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Wild PlayUp Case Shows Blockchain-Gambling Convergence on Horizon

johnwallstreet
·5 min read

PlayUp, an Australia-based sports betting operator with licenses in New Jersey and Colorado, recently filed a restraining order against its former U.S. CEO, Laila Mintas. The civil suit alleges the high-profile executive, unhappy with her role and remuneration, sabotaged a potential $450 million sale of the company. While that is undeniably the juiciest part of the legal filing, it notably identified crypto exchange FTX as the prospective buyer. Benjie Cherniak (principal, Avenue H Capital) pointed to FTX’s pursuit of a deal as the latest indication that the convergence of blockchain and online gambling is underway. He expects other large blockchain companies and/or crypto exchanges to pursue the U.S. sports betting opportunity.

JWS’ Take: The PlayUp lawsuit alleges that following a failed power play for the global CEO position, Mintas sought out FTX founder Sam Bankman-Fried and told him, “There is conflict within management of PlayUp, there are systemic issues, and that the company is not clean.” The Australian operator claims its proposed deal fell through following that interaction.

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On the surface, $450 million for PlayUp sounds rich; the company operates in just two states. But Cherniak says, “There is no way [the proposed deal] only included market access to [New Jersey and Colorado], adding that PlayUp is “down the path of pursuing market access in a whole bunch of states.” PlayUp did not respond to requests for comment. But a source indicated that at least one company exec had claimed a sale would come with market access to a dozen or more states.

If FTX were to inherit licenses in 12-plus states, along with a fully developed back-end technology stack for online casino and sports betting, an established Australian gaming business and a team of people capable of trading games (all of which PlayUp has), Cherniak says $450 million could be a “very reasonable” number to pay.

It makes sense that a mainstream crypto exchange, like FTX, would take a run at sports betting. “If [the logic is] DraftKings and FanDuel [are winning] because they had good customer databases, a database of crypto adopters [could prove invaluable],” said Dustin Gouker (VP of North America, Content for Catena Media). “There are a lot of hoops [a sports betting operator] needs to jump through to get someone to bet online in a regulated market. [But] young adults who invest in crypto are used to that, and [they also] have the disposable income an online gambling company is looking for,” he explained.

Lloyd Danzig (managing partner, Sharp Alpha Advisors) agreed that an expansive database of crypto users, which “behaviorally [are] very similar [to sports bettors] in that both enjoy speculating with limited information on the outcome of uncertain short-term events,” could be a differentiated way for an operator to capture market share. “A new source of users that demonstrates favorable LTV:CAC [customer lifetime value to customer acquisition ratio] dynamics would be extremely valuable to any sportsbook,” he said.

Cherniak does not see crypto trading to be as synergistic with sports betting as daily fantasy was. But he acknowledges “there is absolutely some crossover” among the demos.

For FTX, a company heavily invested in sports sponsorship, sports betting seems like a natural migration. “If you’re going to spend all those dollars on marketing and build up the most visible crypto exchange globally, then using [those same sports sponsorships] as a two-for-one special to drive sports betting business [makes sense],” Cherniak said.

However, while FTX would in theory be able to use stadium naming rights (see: Miami Heat arena) and uniform patches (see: MLB umpires) to drive business for both their crypto exchange and a sports betting platform, it’s likely to be some time before sports fans can bet legally using Bitcoin, Etherium or any other token. Gouker explained: “There’s a lot of ground that needs to be covered before crypto and online gambling in the regulated U.S. market are dovetailed. I don’t think states, as they regulate casino and sports betting, really have their heads around [laying crypto on top of it].” Wyoming is the only state that currently allows players to load an online gambling account with cryptocurrency.

Of course, the crypto exchanges and blockchain companies will need to open themselves up to scrutiny and due-diligence far beyond what they are accustomed to if they aspire to operate an online gaming business. “If you buy a gaming platform, all of a sudden you’re very much regulated in whatever market[s] you are going into,” Gouker reminded.

FTX declined to comment on how it views the prospect of regulation (or if it still intends to pursue the sports betting opportunity).

While Gouker sees the hurdles keeping crypto/blockchain companies from making the transition, Danzig explained that the convergence is inevitable because “blockchain offers built-in security, fairness and efficiency mechanisms that solve important pain points in the sports betting ecosystem.” He noted it has already occurred in various Asian and European markets.

Gouker agreed that truly decentralized, blockchain-based sportsbooks and exchanges will eventually exist here in the U.S. “You see DraftKings with NFTs and Nigel Eccles and what he’s doing [with BetDEX. They are all] getting ready for a future where this is possible and more mainstream,” he said. For information purposes, Eccles—a FanDuel co-founder—has raised $21 million for his decentralized betting exchange.

But Gouker is not convinced that when we inevitably reach the point that peer-to-peer betting and decentralized sportsbooks are available to bettors, the operators offering them will be the big winners (even if P2P virtually eliminates all pricing and event risk). “It’s hard to see how an exchange is going to be a really big thing in the North American market, because if you’re [geo-fencing] exchanges, as you have to do right now [because of the Wire Act], it’s hard to get to the critical mass of having a big enough audience in any one state,” he explained. While decentralized exchanges do well enough in international markets, it is not a model that is winning anywhere.

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