Can VCs take crypto out of this downturn? – TechCrunch

Welcome back to Chain Reaction.

Last week we watched Musk holding doge. This week we’re talking about where all this crypto VC money might be going.

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maybe it’s all a game?

A weekly dispatch from TechCrunch crypto editor’s desk Lucas Matney:

The reality is that the dreams of web3 investors and founders are kind of stalling – a crypto decline generally means less hype, fewer conversations between friends, and generally less organic consumer onboarding to consumer experiences. This is far from ideal for VCs who saw a consumer web dream within reach, but luckily they have some deep pockets thanks to recently raised mega-funds with crypto betting as their sole focus.

Still, it’s a tough time for the core consumer crypto audience, with recently acolytes hitting badly and many likely being discouraged from putting more time, money, or effort into new web3 projects. The question becomes how to put this VC money to work in a bear cycle; many will need the period of reduced focus to dump into infrastructure and the “picks and shovels” toolsets. Others may go insular and support consumer projects that are further disconnected from the wider world of crypto, but expose users to synthetic economies, wallets and digital goods, an arena particularly well served by crypto-infused games.

Gaming seems like a great consumer bridgehead for crypto, and I expect many of these dedicated crypto funds to dump a significant chunk of their money into studios and platforms pursuing it. There are many substantial challenges, including generally negative user sentiment and getting platform buy-in – as NFTs are still treated with a high degree of hostility by app stores and gaming platforms.

The standalone worlds of game titles with special tokens disconnected from the more self-referential corners of crypto may be the easiest place to find new eyes. And as customer acquisition costs rise across the board, VCs may be more willing to subsidize customers directly as part of user acquisition, returning to the gig economy days of VCs bribing new users into signing up.

It has been a weird bull cycle for crypto gaming. While there was a lot of money pouring into earnable titles and pixelated SNES-quality DeFi-infused games, it’s fair to say nothing came up that was really good. Most games were over-indexed on profits and obvious ponzinomics pushing growth to the most extreme targets without worrying about stability. Great games take time to build, and fun games require a level of user concern that’s hard to optimize when you’re trying to maximize short-term profits on both sides of the deal.

the latest pod

We thought winter was already here for crypto, but US regulators just made it seem a lot colder. First, the US Department of Justice arrested three people, including a former Coinbase employee, for alleged insider trading on the exchange. Then the Securities and Exchange Commission accused them of securities fraud, arguing that several of the coins they traded were in fact securities — a designation that comes with a slew of rules that Coinbase and other exchanges haven’t necessarily followed. We shared our unofficial thoughts on how the laws might be interpreted and what this might mean for major crypto exchanges (more on this in my “this week in web3” section below as well).

We also talked about the bitcoin situation that could finally be enough to turn Elon Musk stans into skeptics and beloved video game Minecraft canceling NFTs, at least for now. Our guest was David Nage, a portfolio manager at Arca, a digital asset management company, who helped us understand the ongoing chaos in the markets.

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Follow the money

Where seed money moves in the crypto world:

Decentralized social media (DeSo) platform DSCVR, built on Dfinity’s internet computing ecosystem, has secured $9 million in seed funding led by Polychain Capital. Unstoppable Domains, a popular blockchain naming system and identity platform provider, has raised $65 million in its Series A funding round against a $1 billion valuation led by Pantera Capital. Aptos Labs, a blockchain project run by ex-Meta employees, has raised $150 million in an FTX-led Series A round. Blockchain ecosystem Topl has raised $15 million in a Series A funding round led by Mercury, Republic Asia and Cryptology Asset Group to help companies track and monetize social impact initiatives. Crypto lender CLST picked up $5.3 million for its seed round from investors including Coinbase and Kraken. Solana-based NFT property platform Cardinal announced its $4.4 million seed capital, led by Protagonist and Solana Ventures. Web3 gaming company Mighty Bear received $10 million in a Framework Ventures-led funding round for its Mighty Action Heroes game. FTX CEO Sam Bankman-Fried led a seed round for Trustless Media, a startup that builds community-owned web3 shows. Cybersecurity blockchain protocol Naoris has raised $11.5 million in a stock and token-based round of funding from investors including Draper Associates. South Korean metaverse company Anipen has secured an investment of ~$12 million in its ongoing Series B round of financing from Medici Investment and others.

the week in web3

A weekly look into the thoughts of web3 reporter Anita Ramaswamy:

After a former Coinbase employee and his two associates were arrested this week on behalf of the US Department of Justice for allegedly front-running the crypto exchange, they were slammed by the SEC on securities fraud charges. Shortly thereafter, Bloomberg revealed that the SEC had already investigated Coinbase for potentially allowing securities to trade on its platform without proper filings and disclosures.

Interestingly, the SEC’s costs, at least in the securities fraud case, depended on several pretty niche coins. The sign they chose to go after says as much in some ways as the ones they didn’t. Anyway, Coinbase is quite upset and says it has vetted all the tokens on its platform before listing them to make sure they are not securities.

If Coinbase is nailed into this suit, it will have ripple effects across the industry. Other major crypto firms are already facing similar charges, including Binance, Ripple Labs, and Yuga Labs, either in the form of disgruntled investors filing lawsuits against them hoping to get them into trouble for illegally selling securities or in the form of of investigations by US regulators, as is the case with Coinbase.

Until we know more about how regulators and legal experts are likely to treat each individual token, it’s worth exploring what the current securities laws are and how they might apply to Coinbase. That’s exactly what I did in my last piece with Alex Wilhelm for TechCrunch+, where we took a deep dive into the four-part “Howey Test” to try and determine whether the SEC or Coinbase has a stronger argument here.

TC+ analysis

Here’s some of this week’s crypto analysis available on our senior reporter’s subscription service TC+ Jacquelyn Melinek:

Crypto Valuations Could Fall Until September While VCs Play a Waiting Game
“In recent months, tons of capital has been raised in the crypto industry, but there has been a noticeable pause in implementation. That could change in the coming months. As it has taken longer to close crypto VC deals, valuations have fallen across the industry, according to David Nageventure capital portfolio manager at Arca.”

Investors are targeting DeFi as it remains resilient to crypto market volatility
“As many crypto market subsectors continue to be hit hard by recent volatility, some market players view decentralized finance (DeFi) as resilient and interesting despite the negative macroeconomic environment. Centralized financial institutions are similar to traditional companies, with people running their operations and managing their funds. In contrast, DeFi protocols use technology – not humans – to run services through things like smart contracts.”

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