The SportsFolio Journal - January 7, 2021
The NBA is back at it. The season started on December 22, under a new format. We are not in a bubble environment anymore, so while a new protocol is in place, this is riskier territory for the NBA. We can only hope that the NBA can repeat its successful handling of the pandemic.
Meanwhile, LeBron James is at it again. His foundation is opening a new community hub with job education and financial literacy. House Three Thirty is a significant community effort in, you guessed it, Akron, Ohio.
LeBron James, the Time Magazine Athlete of the Year in 2020, has really defined what a superstar athlete looks like today. Amazing talent meets excellent work ethic meets social responsibility. LeBron realizes that he has a platform and uses his voice to make all of us better. Keep it up King and please retire in Los Angeles.
LeBron was the rare talent who could skip college and start earning a paycheck as a teenager. Nearly everybody else gets plugged into the college system; they become key value drivers for the college game, creating substantial financial benefits for everybody else, except themselves.
That could change soon.
The amateurism narrative may have made sense in the past, but it is becoming more of a stretch every passing day. Does it really make sense that the student-athletes are largely left out when it comes to the enormously valuable pie they help create? This will be a key question that the Supreme Court needs to address.
Merry Christmas, Ripple.
The SEC sued Ripple, home to XRP, one of the largest cryptocurrencies by market cap, and two of its executives. The complaint can be found here (PDF).
Rather predictably, XRP’s price took a nosedive on the news. XRP was trading in the 50-60 cents range for most of December. As of January 4, 2021, it stood at approximately 22 cents.
The key issue in this case: Is XRP a security?
It certainly looks like one. XRP, in essence, seems to be a claim on an enterprise masquerading as a currency. The allegations in the complaint are quite damning, and if one takes them at face value, it appears that there really wasn’t much of a use case for XRP. Instead, the owners of the enterprise, who themselves held large amounts of XRP worked really hard to convince others that there will be one in the future, and therefore, they should buy today. The SEC says:
The economic reality is that reasonable investors are speculating that Ripple has the incentive and potential to create demand for XRP. XRP investors are betting that Ripple may yet solve Garlinghouse’s “trillion-dollar problem,” and they will profit as a result.
Ok, this looks like a security, indeed, at least if Howey is the governing definition. Howey refers to the principles developed by the Supreme Court of the United States in the infamous securities case SEC v. Howey Co., 328 U.S. 293 (1946): investment of money in a common enterprise with the expectation of profits solely from the efforts of the promoter or a third party.
SEC’s Ripple suit begs the question: What about Bitcoin? Is Bitcoin a security?
One man’s trash is another’s treasure. Bitcoin was already riding high on the Paypal news. The Ripple news gave it another jolt. The price action is quite impressive, with the Paypal announcement taking it from roughly $12,000 to $24,000, and the Ripple news taking it from $24,000 to $37,000 (at the time of this writing). It seems that traders took it as a sign that Bitcoin is destined to be the category winner; after all, the SEC has already opined that Bitcoin is not a security.
As Bitcoin traders rejoiced, we pondered. What is the rationale that XRP is not kosher, but Bitcoin is? Aren’t these both cryptocurrencies? Why is the SEC suing Ripple, but giving Bitcoin a pass?
There are a few key passages in the complaint that go right into the heart of that question. These passages also happen to be areas where we expect Ripple to push back hard. The first one:
If individuals purchased XRP “to engage in speculative investment trading” or if Ripple employees promoted XRP as potentially increasing in price, the Legal Memos warned that Ripple would face an increased risk that XRP units would be considered investment contracts (and thus securities).
Both memos warned that XRP was unlikely to be considered “currency” under the Exchange Act because, unlike “traditional currencies,” XRP was not backed by a central government and was not legal tender.
How does Bitcoin fare in these respects? Speculative trading? Check. Not backed by a central government? Check.
Employees promoting Bitcoin? That’s where Bitcoin is different, as there is no central organization that promotes Bitcoin. Rather it’s a collection of individuals with varying incentives (libertarianism, profit, illicit use, or other) that essentially serve as a decentralized group of promoters.
The SEC is taking the position that this is a threshold issue that separates BTC from XRP. It says:
The Legal Memos focused on this very fact—the existence of an identifiable actor who held itself out as responsible for making efforts with respect to XRP—in distinguishing XRP from bitcoin for purposes of the federal securities laws. The Legal Memos noted that, unlike with bitcoin, there was “a specific entity,” Ripple, “which is responsible for the distribution of [XRP] and the promotion and marketing functions of the Ripple Network.”
Is this an important factor? It is. Does it mean that Bitcoin is out of the SEC's crosshairs? We don’t think so. We’ll cover the why in the next issue of The SportsFolio Journal.
Sports & Money
December 2020 may be remembered as a turning point.
First came the news on NFL-Nickelodeon partnership. A pro-sports gambling site took issue with it, referring to it as a “kids site with sports-betting like elements.” We agree. This is the pick-em printable from the site. What does it remind you of?
You might think this is harmless. We disagree. Sports gambling represents a huge cultural shift, and the jury is still out on whether or not America wants sports gambling. Thus, the industry is moving in baby steps and plans for the long term. Where people see a fun activity, we see planning for the next generation of customers.
You know who else is planning for the next generation of customers? Robinhood, the commission-free stock trading app. By going after retail traders and gamifying the stock market, it has reached a truly astonishing $11.7 billion valuation in its most recent funding round. This Bloomberg piece has done a great job not only chronicling Robinhood’s ascent, but also laying out the fundamental issues with it. It also touched on Robinhood’s aspirations.
Robinhood enticed big VC investors such as Sequoia Capital with the promise that “customers will grow with us,” according to a 2019 pitch deck seen by Bloomberg. In a slide that said “creating relationships to last generations,” the company said each customer’s value should increase over time.
There are parallels here. Gamify stuff and hook the youth, so you can sell them more stuff when they grow up.
Before the ink was dry on what we feel is the gambling faction’s blatant attempt to get kids hooked with sports gambling, there was another new low.
Eris Exchange, in collaboration with RSBIX, notified the CFTC that it will list financially settled RSBIX NFL Futures Contracts. The .pdf notification is here. The contracts are called moneyline futures, over/under futures, and money spread futures. Sounds like.... sports betting?
Let’s dive deeper. We did the hard work so you don’t have to.
RSBIX stands for Regulated Sports Book Index Exchange. You heard that right. An entity that has the phrase sports book in its name is trying to get moneyline, over/under and money spread contracts regulated. They are not even trying to pretend.
There is not much info on RSBIX on the web, they seem to be in stealth mode. Maybe they are still preparing the website. Or, they don’t want to be in the spotlight. Our radars always go up when there is not much transparency.
This is pretty big news, so why is traditional media silent on this? There is a Sports and Jocks podcast here, which is the only piece we saw in December. Sportico, generally quick to the spot, covered it only a couple of days ago. Not a peep from anybody else as far as we can see. Hmm, maybe they don’t want to be in the spotlight. Didn’t we just say this?
Now for the contracts themselves. That these contracts serve a hedging purpose for sportsbooks is, how can we say this nicely, utter nonsense. As we have repeatedly said, sports betting is a claim on sports performance and it serves no valid economic purpose. True, having an imbalanced book is a risk for a sportsbook, but the only reason that risk exists in the first place is that the CFTC has not put its foot down on sports gambling and prohibited sports gambling contracts on the basis of not having a valid economic purpose.
Said differently, the imbalanced book risk is not a naturally occurring commercial risk like the harvest not being good this year, or it snowing too much (or too little). The imbalance book risk is an artificial one that is a result of the CFTC treating sports betting differently from election contracts by not taking any action on the former but prohibiting the latter. The CFTC’s stance is even more puzzling because the former serves no valid economic purpose whatsoever, and never claimed it does. The latter can at least claim, and in fact claimed (PDF), that it serves some purpose.
That these contracts serve a hedging purpose for stadium vendors and stadium owners is even more absurd. Eris says:
Because a team that is performing well (i.e., winning games) generally draws larger crowds relative to a team performing poorly, a team’s win-loss record creates financial risk for Vendors and Stadium Owners. Furthermore, a team’s win-loss record dictates whether the team makes the playoffs and, therefore, is eligible to host additional games. For the same reason, a team’s win-loss record also dictates whether Vendors can sell goods, food, beverages and services and Stadium Owners can sell tickets and services at such additional games.
But the win-loss record reflects everything that has happened in the past! The
whole point of hedging via futures is to manage commercial risks with respect to
a future uncertain event. Duh.
Assuming, arguendo, that the win-loss risk is a legitimate commercial risk that
needs to be managed by these entities, why does NONE of these contracts have a
win-loss trigger? Why is the Lakers covering the spread relevant for the hot dog
stand at the arena?
So what is going on here? It is impossible to miss the grand plan here, which is to start small and hoping the CFTC signs off on the contracts on the basis of limited participation; in its proposed form, only certain entities can trade these contracts. Then, a couple of years down the road, there may be an opportunity to amend the participants.
Let us be the Nostradamus here and give you the hypothetical Eris argument in the future: “Sports betting is ubiquitous in America. Once an activity that was frowned upon, today it is legalized in over 40 states. Given how popular it is, sports bettors are subject to myriad risks they need to manage. Today, we have filed an amended self-certification notification with the CFTC and requested that the participant definition is extended to include all retail participants.”
There you go. That’s how you get nationally regulated sports gambling in America. Sorry Nickelodeon, this is how the adults play the game.
Farfetched? Don’t take our word for it. Fast forward to about 1:13 in the Stocks and Jocks podcast. The host asks about prop bets, and Eris effectively responds that they will consider future innovations once the first batch of contracts get traction.
We know how this stuff works. We were in front of the CFTC all the way back in 2008 with our Sports Risk Index product. It did not have a performance trigger as we assessed performance to be a long-term, indirect factor for the financial health of the sports franchises.
Only designated contract markets (“DCM”) can trade these types of contracts. That’s why RSBIX needs Eris, and that’s why we had our own partner in USFE, which, like Eris, was a Chicago-based DCM. Then, the economic recession happened, and USFE shut down for financial reasons.
We are all for sports-based financial products. Our mission is to transform society through sports, and one key objective is to make sports an asset class. The more the merrier, and we mean it.
That said, these Eris/RSBIX contracts ain’t it. The ERIS/RSBIX effort is putting lipstick on a pig and hoping nobody notices.
We urge the CFTC to stick with the longstanding principle of the economic purpose test and to reject these contracts. The public comment period is open until January 28, 2021, and we’ll be filing a public comment. If you feel as strongly about these contracts as we do, you might want to do the same.