We welcome 10 new subscribers to the Sporting Crypto Newsletter who have joined us over the last week! You’re part of a 0.41% week-on-week increase in Sporting Crypto subscribers!

Join 2,437 readers who are interested in exploring where Sports meets Web3. If you're reading this and still haven't signed up, click the 'Subscribe' button below to join sports industry leaders and fans learning about Web3!

If you’re already subbed - thank you very much. Please be sure to share the newsletter with your friends and colleagues!

Intro Notes, Plugs & Amendments 🔌🔧

Headlines are written for clicks.

I love breaking some of these down in the newsletter to get to the root of the story.

This week, a story has broken that probably shouldn’t be making as many waves as it should; NBA Top Shots are deemed securities, says judge. 

They haven’t been deemed securities.

But the issue is far more complex than that.

I went down multiple rabbit holes to break down both sides of this story in this week’s newsletter.

🔌 Sporting Crypto is hosting a meet-up in NYC on April 13th. If you’d like to attend, please email back at this address!

🔌 If you’d like to work together in a consultancy or workshop capacity, please respond to this email!

🔌 If you’d like to partner or sponsor the newsletter, email back at this address or reach out on Twitter or LinkedIn.

This Week’s Deep Dive: Are NBA Top Shots Securities?

Last week there were headlines from media publishers that read something along the lines of; NBA-Branded 'Top Shot Moments' NFTs May Be Securities, Judge Rules in Dapper Labs Case

This brewed discourse around 1) Top Shots themselves being securities and 2) NFTs as a thing being securities. 

Both 1) and 2) are wrong in my opinion, for a variety of reasons.

But like anything, there are nuances and multiple angles. In fact, every time I go back to think about this exact topic, I think about something new to write about. It could be turned into some sort of long report if I’m not careful.

📖 The Story

Before we get into the aforementioned headline, it’s important to tell the story of Dapper Labs.

Dapper Labs are best known as the creators of NBA Top Shot.

But how they got there and how the FLOW blockchain that Top Shot is built on was born, is a fascinating story.

In November 2017, Dapper Labs launched Cryptokitties. NFT Cats on the Ethereum blockchain.

This was before the word NFT was even used regularly.

The reason it made waves was that the NFT drop itself congested the Ethereum blockchain to such an extent that it was almost unusable.

NFT cats broke the Ethereum Blockchain. 

This forced Dapper to think about the suitability of Ethereum in terms of hosting future NFT projects. One of which went on to become NBA Top Shots, of course. They needed something more scaleable.

Dapper decided that instead of creating more NFT propositions on Ethereum - they would create their own blockchain; FLOW.

Fast forward to the present day and it is widely known as *the* blockchain for sports projects, for the most part, and famous for hosting NFT video moments like Top Shot, NFL All day — and also the lesser-known UFC Strike and LaLiga Golazos. 💬 The Context18 months ago a lawsuit was filed against Dapper Labs and its CEO Roham Gharegozlu alleging that NBA Top Shots are securities.

Dapper responded with a motion to dismiss, which was denied by a judge last week. Before we move on, what actually is a security?

Securities are defined by the Howey Test; an 80-year-old test that determines whether something is or is not a security.

It establishes four criteria to determine whether an investment contract exists. 

1. An investment of money

2. In a common enterprise

3. With the expectation of profit

4. To be derived from the efforts of others

If something meets each of these four points, it is a security.

Now, I don’t think using 80-year-old rules and regulations to govern 2020 technologies is smart, but the rules are the rules.

👨‍⚖️ The Judge: 

As per the lawsuit, one of the things raised by the plaintiff and the judge were tweets by NBA Top Shot’s official account on price movements that the court found: “that Defendants’ public statements and marketing materials objectively led purchasers to expect profits,” 

The judge went through each prong of the Howey Test, and on prong 3, an expectation of profit - the judge simply pointed to the tweets above.

I’d actually question the objectivity point there. The second tweet especially is a post of objective data… and interpretation of that data could be seen as an expectation of profit, but the use of the word objectively is something I question.

More interestingly, the plaintiff made several allegations that cited the relationship of the price of FLOW tokens with the durability (in a technical sense) of the Top Shot market.

In the final prong of the test, the efforts of others was also pointed to by the judge:

“it is plausible that Moments’ value is derived almost entirely from the continued operation by Dapper Labs of the Flow Blockchain, which enables price transparency (and thus influences value) but, perhaps more critically, appears to provide purchasers with the ability to trade at all. Defendants’ failure to acknowledge the blockchain technology that underlies Moments is fatal to their Motion in this respect” 

🎴 The Argument Against: Dapper, the defendants, argued that “Basketball cards are not securities. Pokemon cards are not securities. Baseball cards are not securities. Common sense says so. The law says so. And courts say so”And to be honest, I definitely side more with this argument than the judge and the plaintiffs. It just doesn’t make logical sense for a digital collectible to be classed as a security.

It’s just quite… dumb?

📰 Are the headlines accurate?

Many media reports have stated 'Top Shots are Securities' which is entirely inaccurate. Some even went on to question whether all NFTs are securities. Again, inaccurate.

My inference is that the judge’s main issue is actually with the FLOW blockchain. According to the ruling "FLOW tokens – while not necessarily securities themselves – are necessary to the totality of the scheme at issue.”

It goes on to say:

“Plaintiffs have alleged that, without FLOW tokens, no transactions on the Flow Blockchain can be validated. Indeed, the ‘Proof-of-Stake’ mechanism employed by the Flow Blockchain requires FLOW to power it and incentivise miners to validate transactions. In that respect, FLOW’s utility creates value for Moments through the network’s consensus as to ownership and the price of each transaction,” 

Blockchains traditionally are more secure the more distributed they are from a block validation perspective.

In plain English - the more people validating things on a blockchain - the more decentralised and for the most part secure it is.

One thing that I’ve never thought about until now is that the decentralisation of validators is not the only thing that makes a blockchain traditionally ‘distributed’ and arguably not ‘a common enterprise’ as per the second prong of the Howey Test.

It’s also the transactions on that network. 

So the allegations made by this lawsuit specifically is that FLOW is dependent *enough* on Top Shots from a blockchain activity perspective, that Top Shots could be deemed a security. ✏️ Some important and summarising so far:

• This lawsuit does not mean NBA Top Shots have been classed as securities, there is a long, long way to go before that is even a reality from a legal perspective.

• NFTs are a form of technology, and Top Shots use NFT technology to create their offering. This would not mean all NFTs are securities even if Top Shots are classed as securities. The judge’s conclusion was that; “what Dapper Labs offered was an investment contract under Howey is narrow” which specifically means the ruling is intended for this specific project on this specific blockchain.

• FLOW the blockchain, started as a private blockchain to cater to Dapper Labs projects such as Crypto Kitties, and eventually NBA Top Shots. It is now more open, and more decentralised than it was - with far more projects building on the blockchain.

🧠 𝗠𝘆 T𝗵𝗼𝘂𝗴𝗵𝘁𝘀:My initial reaction to this was "are they going to take my Panini stickers away?".Top Shot packs are accessible in price point for the most part and they still have 10s of thousands of unique users a month. Their users will be on the platform for different reasons, just like sneaker fans. Some will be buying for their personal collection, some will be buying to wear them and some will be buying to resell. And look, there's absolutely nothing wrong with trading these things and making money.In the 5-6 years I've been in the crypto space, lawmakers and regulators have continued to try and use archaic legislation on bleeding-edge tech. The is made even more difficult thing is some of these projects may well start as securities, but then become something else as they decentralise further, for example.

If we take FLOW for example, when it launched and Top Shot followed, the case by the plaintiffs would be a lot stronger — especially if it is assumed that FLOW was dependent on the volumes and transactions Top Shot was generating.

But if we look at the top volumes on FLOW currently, Top Shot is still the outright leader but it’s not by much - considering the volume from their NFL video moments proposition; NFL All day. FanCraze, Doodles 2, and La Liga Golazos are also in the top 5 driving between $400-600k respectively.

Top Shot still accounts for 35-40% of the volumes over the last 30 days on FLOW and it will no doubt continue to lessen as a piece of the overall FLOW pie.

But is that 35-40% enough of a chunk to be deemed entirely dependent?

The complication with blockchain-based assets and technologies is that they might start off, as I earlier explained, looking a bit like securities — but end up like something that is a far cry from one.

The question is, do we have legislation and regulation that is equipped to handle something that changes at that rate?

My answer would be no.We need better, clearer rules and regulations when it comes to crypto. Both for consumer protection purposes but also for innovators.

Dapper shouldn’t, in my opinion, be punished for creating a product people love that used bleeding edge technology.

They shouldn’t be punished for creating a scaling solution that allowed for millions of transactions on their blockchain to fill the demand they knew would come from popular NFT projects.

The crypto markets reacted to the lawsuit news with a dip in FLOW, but the price quickly recovered.

Whether that helps or worsens their case with the judge… I’m not sure.

But markets don’t seem to be too worried. 🥎 Rights holders, beware?

Sports rights holders should absolutely be doing the utmost scrutiny on what blockchains they partner with and what crypto companies they deal with in general.

That hasn’t been the case up until now.

The reason I say this is because if an outfit that are tried, and trusted, and have created things that sports fans love like Dapper Labs has lawsuits of this kind being thrown their way — there are various other sports x web3 projects I can think of that will absolutely be under the microscope in a similar way.

Rights holders should be worried more about who they’re working with and what they’re working on rather than whether NFTs are securities (they’re not).

More Sports & Crypto stories & things to put on your radar

• Dapper Labs have cut their head count by 20%. 

• NBA partners Chinese fintech giant Ant Group to launch NFTs in China

• Crypto company Whalefin are pulling out of their sponsorship deal with Atletico Madrid. This will definitely not be the last crypto x sports deal that ends prematurely.

• Layer 1 Blockchain Avalanche have launched Legends By Loco, an NFT marketplace for Esports fans, in collaboration with Loco, the largest Esports streaming platform in India. 

• OneFootball have shredded another 150 jobs after Web3 overspend. The company raised a reported $300m Series D in April 2022, and created a joint blockchain venture called OneFootball Labs alongside Animoca Brands and Liberty City Ventures.

• Private Qatari investment groups might have some competition when it comes to purchasing Manchester United FC. Aren’t DAOs to take over sports teams so 2022?

• Draft Kings have announced its premier NFT Golf product:

• Speaking of Golf, LinsDAO had a huge voter turnout of almost 1000 unique wallets, voting ‘yes’ to use community funds to bid for a golf course in Scotland; Sprey Bay Golf Club

Great reads, great tweeting and more general ‘stuff’ that could impact you

• Google Cloud are now a validator on the Tezos network. 

• I’m swaying more toward this thesis…

• Spotify are rolling out token gating. Pretty big news from the audio streaming giant,

• Coinbase have launched their own layer 2 blockchain…but it won’t have a token. 

Thank you!

Thanks for reading the latest edition of the Sporting Crypto newsletter. I’m happy to see so many people enjoying and sharing it with their networks. If you enjoyed this, please tell your friends who might be interested - and share it on social :)

This newsletter is for informational purposes only and is not financial, business or legal advice.These are my thoughts & opinions and do not represent the opinions of any other person, business, entity or sponsor.

The contents of this newsletter should not be used in any public or private domain without the express permission of the author.

The contents of this newsletter should not be used for any commercial activity, for example - research report. consultancy activity, paywalled article without the express permission of the author.