There were a few key developments to cover across gaming, Web3, crypto regulation and NFTs this week! Separately, we had a great experience on the West Coast, participating in two panels at MetaBeat (Mythical, Solsten, Naver-Z, Chipotle, Arrowroot) and in a spirited next-gen gaming discussion at MIT’s Imagination in Action (NCSOFT, XEO Design, Alar, Making Fun Games, EA).
Speaking of Mythical, the company announced the Mythos Foundation, the first Web3 gaming alliance of its kind, alongside several well-known brands in gaming and Web3, including Krafton (PUBG Battlegrounds), Ubisoft, Kakao Games, Animoca and others. See full map below but from reading the announcement, it seems likely that there are new partnership announcements in the works as well.
In Web3/crypto, there was very big news in the Polkadot ecosystem - KILT, a decentralized identity application, was the first to successfully migrate from the Kusama network, where developers battle test their applications in a real world environment, to the final destination - the Polkadot Network!
In NFT land, a trend continues to grow - crypto to corporatization. Apes, Doodles, and Moonbirds have all raised capital to monetize their IP with consumer experiences, games and products. Cool Cats is the latest this week. Noticeably, the capital is not being raised through NFTs, but potentially as equity in the operating entity or through governance tokens like Moonbirds has planned. Could celebrity endorsements bring back Crypto Kitties? There is still much to analyze here from a regulatory perspective in our view.
Alas, it's not all rainbows (cats) and unicorns. The crypto industry is, generally speaking, intent on freeing itself of the SEC jurisdictional grip, and fleeing to the crypto-friendly CFTC. However, this week, the CFTC charged Ooki DAO and all of its members, claiming that the DAO was offering leveraged and margined trading products, reserved for registered futures commission merchants (FCMs), and in failing to conduct KYC-AML (Know your customer-Anti money laundering). Also, as an unincorporated association, anyone who has participated (even in voting!) theoretically has unlimited liability.
Stay tuned for details on an upcoming 9am ET daily Twitter Spaces - the AM Call with Signum Growth. Thanks and have a great weekend!
Angela Dalton & the SGC Team
The Mythos Foundation
Mythical Games publicly announced the Mythos Foundation and the Mythos DAO, collectively Mythos, an entity established to “simplify, standardize, and democratize Web3 gaming.” Mythos aims to bring players and creators into the value chain of game creation which has excluded players and creators for so long.
According to the release, initially, the Foundation’s focus will be on five key areas of development: building out NFT infrastructure, supporting communities, developing traditional esports connections, participating in Web3, and crafting policy aligned with gamers wants and needs.
The company reported that the DAO will operate using the MYTH governance token, which will also function as the native utility token across the Mythical chain, marketplaces like Blankos, Mythical Marketplace 2.0, dMarket, and future games in the ecosystem.
Other DAO members will include three subcommittees (shown below), as well as a Special Council consisting of one representative from each group, a Mythical Games rep, and a rep from Cartan Group, the consulting firm helping to manage and operate the DAO. Cartan Group notably also participates in operating the Ape Foundation. Advisors will be added on an as-needed basis.
Game Developers / Publishers
Web3 / Metaverse Infrastructure Partners
Esports / Guild Partners
Current advisors:
An Industry First for Polkadot - A Decentralized Identity Application Makes a Full Migration (without a hitch) from the Kusama Network to the Polkadot Network.
“Happy to see KILT Protocol showing, for the first time ever, the live transition of an entire parachain ecosystem from one Relay Chain’s security umbrella to another. This is another demonstration of the power and flexibility of the Relay Chain model for decentralized application platforms,” said Dr. Gavin Wood, founder of Polkadot.
In a milestone achievement for both the Polkadot Network and Web3, KILT protocol has successfully migrated from Kusama to Polkadot. The Kusama network is not a ‘testnet’ but rather a real world, real value, decentralized environment in which developers can work out the kinks and battle test their applications. KILT is setting an example for how parachains may do this moving forward.
"This decision was spurred by large-scale enterprises starting to implement business cases on KILT…Thanks to Kusama’s fast iteration cycles, KILT quickly became decentralized and added many new functionalities, allowing the network to prove its efficiency and utility.”
In the year since it went live, KILT partnered with many Kusama and Polkadot teams to integrate digital identities composed of decentralized identifiers (DIDs) and verifiable credentials.” Kilt leveraged XCM technology, Polkadot’s cross-chain interoperability standard, to generate the final block on Kusama and the first block on Polkadot, without changing any data or services on the network.
CFTC Charges Ooki DAO - Are All DAO Members Equal?
“DAO” - any blockchain-based community with on-chain assets, shared governance and a shared treasury
On Sep. 22, the CFTC announced that it simultaneously filed and settled charges against the former operators of Ooki DAO, previously bZeroX protocol, a decentralized smart contract-based protocol for margin trading. This surprised many in the crypto industry as the CFTC is viewed as the friendlier regulator relative to the SEC. By designing, deploying, and marketing the bZeroX Protocol without registering with the CFTC, the claim is that defendants illegally operated a designated contract market (DCM), engaging in activities only registered futures commission merchants (FCM) can perform, and failed to conduct mandatory KYC diligence on the platform’s users.
Along with charging the project's founders, the CFTC is exploring charging all Ooki DAO members–token holders–who voted on decisions, even if they are not directly a part of a controlling entity. This could have implications far beyond Ooki that extend into major DAOs like MakerDAO; as such, the resolution of this issue will likely have a significant impact on how DAOs work and are structured in the future.
To quote the settlement directly, “a key bZeroX objective in transferring control of the bZx Protocol (now the Ooki Protocol) to the bZx DAO (now Ooki DAO) was to attempt to render the bZx DAO, by its decentralized nature, enforcement-proof. Put simply, the bZx founders believed they had identified a way to violate the Act and Regulations, as well as other laws, without consequence.”
The CFTC concluded that “DAOs are not immune from enforcement and may not violate the law with impunity.” In other words, illegal activities are illegal activities, even if they are obfuscated in technologically innovative structures.
On Tuesday, a California court said the CFTC has effectively served summons to Ooki DAO token holders in the form of posting to its chat box and notice board. This isn’t the first unique way of serving legal papers we have seen in the blockchain space–earlier this year, a New York County court approved serving defendants directly on the blockchain using a NFT or “Service Token”:
“The Service Token will contain a hyperlink (the Service Hyperlink) to a website created by [Plaintiff’s attorneys], wherein Plaintiff’s attorneys shall publish this Order to Show Cause and all papers upon which it is based. The Service Hyperlink will include a mechanism to track when a person clicks on the Service Hyperlink. Such service shall constitute good and sufficient service for the purposes of jurisdiction under NY law on the person or persons controlling the Address”
In terms of legal precedent, in The DAO Report (July 2017), the SEC made clear that The DAO tokens were investment contracts, and therefore securities, according to the Howey Test. In other words, these tokens represented investments of money in a common enterprise with a reasonable expectation of profit, based solely or primarily on the managerial or entrepreneurial efforts of others. Although The DAO claimed to be a decentralized autonomous organization, the SEC found that Slock.it (the promoter) was an issuer for purposes of U.S. federal securities laws.
Serving members of a DAO is tricky because it is difficult to ascertain the degree to which DAO token holders engage in the DAO. The CFTC, in this case, is probably not concerned with the structure of the entity, but with the nature of the product itself.
In October of 2021, CFTC acting Director of Enforcement Vincent McGonagle stated, “In the digital asset space, we’ve brought several actions against entities where they’re offering digital assets, Bitcoin or others on a margin or finance basis…and those products should be on an exchange.”
A final important point about the DAO structure is the fact that it was referred to as an unincorporated association, which could mean that everyone involved has unlimited liability. Note: we have highlighted in the past the concept of “L-DAOs,” first established in the state of Wyoming. These offer participants the same liability protection offered by LLCs. While Wyoming allows them to have an unlimited number of members, other states have recognized L-DAOs but limit their participation to 100 members.
NFTs, Brands, and Content
Cool Cats made a series of moves in the past month that highlight a growing trend in NFT projects – from crypto to corporatization. The Cats partnered with GAMEE, the casual gaming subsidiary of Animoca Brands, to launch a branded mobile mini-game. Additionally, they raised an undisclosed amount in strategic funding from Animoca Brands, and hired ex-Disney brand manager Stephen Teglas as their new CEO. Teglas has 25+ years in brand management and commercialization for Disney, Warner Bros., and, most recently, advising Web3 brand, Recur.
This concept of corporatization can be seen across other “blue chip” collections such as Apes, Doodles, and Moonbirds, which have raised tens of millions of dollars to fund gaming, media, and consumer goods projects. The money raised is noticeably not through NFTs, thus may be through equity in the operating entity, or governance tokens for a future DAO.
So far, most NFT collections haven’t launched anything outside of community memberships – Mutant Apes and Azuki BEANZ are a couple examples. Others, like Cool Cats, ventured to design their own gaming content, Cool Pets. The launch of this game drove the value of the ecosystem down when the community decided the game was simpler than they hoped (“Click here and get a coin!”). Overall, many realized that building “sticky” content is harder than launching an NFT and forming a community around it.
Another project that illustrates this concept is Pixelmon. Last February, Pixelmon raised $70M in an ultra-hyped NFT mint, which quickly fell apart as the art reveal was FAR below expectations. The now-doxxed, 21 year-old founder sought to right his wrongs by onboarding new counsel for the project, which still had millions in funding. This week, it was announced that VC firm LiquidX acquired a 60% stake in Pixelmon, full control over operations, and has been holding daily “Ask the CEO” chats in Discord for the past 4 months!
The moral of these stories is that monetizing content is hard. Cool Cats hiring Teglas, among other examples, might be a sign that NFTs are coming to a mainstream audience. For example, Cool Cats could bring their IP to Web2 brands and celebrities to gain an instant non-crypto audience and a better view of their market fit. As an example, in June, Doodles hired Pharrell Williams as their Chief Branding Officer! Doodles receive mainstream status, while Pharrell demonstrates how NFTs can shrink the distance between himself and his fans.
Apple Brings (a little) Clarity to NFTs on App Store
Despite mobile traffic accounting for half of internet usage, almost all NFT volumes are web-based. Regulatory clarity from governments, as well as strict app-store policies governing how digital goods can be sold has prevented NFT developers from publishing meaningful NFT-driven apps. At the end of September, the Information published an article with quotes from startups claiming that Apple allows sales of NFTs, as long as they are in-app purchases and clip Apple’s standard 30% tax.
The restrictive policy comes as no surprise to many developers, as it is Apple’s standard tax on digital goods like in-game items and in-app currencies. Major NFT players like OpenSea have generally avoided conflict with their mobile app by solely allowing the viewing of NFTs. On the other hand, Crypto.com, whose NFT app launched in March and allows the purchase and sale of NFTs, may have bowed to Apple’s 30% fee. OpenSea’s website takes a 2.5% commission on all transactions while Crypto.com’s mobile app takes a 5% commission with 1.5% (30% of 5%) going to Apple.
Tim Sweeney commented: “Now Apple is killing all NFT app businesses it can’t tax, crushing another nascent technology that could rival its grotesquely overpriced in-app payment service. Apple must be stopped.”
Games that use NFTs, especially startups with limited funds, may be discouraged by Apple’s policy. Even if they go mobile to grow their user base, they will forfeit at least 30% of their profits and risk running into unforeseen legal troubles.
If a publisher does have enough runway to build a user base on both mobile and web, one option could be to give away free items on mobile that can be used in their web app, where users could then purchase more goods. We mentioned “free-to-own” in our last Bits, an idea that card game Gods Unchained put into action. The game recently gifted packs of NFT cards to all GameStop PowerUp Pro members as a push to help bridge Web2 gamers to Web3. Gods Unchained has ~80,000 WAU while GameStop’s PowerUp Pro has 5M members!
***We are not spending time on Web2 companies that aren’t innovating, but Meta’s announcement did provide some comic relief. Most users of Facebook and Instagram are now able to share NFTs through the apps. They describe moving NFTs between the apps as “interoperability.” ***