Why sport has been on the wrong side of crypto and how we fix it

I was attracted by the original promise of crypto: a decentralising of finance, a chance to redistribute monetary power away from large Wall Street institutions. Similarly, when I first heard of non-fungible tokens (NFTs), I hoped they would be the key to the internet’s transition away from platforms where creators have no ownership. I was fearful that my lack of technical understanding would leave me behind during this transition. I bought a small amount of different cryptocurrencies entirely because of 'the fear of missing out' rather than the knowledge or belief that any single one would be the future global currency.

Those days are long gone. I am now very concerned that a large percentage of the efforts in crypto have been co-opted by swindlers (or maybe it was doomed to that from the start). In other words, no new rosy future, just another new piece of technology to be built on top of the status quo.

Web3 and Sport?

As of this writing, cryptocurrencies seem to be closer to high-risk securities than anything else. Their value has correlated strongly with the value of speculative stock market plays, as opposed to being the hedge against stock market volatility and inflation, as some had argued. Meanwhile, away from the price of Bitcoin and Ethereum, Web3 (the idea of the web thoroughly incorporating blockchain technology) has been making waves in the world of sports.

Although it was bubbling along before, the sports-crypto partnership properly burst onto the scene in 2020 as many fans were stuck at home unable to attend sports matches. It was a perfect time to market companies like the much-maligned Socios, whose slogan is "Be more than a fan". Socios is a platform where fans can buy NFTs giving them a kind of ownership stake in the club and the ability to win rewards based on performance. For some, this filled the gap left by the lack of real crowds and normal match day experiences. It replaced crowd emotion with financial emotion.

Here is the beginning of where things can go wrong. As industry veteran Alex Amsel (aka Sillytuna) said during an interview with the Unofficial Podcast, 'crypto is inherently financial'. Indeed, while sports teams and leagues seek to grab more of the fans' attention, they also want both the payments they get from crypto sponsors and perhaps a commission on token trading fees. In short, it is another way for clubs to monetise their intellectual property (IP) or brand value.

Now before I am accused of being too critical or told that "of course, sports teams want to monetise their brand", I acknowledge that sports institutions are in a tough spot. Sport is constantly fighting for its share of the “attention economy”, in which attention can be conceptualised as a scarce resource. Especially in less popular sports or in lower leagues, clubs and athletes are not just competing against other clubs, but rather for the attention of consumers versus anything else entertaining (see: Netflix competes with sleep). And the competition right now is strong. There are dozens of streaming services pouring money into creating endless content and TikTok’s algorithm easily captures us for hours on end. Therefore, I do not in principle denigrate clubs for jumping on the crypto bandwagon. The same was true for the use of social media: they had to start doing it or risk fading into the background.

What I am critical of is that sports-crypto partnerships, from what I have seen, have yet to offer much in the way of genuine value to genuine fans. Instead, many of the ventures that have been launched fall into the categories of scams, gambling in disguise or cheap and rushed. Moreover, sellers have said NFTs will have utility value on top of their appearance and scarcity, but that has, so far, been very insignificant.

Socios tokens can only be purchased using the cryptocurrency Chiliz.

How do NFTs compare to other brand assets that have utility? 

You should always first compare the digital assets being offered by sports-crypto ventures to a physical scarf or jersey from your team. When you buy it, are you planning on selling it? You will hear many a ‘crypto bro’ saying you will be able to trade these tokens. But that assumes someone will want to buy it, and there are simply too many variables outside of your control to be sure of this. 

For example, what if your club decided that the original player NFTs it listed are not great, or the contract with the platform or intermediary expires, or a new blockchain is getting more attention? The club can simply mint more player NFTs somewhere else. You will always have your NFT (remember on the blockchain, assets cannot be hacked) but it might quickly not be respected or valued by anyone else. This is not the case with a jersey. The official jersey you purchased from your club 10 years ago doesn't lose significance as soon as the club signs with a new kit manufacturer (also you can wear a jersey, so it has actual utility).

We have seen this within gaming already. On Electronic Art’s (EA) FIFA Ultimate Team game, you spend actual money to try to get player cards to use in your team. But for years, the cards have only been valid while playing that year's version of the FIFA game. Furthermore, contracts have time limits and might not be extended, as is the case with EA and FIFA from 2023. That is beyond your control. FIFA Ultimate Team player cards are a digital asset within a digital ecosystem. The value of the player cards is still within the platform's control and the platform may make choices that cause it to go to zero (and in this case, Ultimate Team cards actually have some utility as you can play the game with the player and make your team stronger).

Are Fantasy Sports NFTs gambling in disguise? 

It is well known that there is significant demand from sports fans, gamers and traders for these worlds of digital collectables and gambling-style games. DraftKings are a company offering fantasy sports (using a USD-based trading system) and their 2022 second-quarter revenue was an imposing 466m USD. The loot box (essentially in-game slot machines to try to win player cards) driven Ultimate Team appears in EA's FIFA, NBA, NHL, and UFC games. A court in the Netherlands ruled in 2020 that the mode violated gambling laws and EA was fined 12.2m EUR, although that is immaterial when, according to EA's 2021 report, the Ultimate Team game mode generated 1.62bn USD in annual revenue.

I am a big fan of an advanced version of Fantasy Premier League. I am part of a dedicated league with a great group of friends who live far away in Texas. It is an interesting way for us to stay connected and adds an extra layer of fun to watching Premier League football. But we do not, and cannot, spend actual money to buy a player. If the players you select do badly, you get fewer points and maybe your mates laugh at you, but that's it. You don't lose financially.

In contrast, I recently heard an in-person pitch for the fantasy game Unagi. It is a game based on a blockchain where you buy an NFT of a player and you get rewards based on that player's real-world performance, and you might be able to trade them for a higher price than you paid. This in theory sounds great and the marketing is very effective. If you are a diehard fan with deep knowledge and time to invest, you can gain rewards. What is not mentioned, of course, is that you can lose. If your player does badly, the NFT loses value and maybe no one wants to buy it off you. This is very similar to sports betting - by buying a player, you have essentially placed a bet dependent on their performance, on an event you have zero influence or control over. Even though the NFTs are bought with cryptocurrency, the cryptocurrency was most likely bought, at least at first, with fiat money (any government-issued currency that is not backed by a commodity such as gold).

This sounds like gambling just hidden behind a few extra steps, and seems very similar to the Football Index debacle. Furthermore, for all the talk of decentralisation, the platform is making money from trading fees, which is one of the key methods that the banks make money - banks that Web3 is supposed to be disrupting. 

It is curious that in many areas crypto brands have taken the place of gambling companies, as the latter is facing some much-needed regulatory pushback, at least outside the USA market. I would argue this replacement is more like for like than it appears, and that it is no coincidence that both industries are willing to spend big on getting their brand out there. In both cases, the business model relies on a constant supply of new entrants, and in this vein, there has been a rush of crypto stakeholders trying to establish their brands with sports fans.

The Sports Crypto Goldrush

For most of 2021, hundreds of clubs and leagues around the world took on crypto partners and launched tokens of various kinds. Crypto is now the second most lucrative sponsorship category for the NBA. The Staples Center in Los Angeles is now the Crypto.com Arena and the Crypto.com logo is plastered all over every Formula 1 track. Socios, along with so many others, recently became FC Barcelona's "strategic technology partner accelerating FC Barcelona's blockchain, NFT and digital assets, and Web3 strategies" in exchange for 100m USD, a sum that industry commentator Pet Berisha told me is under value for Barcelona's Web3 asset rights and might be motivated by their disastrous financial situation. Sorare, once valued at 4.3bn USD in mid-2021, is steadily picking up official partnerships with institutions like AC Milan, Liverpool FC, and all of Major League Soccer. 

The Athletic reported that, for the 2021/2022 season, every single Premier League club, bar Brighton, launched some kind of token or blockchain-based collectible, or at least took sponsorship from crypto companies in exchange for peddling the trading of currencies. Within seven months, all the tokens and, indeed, the broader cryptocurrency market, were way down in value. Some tokens were down as much as 80% from their initial price. A lot of fans lost money and there has been a justified backlash.

Liverpool FC received particular criticism for the poor quality of the artwork they used on their NFTs, and their whole campaign felt rushed. This criticism and pushback more generally is healthy. It has instilled some extra scepticism in sports fans, and some scepticism combined with appropriate regulation can be great for innovation. To date, it has been too easy to start a product based on blockchain and rush it to market to make quick money before consumers develop a sense of what quality Web3 products look like. If there are some really good uses for blockchain in sport, let them be carefully developed and properly tested before being sent to market. Let actual genuine value to fans drive sales, and not just hastily linking IP with buzz words. I heard representatives of Arsenal and Brentford say first-hand that, after the rush of late 2021, they are now wary of attempting anything that looks like a cash grab.

Liverpool FC partnered with Sotheby’s to host two sales of NFTs. Source: Sothebys.com ​​ 

The inclusion battle

Not unique to sport, another point to be addressed is crypto's claim to be more inclusive. Once again, this is yet to play out in any meaningful way. Indeed, the opposite may be true. Data shows that many of the early investors and instigators were white men with disposable income who had had the time to educate themselves and could afford the risks. Many of those who were exposed as the market crashed last year were non-white people looking to escape some of the barriers placed on them by traditional financial markets.

Relating that to sport and crypto, I was present when Preeti Shetty (CEO of Upshot and non-executive director at Brentford Football Club) was a panellist at a crypto and sport event. By a show of hands, she noted that of over one hundred people, there were about eight women in attendance and only one of them had ever purchased an NFT. What this shows is that the historical prejudices of the finance, gaming, tech and sports industries are still with us. 

There are those, such as Preeti herself or the Ready Sport education platform, who are bullish on Web3 and sport and are dedicated to making it more inclusive, ensuring fans are informed before encouraging them to get involved financially. Furthermore, women’s sports are being incorporated as assets into sports NFT enterprises, although the jury is out on if those enterprises will be any less unscrupulous.

Regulation playing catch up 

Many in Web3 fear that regulators lack the technical knowledge to regulate this space and therefore go too far, completely killing it off and preventing some worthwhile innovations. Yet history has shown us the opposite. Regulators are often behind the curve so do nothing, leaving people vulnerable to exploitation without recourse.

It is clear then that a lot of these products are not revolutionary new ideas but rather modernised versions of gaming, gambling and collecting. But since they are all in the slightly mysterious world of blockchain, regulation has not caught up yet and companies are getting away with actions that might otherwise be illegal. If we are to embrace these new opportunities as trading, they should be treated and regulated as such, or if they are gambling, they should be treated and regulated as such. The fans or "consumers" are still ultimately the revenue source so this space needs oversight, regulation, and consumer protections.

A message to industry stakeholders

I am sure, at some point, smart people will find some utility for Web3 and sport. For example, using blockchain for ticketing to limit black-market resale would be an amazing improvement. But this requires patience and time. If sports-crypto ventures want to actually do what crypto says it will - build organic diverse communities and generate genuine fan engagement - they need to put less emphasis on tradeables. While traditional baseball cards have been shown to excite younger fans, the new unregulated global digital marketplace that we have seen so far leaves fans too vulnerable to day traders who have zero interest in the team (see: Atletico Madrid token collapsed when they won La Liga as traders from Turkey bought the rumour and sold the news).

While it is in clubs’ interest to onboard new fans, it is also in their long-term interest to not encourage new or legacy fans to lose money to mysterious traders who will not be filtering any money back to the club. The ridiculous trading of the last year (according to some estimates, the Sports NFT market size is valued at 2.6bn USD in 2022 and will reach 41.6 bn USD by 2032) is so tempting, but I fear things will quickly cool off when these 'players' find a new 'game'. Are short-term large revenues worth devaluing the IP and brand of a sports team in the long run? Clubs’ commercial directors think in three- to five-year terms but the sporting entities they preside over are supposed to live in the hearts of supporters forever.

It does not have to be this way

To the fans, I am sorry that sports clubs and leagues, despite the love you have for them, rarely have your best interests at heart. There might be some fun to be had but do not get caught up in the blockchain frenzy. Of course, if you see an NFT with inspiring artwork of your favourite player and you want to keep that forever, that might be worth buying, and I encourage more creators to attempt such efforts and for clubs to champion them. Just remember that if you are buying to trade, you are buying with the risk of losing.

I don't know where crypto is going, I don't know exactly what parts will be used, and what lessons will be learned. What I do know is that, like any new technology that has the power to disrupt industries like sport, some individuals will attempt to turn the love of a team or an athlete into money. But if regulators, sports institutions, and fans come together, we can have less financial extraction and more collective value creation.

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And do not hesitate to contact me at: benmole@sustainingsport.com.