An update this evening for MTG Arena fixes the earlier issue with Unsanctioned basic lands and brings Direct Challenge back for all supported formats.

Quote From MTG Arena Admin

  • Direct Challenge is once again available for all supported formats/modes.
    • Please Note: Historic Tournament is currently unavailable through Friend Challenge (challenging a friend through your friend's list. Direct Challenges are unaffected).
  • Players should no longer experience game play issues related when using the Unsanctioned basic lands.