UK Parliament Opposes Football Clubs’ Crypto Fan Tokens
British Members of Parliament (MPs) have sounded the alarm over sports clubs issuing cryptocurrency fan tokens, including NFTs, warning that they could cause significant reputational damage to sports institutions, as well as the UK economy.
The Oct. 11 report, published by the Culture, Media, and Sport committee (CMS), acknowledged the growing popularity of NFTs within professional sports because of their ability to open up a new revenue stream for professional athletes, football clubs, international teams and leagues – at little cost to them.
The CMS is a cross-party collective that examines government policy, spending and administration on behalf of the electorate and the House of Commons, as well as closely examining the work of the Department of Culture, Media and Sport and its associated public bodies, including the BBC.
Speculative Harm
The CMS’s most recent inquiry was published on October 1, diving into the operation, risks, and benefits NFTs and the blockchain bring to sports institutions.
Specifically, the inquiry asks MPs to consider whether NFT investors, especially vulnerable spectators, are put at risk by the market and the potential reputational damage it could bring to British sports clubs.
“…[t]he unique relationship between clubs and fans means that fan speculation on sport-based cryptoassets carries a real risk of financial harm to fans and reputational harm to clubs. We are also concerned that clubs may present fan tokens as an appropriate form of fan engagement in the future, despite their price volatility and reservations among fan groups. We recommend that any measurement of fan engagement in sports, including in the forthcoming regulation of football, should explicitly exclude the use of fan tokens.”
An investigative reporter at The Athletic, Joey D’Urso, explained in the report that crypto companies “have figured out that [offers] a very good-value way of reaching that demographic who have lots of disposable income.”
D’Urso cited a few examples where fans have lost “hundreds, thousands” investing in football NFTs, naming Turkey as one of the more significant markets for crypto due to the volatility of its native currency. The issue, according to D’Urso, is that many people reportedly feel embarrassed to identify themselves and disclose these losses to family, friends, or to authority figures such as MPs or journalists.
Advertising Harms
The UK’s frontline regulator, the Advertising Standards Authority (ASA), in addition to the Committee of Adverising Practice and Broadcast Comittee of Advertising Practice, believe that advertising NFTs, pursuant to their “largely unregulated nature” means that the offered products come with a “significant harm to consumers” – even for legitimate products.
The Government, the Bank of England, and the FCA’s joint Cryptoassets Taskforce also believes that advertising crypto assets, especially towards retail investors, is “not typically fair or clear and can be misleading.”
Back in Dec. 2021, the ASA proactively investigated and ruled against two adverts for Arsenal Football Club’s “fan token,” which was operated by Socios. The ruling stated that the advertisements were:
- Misleading due to its failure to illustrate the risk of investment;
- Misleading because they didn’t make clear that the tokens were crypto assets; and
- Irresponsible because they took advantage of consumers’ inexperience or credulity and trivializing engaging with and investing in crypto assets.
While Arsenal’s club rejected the ASA’s decision, the ruling was upheld on revised grounds in August 2022.
“False advertisements and endorsements can enable scams and fraud,” the report stated, referencing “rug pulls” as a major scam. The U.S. has been ripe with class-action lawsuits and SEC fines where A-list celebrities have been caught in the middle by using their platforms to advertise products they didn’t understand in violation of the anti-touting provision of the U.S. Securities Act.
Similarly, UK Finance, the trade association for the banking and financial services sector, also believes that NFT ads increasingly use fake celebrity and influencer endorsements… “falsely guarantee[ing] significant returns on investment and dupe unwilling customers into Ponzi schemes.”
“We welcome the Government’s recently articulated intention to introduce statutory regulation for online advertising, in line with our conclusions and recommendations from our ‘Influencer culture’ inquiry last year. We recommend that the Government respond to the evidence we have gathered on misleading and/or fraudulent advertising for NFTs. It should ensure that any regime compels the entirety of the advertising supply chain to take steps to mitigate the risks of harm to consumers from the marketing of NFTs. We further recommend that the Ministerial-led taskforce explicitly reviews the marketing of NFTs and other crypto assets to address the prevalence of misleading and fraudulent ads,” CMS MP’s stated.
Are Fan Tokens Securities?
But the biggest question that regulators and lawmakers need to answer before anything substantively can change is whether these types of ‘fan token’ are classified as “securities,” pursuant to the SEC’s Howey Test.
In other words, what’s the difference between “patronizing” versus “promoting” digital assets, and where do we draw the legal line?
NBA Top Shots and ‘Moments’ NFTs
Right now, Dapper Labs’ NBA Top Shots, is the subject of a class-action lawsuit, filed in February, accusing the company of selling unregistered securities in the form of its ‘Moments’ NFTs. These collectible ‘Moments,’ which depict video clips of specific NBA highlights, operate as “utility tokens,” or “fan tokens” that provide fans with membership perks.
Both NBA Top Shots developer Dapper Labs, and its CEO, Roham Gharegozlou, are named parties to the lawsuit, where their lawyers argue that sports cards – basketball cards, baseball cards, and Pokemon cards – are not securities pursuant to legal precedent.
NBA Top Shot’s Judge Victor Marrero allowed the case to move forward, ruling in his Feb. 22 Decision that the plaintiffs – Gary Leuis, Jeeun Friel, and John Austin – “adequately allege[d] that Dapper Labs’s offer of the NFT, Moments, was an offer of an ‘investment contract’” pursuant to the SEC’s landmark case of Howey.
You can follow the case at Friel v. Dapper Labs, Inc. et al., 1:21-cv-05837-VM.
Sorare and Socios
Additionally, partnerships with NFT companies such as Socios, a sports cryptoassets marketplace, and Sorare, a cryptoasset-based fantasy sports game, offer new revenue streams for clubs and leagues, enabling them to monetize their global fan bases.
These two companies have also marketed themselves to fans and fan groups in order to establish credibility and overall brand trust for their products. However, many sports fans have been hesitant to buy into fan tokens, often questioning the benefits these products actually bring in comparison to traditional memberships.
The problem, however, is that these mechanisms do not provide football clubs with matchday revenue, and instead, according to D’Urso, are marketed as “equivalent to other legitimate club memberships,” which also offer similar perks including merchandise, increased access to tickets, prizes, loyalty points, and more.
At the end of the day, these fan tokens are still powered by a “volatile, unregulated cryptocurrency,” which presents a strong risk of them losing their value overnight – regardless of the various privileges token holders are granted, ranging from voting in fan surveys to exclusive ticketing opportunities. Ultimately, token value remains susceptible to dramatic shifts, mirroring the broader volatile nature of cryptocurrencies.
Socios has continued to defend its position, emphasizing the unique engagement opportunities fan tokens present, all under the Financial Conduct Authority’s regulation.
Formula One – Red Bull and Mercedes
Formula 1 has also dabbled in this domain, with teams like Mercedes F1 and Oracle Red Bull Racing leveraging NFTs to foster fan engagement, in addition to the F1 Dutch Grand Prix unveiling ticket-linked digital collectibles in August.
In early August, F1’s Williams Racing and Kraken also were preparing to showcase NFTs on the Grand Prix circuit.
The FCA’s New Crypto Investment Rules
As of Sept. 10, the FCA issued 146 new alerts within the first 24-hours of its new crypto marketing regime, following several warnings dating back to February of this year, and a Sept. 21 warning letter to crypto asset firms.
Regardless of whether the firm marketing crypto assets to UK consumers is based overseas or what technology they use to produce the promotion, the FCA’s marketing regime applies across the board.
The FCA’s marketing regime officially went into effect on Oct. 8, requiring firms wanting to promote crypto assets in the UK, to legally be authorized by or registered by the regulatory watchdog – or have their marketing approved by an authorized firm.
Similar to the FCC rules in the U.S., the FCA rules also require that promotions be “clear, fair and not misleading…labeled with prominent risk warnings” and must not inappropriately or unethically encourage people to invest. Now, firms are compelled to exhibit a cautionary note, emphasizing that potential investors should be braced to potentially lose their entire investment.
According to the Sept. 9 FCA press release, firms could be given until Jan. 8, 2024 to introduce new mechanisms that require greater technical development to comply with the rules that are now in effect.
According to the CMS committee, a government response to the 2023 inquiry is due by December 11.