The federal government announced its decision yesterday after completion of a review of the Interactive Gambling Act 2001.
NSW minister for gaming and racing, Grant McBride, said the federal government's decision was a "double blow" to the NSW racing industry.
Betting exchanges are online betting sites where punters can bet against each other. They work by matching the bets of punters directly, thereby eliminating the bookmaker from the arrangement entirely.
"Offshore betting exchanges are bleeding the local racing industry dry, and will deprive it of AU$30 million over the next three years," McBride said.
"The NSW racing industry employs 50,000 people and if betting exchanges are permitted to operate, the jobs of these people will be under grave threat," he added.
In March this year, a majority of racing ministers and the Australian Racing Board called for a "complete and total prohibition on the offering of betting exchange services to Australians."
McBride said despite the federal government's disappointing decision, the NSW government will not licence betting exchanges in NSW.
The office of communications minister Daryl Williams announced today that the government report, which will be released soon, "found no compelling evidence to suggest that betting exchanges were likely to contribute to an increase in the level of problem gambling."
Williams, however added, that the decision not to take regulatory action on betting exchanges does not prevent the states and territories "from acting on licencing issues falling within their own jurisdictions relating to interactive wagering and betting exchanges" and that "the licencing and regulation of gambling services has traditionally been a matter for the states and territories."
The review also noted that there is the "potential for enhanced consumer protection measures to be introduced in an online gambling environment."
Williams added that consumer protection is best done "through existing state and territory licencing regimes."
"I call on the states and territories to recognise their responsibilities and investigate opportunities to strengthen their licensing regimes across all wagering services," Williams said.
Public submissions for a review of the Act ended April 22 last year with TAB Limited and other institutions sending out their suggestions for change.
TAB Limited previously called on the government to correct what seems to be a "loophole" in the Interactive Gambling Act which allows foreign betting exchanges to offer services here.
Tab Limited Wagering chief executive Peter Kadar, previously expressed the company's support for the NSW government's call for the federal government to ban online betting exchanges.
"These operators are a recipe for disaster in terms of taking gambling in this country in a new and dangerous direction. They provide the mechanism for an explosion in excess gambling and potential corruption. The Minister for Gaming and Racing, Grant McBride, is to be congratulated for his stand on these parasites who are ripping money out of local markets and putting nothing back in," Kadar said.
Church-based organisation Wesley Gambling and Financial Counselling Services also previously said that they believe online gambling will triple the 330,000 gamblers in Australia.