought hard about offering American customers the means to bet on head-to-head propositions – whether or not to take the New York Knicks over the Washington Wizards and then to propose terms for the wager," says Mr O’Malia. "We are offering them what they want."

Despite the reservations, onlookers are agreed that if BetBug succeeds in ducking under the Justice Department’s radar it could quite possibly take down the American online gambling house.

"If these guys are right about their game plan then being legal would be a major advantage," says Alun Bowden, the editor of egaming review, the industry magazine.

"Being able to market themselves properly would make a big difference. And, when it comes down to it, lots of the so-called illegal guys don’t look to be doing too badly as it is."

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