A cross-party committee of UK MPs has recommended that soccer clubs should be prevented from selling crypto-based ‘fan tokens’ that are presented as a method of supporter engagement. It also identified serious concerns over the impact of NFTs on intellectual property rights, and on advertising standards.

A report from the House of Commons Culture, Media and Sport Committee expresses deep concern about the prospect of club supporters being convinced to buy risky and volatile assets in exchange for access to club-based rewards.

Dame Caroline Dineage MP, the committee’s chair, said: “In the world of sport, clubs are promoting volatile cryptoasset schemes to extract additional money from loyal supporters, often with promises of privileges and perks that fail to materialise.”

“Fan token schemes must not be used as a substitute for meaningful engagement with supporters.”

NFT regulatory challenge

We wrote in April about the tricky regulatory challenge posed by sport’s embrace of NFTs, quoting expert evidence presented to the committee. With the committee’s conclusions now published, and in the same week as the FCA’s new approval regime for cryptocurrency marketing came into force, it’s clear that the UK regulatory system is moving to get a grip on a digital marketplace that is still rapidly evolving.

The report restates the FCA definition of cryptoassets as “cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology and can be transferred, stored or traded electronically”. And it notes that the term crypto asset can refer to a range of products, namely;

• cryptocurrency, or exchange tokens – digital means of financial exchange that use encryption for functions including storage, transactions and the creation of new units;
• non-fungible tokens (NFTs) – pieces of data stored on a digital ledger which act as unique identifiers for an underlying asset;
• security tokens – an NFT where the underlying asset is a financial instrument such as a share, option or future;
• utility tokens – which give holders access to membership perks; and
• governance tokens – which give holders the right to vote on a distributed ledger’s rules.

The call to prevent sports clubs from pushing crypto assets as a form of fan engagement is rooted in a concern that volatile financial products are being presented as something they are not.

One of the people who gave evidence to the committee was Charles Randall CBE, a former chair of the FCA and the Payments Systems Regulator from 2018 – 2022. He said: “The aim of promoters of speculative cryptoassets in lobbying for a regime which legitimises their issue and trading is to obtain the ‘halo’ of financial services regulation in order to persuade more people to part with real money in exchange for volatile tokens with no inherent value”.

Membership benefits

Companies such as Socios, which is named in the report, and the clubs it signs deals with are keen to present the offer as a membership benefit. But it is far from clear what these benefits are, or whether they differ significantly from the benefits fans who are members of other club membership schemes – such as Season Ticket holders – can access. The headline talk of being able to have a say in how your team is run often turns to be a vote on what player’s washbag you’d like to see the inside of – a poll run for Socios members at Italian club Juventus.

At English club Tottenham Hotspur, which raised eyebrows by signing a deal with Socios only recently, the scheme claims compliance with regulation because it offers existing members free tokens to get them started. Therefore, fans are not being encouraged to trade crypto. But it’s clear that the point of giving fans some free tokens is to encourage them to buy more. And the ‘benefits’ it is claimed are solely available to token holders are far from clear.

Socios was invited to submit to the committee hearing, but declined to attend. It did, however, issue a statement saying that fan tokens were not NFTs, and that “the individuals quoted in the report do not have any background in blockchain technology”.

Governance reforms

Fans have objected to what they see as the monetisation of fan engagement, popularising the slogan ‘Don’t pay to have your say’. This proved effective at another English Premier League club, West Ham United, where fan pressure led to the withdrawal of a deal with Socios. The parliamentary committee is also concerned about the fan engagement claims, especially with long-awaited reforms on the governance of football expected to be tabled in the next session of Parliament.

The report says that: “The 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.”

And so the recommendation is that “any measurement of fan engagement in sports, including in the forthcoming regulation of football, should explicitly exclude the use of fan tokens”.

Intellectual property

On the issue of copyright, the committee report notes that: “The transfer of an NFT does not inherently include any rights to, or even ownership of, the underlying asset.” But, for example, terms and conditions on online marketplace OpenSea state that users “bear full responsibility for verifying the legitimacy, authenticity, and legality of NFTs that you purchase from third-party sellers”.

Many of the millions of NFTs available on the site do not provide any information on how to verify this, and consumers may not even be aware that what they have purchased infringes copyright. A large proportion of those who buy NFTs believe that ownership of the NFT automatically confers ownership of the underlying asset.

The committee recommends that “the Government engages with NFT marketplaces to address the scale of infringement and enable copyright holders to enforce their rights. The Government should also address the impact of safe harbour provisions by introducing a code of conduct for online marketplaces operating in the UK, including NFT marketplaces, that protects creators, consumers and sellers from infringing and fraudulent material sold on these platforms”.

Advertising standards

The issue of how these products are advertised is also examined, with the committee noting regulation of NFT-related advertising is split between the FCA and the Advertising Standards Authority (ASA). The ASA has already taken action against a number of soccer clubs, including Arsenal and Barcelona, for misleading promotional activity, but the committee heard arguments that the regulator needs more power.

The report also notes the role played by so-called ‘finfluencers’ which adds to overall concerns about the way consumers are being pulled into crypto trading. It recommends the Government should “should ensure that any regime compels the entirety of the advertising supply chain 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 cryptoassets to address the prevalence of misleading and fraudulent ads”.