The use of NFTs and blockchain technology is on the rise, with sport providing arguably one of the most fertile grounds for the digital assets to be marketed in. As the uptake of digital assets becomes more mainstream due to increased exposure to the mass market, lawmakers and regulators are wrestling with the challenges this brings.

Earlier this week, a UK Parliamentary Select Committee held an oral evidence session to consider some of the issues raised by the use of NFTs in sport. The two experts invited were Kieran Maguire, a senior teacher in accountancy at the University of Liverpool in the UK; and Joey D’Urso, an investigative journalist at The Athletic.

D’Urso (£) has written extensively over the last two years on the uptake of NFTs and digital assets in soccer, and Maguire hosts a very popular podcast on the business side of the sport called The Price of Football, along with a blog of the same name.

“Are you going to tell your family you’ve lost $10,000 on a cartoon footballer?”

Joey D’Urso, Investigations reporter, The Athletic

The committee opened up by asking why NFTs had become so popular in professional sports. Maguire said that, as far as Premier League soccer was concerned, “we’ve reached a plateau in terms of revenue generation. Since 1992 revenues have increased by 2,700%, wages have increased by 3,400%. Therefore football clubs are looking for alternative ways to generate revenue”.

Both said that soccer, and particularly the Premier League, generated so much cash that other sports were on the periphery of the picture. In the US, basketball is arguably the sport where there has been the biggest push around NFTs.

Maguire said that the main established forms of revenue raising, mainly income from stadium attendance, commercial sponsorships and broadcasting rights, had been taken pretty much as far as they could be, hence the focus on something new such as NFTs.

Untapped opportunity

Illustrating how even the biggest clubs saw untapped opportunity to expand revenues, Maguire referenced Manchester United which, according to the club’s own figures, has revenues that work out at “about 57p per fan per year”. Which means they see plenty of room for expansion. Enter NFTs.

While the clubs see digital assets as another potential income stream, those selling digital assets target sport because the brands are established – and so provide normalisation and legitimacy for products associated with them – and because of the unique customer loyalty that goes with them.

But the problem is with the way these assets are marketed, and this is where the regulatory angle comes in.

Both D’Urso and Maguire emphasised they were not arguing against digital assets per se, rather the fact that they are widely marketed as investments. Maguire said: “There’s nothing inherently wrong with the product, it’s the way it is marketed.” But he also warned that this was “an unregulated, highly volatile, easily manipulated product”.

“There’s nothing inherently wrong with the product… It’s when they are being marketed on a dog whistle basis as a form of investment that we have to have reservations.”

Kieran Maguire, senior teacher in accountancy, Liverpool University

D’Urso agreed that: “If you know what you are getting in to, you should be free to. But that’s not what it’s sold as, or what it’s saying to regulators. And the clubs are taking quite a lot of money for something which is dangerous for their fans”.

Dangerous may come across as a strong word to use, but D’Urso had a more blunt assessment after two years spent reporting on soccer’s relationship with digital assets and the effect this has had on individuals.

He said: “There is a lot of artificial or misleading complexity to a lot of this … Actually you are creating this thing which you can sell to people for real money, and you swap your fake money for the real money. And then when it crashes in value, the person holding the fake money loses out.”

“A lot of this is hidden, there are a lot of people around the UK who have lost money on cryptocurrency who are not telling people about it. Because it’s frankly embarrassing. Are you going to go home and tell your family that you’ve lost £10,000 on a cartoon footballer?”

Devastating real lives

He told of going to Istanbul and speaking to a delivery driver who lost $2,000 on a footballer NFT. “Turkey is a huge market for crypto because the domestic currency has collapsed so people are looking for alternative investment,” he said.

His conclusion was that “this is devastating real lives. It’s just a vehicle for financial speculation that transfers money from poorer people to rich people”.

Maguire said: “There is nothing inherently wrong with a digital Panini card. It’s when they are being marketed on a dog whistle basis as a form of investment that we have to have reservations.”

The members of Parliament at the hearing pressed for greater clarity on what the product actually was, illustrating the difficulties many with knowledge of more traditional transactions have in getting to grips with the issue.

Committee chair Julian Knight (Con) asked: ‘Do you get anything tangible?” D’Urso answered: “You get a string of letters and numbers on the blockchain which is yours to keep and print out and gaze at. We’re told they are just like collectible playing cards or stickers and we should all stop being such dinosaurs.

“But,” he added, “nobody is buying these things to collect them. People are buying them to trade them to try and make money – as quite a lot of people have done in the short term.”

Digital receipt

Pressed on what the product was, Maguire explained that an NFT was “a digital receipt and the receipt has the value”, adding that “A piece of art is worthless until someone is prepared to pay for it.”

A number of the MPs asked if what was being talked about was essentially a Ponzi scheme. Maguire said: “It has the opportunity to be.” He also referenced the tale of Football Index, which went into administration in March 2021, costing some customers their life savings.

One of the issues with Football Index was that it was originally licensed and regulated by the UK Gambling Commission, but it operated as a stock market and used the language of financial markets. So the Gambling Commission approached the FCA to see if it would help with its regulation. The FCA initially agreed, then changed its mind, leading to two years of back and forth about who should protect customers, all while customers continued to pour money in. Football Index held £124m ($154m) in open positions when it crashed.

So, when asked if the type of regulation that applies to the financial services industry was what was needed, D’Urso said: “That sounds very sensible. But one of the problems you’ll have is that a lot of these companies span multiple jurisdictions.”

He also pointed out that “the leagues don’t take an interest in the commercial deals of their clubs”, a point expanded upon by Maguire. “At the moment the clubs say ‘thank you very much for the money’ and they let the likes of Sorare and Socios market their products,” he explained.

Buyer beware

He suggested the way forward could be the ‘buyer beware’ approach, and made a number of references to the need for education and information to enable customers to make their own informed decisions.

There were several questions about whether the threat of reputational damage might be sufficient to incentivise more responsible behaviour. Maguire pointed out that: “The brand loyalty you get in football is probably unique, compared to all other products,” prompting some laughter when he added: “It’s a bit like trying to stop loving your children. No matter how much they misbehave, you can’t.”

And D’Urso empahsised the point, saying that: “Clubs don’t have the same issues with reputational damage as other industries. You’re not going to switch support to the team down the road that you’ve hated all your life.”

Who regulates?

All of which prompted whether the question of ‘who regulates?’ would be solved by the establishment of the proposed Independent Regulator for English Football (IREF).

That issue was probably more one for the MPs than the invited experts, but there are rumours that the IREF will be located inside the FCA, particularly as much of the proposed regulatory framework is built around the need to promote more sustainable financial practices at clubs.

If those rumours were proven to be true, maybe the issue of where regulatory jurisdiction on NFTs begins and ends will be easier to resolve. Or maybe not, as social media – which as Maguire pointed out is “itself an unregulated market” –  is where much of the hype around the marketing of digital products is generated. And regulating that is a whole different debate.