🔍 DEEP DIVES

The Crypto Sports Market Is Promising

On April 5th, 1975, Satoshi Nakamoto was “born”. On January 9th, 2009, he released bitcoin, and, as a result, invented the cryptocurrency industry.

Flash forward to 2017 and DapperLabs launches the first NFT viral sensation, CryptoKitties, resulting in the company landing a partnership with the NBA in 2021 to launch NBA Top Shots.

Top Shots were so simple but so genius. Digital trading cards of NBA highlights captured the attention of hundreds of thousands of sports fans and speculators alike, with many willing to spend small fortunes to obtain the crypto GIFs. It didn’t take long for people to realize they could get rich off NFTs, and thus, the great NFT bull run of 2021 began.

Unfortunately, NFTs have been down-only since 2022, and it’s unclear when the non-fungible JPEG resurgence will be. But, despite the brutal amounts of money lost in NFTs over the last year, one sector of the market is still thriving: sport NFTs.

A Big Market
The sports (and esports) market is gigantic with projections for it to generate over $500 billion in revenue in 2022. This is due to two major tailwinds:

Thankfully for crypto, such a large market presents big opportunities to onboard new users.

Instead, like most segments of crypto, the industry is at its best when it doesn’t try to fit into legacy molds but instead does things in a new and innovative way.

Crypto companies such as Chiliz, Sorare, and Stake are doing just this, standing head and shoulders above the competition.

Beyond the mainstream partnerships, these platforms have done quite well in onboarding regular users, as Chiliz currently has a market cap greater than $700 million, Sorare has done more than 50,000 ETH in sales, and Stake had the aforementioned $2.6 billion in revenue in 2022.

Looking deeper, we can see that sports NFTs are among the most popular NFTs in existence. Sorare is far and away the most traded NFT over the last day, week, and month, while only Axie Infinity stands above Sorare and Top Shots all time.

The implication? Besides Axie, no NFT collection has done more to onboard new users than sports NFTs.

Looking Ahead
It’s still early days for the crypto <> sports industry. But, it’s clear the union is mutually beneficial:

For these reasons, we would not be surprised to see this industry grow exponentially in the coming years, especially if the rules around regulation become clearer.

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🏛️ REGULATORY FRONT

US Treasury Department Releases Illicit DeFi Report

If 2022 is remembered for the bear market, hacks, and almost unfathomable collapses, then 2023 will be remembered for the regulatory war.

So far this year, we’ve already seen:

That’s a lot of regulatory hits in less than four months, but it’s about to get even worse.

This week, The US Treasury Department released a “DeFi Illicit Finance Risk Assessment”, to assess how decentralized finance, or DeFi, is being abused by illicit actors.

And already, pro-crypto lobbying outlets such as CoinCenter are pointing out that the report is unhelpful, inaccurate, and potentially dangerous.

So who’s right?

The report is worth a read in its entirety, but in this article, we’ll briefly summarize its good, bad, and ugly parts.

The Good
Against our expectations, the report isn’t all bad, as the Treasury actually makes some encouraging points.

First, the report repeatedly makes clear that it’s just a report, not binding law. This means that the 2019 FinCEN guidance, which CoinCenter believes is good law, is still the law of the land pertaining to DeFi.

The report also makes clear that DeFi is a relatively small fish, and that traditional finance is a much more significant money laundering threat. We couldn’t agree more.

Finally, the report states that it’s not concerned with transfers between two “self-hosted” wallets. In other words, the Treasury doesn’t care about you sending money directly to a friend. This is obviously positive, because if they were concerned about this, we would be entering the doldrums of a dystopian surveillance state where every transaction is monitored by the government. Oh yea, that's what CBDCs are for…

Anyway, on to the bad.

The Bad
Although the report claims the Treasury is cool with peer-to-peer transactions, it qualifies this by saying “as long as it doesn’t involve smart contracts” (paraphrasing). As smart contracts are the lifeblood of DeFi, this is basically the Treasury saying, “we have our eyes on DeFi.”

Beyond the implications for DeFi, this also shows a fundamental misunderstanding by the Treasury of how wallets work. Crypto wallets are on the blockchain, not in people’s pockets. To access them, you need to use smart contracts. Thus, every peer-to-peer transaction involves smart contracts in some form, making the Treasuries statement completely incoherent.

Moving on, the report spends page after page debating regulations for centralized vs. decentralized tools and protocols.

In the grand scheme of things, it shouldn’t matter whether a protocol is centralized or decentralized. What should matter is what the protocol is doing. If you’re managing other people’s money, you should be regulated. If you’re helping people secure their own money, you shouldn’t be regulated.

Whether you’re centralized or not is irrelevant.

The Ugly
Ultimately, the Treasury’s obsession with centralization and decentralization seems to be a step to regulate crypto protocols regardless of what the protocol is actually doing.

This is best seen in the report’s sections on the division of the Bank Secrecy Act (BSA, also known as the Anti Money Laundering law).

The way BSA authority is (supposed to be) triggered is based on what the party in question is doing. As these activities have very different definitions, this gets very complex very quickly. Thus, it’d be helpful for the report to dive into what DeFi activities trigger what BSA attention.

As you can probably guess, the report does none of that. Instead, it claims that “DeFi services at present often do not implement AML/CFT controls or other processes to identify customers”. In other words, all of DeFi is breaking the rules, irrespective of the protocol’s activities.

So, according to the Treasury Department, it doesn’t matter if you’re just publishing software to help people secure their money, you are (potentially criminally) breaking the law.

Not good.

Conclusion
As we stated in the good section, this is just a report, not binding law. But, that doesn’t change the fact that reports like these and the White House report are concerning for the future of crypto in the US.

It is clear that the powers-to-be are not fans of crypto and are working to destroy it, whether explicitly through CBDCs or implicitly through cutting off banking access.

This, as we have said many times, is extremely short-sighted. We should be encouraging innovation, not driving it away.

Unfortunately, it looks like the US Government sees crypto not as a tool for prosperity, but as a threat to be destroyed.

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