The New Players in the Sports Industry: NFTs, Fan Tokens, and Blockchain

The Hottest Thing in Blockchain – NFTs

NFTs are unique digital assets stored in a given blockchain, which represent a wide range of unique tangible or intangible items, from collectible sports highlights to virtual real estate and digital art. An NFT is completely unique and contains certain distinguishing information that is easily verifiable on the blockchain network, and therefore, is not interchangeable. Perhaps the most valuable characteristic of an NFT is derived from the verification of authenticity. Each created or “minted” NFT can be traced back to the original issuer using the blockchain platform on which the NFT was created. The ability to trace an NFT back to the original creator removes the need for third-party verification and provides a ready-built audit trail for authentication purposes. However, the potential for both unintentional and willful infringement remains.

The impressive amount of capital flooding into the NFT market has led to an abundance of NFT projects in various professional sports leagues and firms in the sports industry, including the MLB, NBA, MLS, UFC, and WWE. A notable example is Dapper Labs, the blockchain company that created one of the most popular sports-related NFT applications, NBA Top Shot. NBA Top Shot is the NFT marketplace for NBA highlight reels and provides individuals with NBA-licensed digital items, otherwise known as “moments.” NBA Top Shot at its foundation is a blockchain-based trading card system. Since NBA Top Shot’s launch in 2019, it has generated more than $500 million in gross sales. When an NFT is purchased on NBA Top Shot, the NFT owner does not own the NBA highlight reel but instead, as is typical with most NFTs today, owns a license to use, copy and display the highlight reel: (i) for personal, non-commercial use; (ii) on a marketplace to sell the NFT, provided there is cryptographic verification in that marketplace; and (iii) as part of a third-party website or application which would likely be used to enable the trading card game aspect of the NFT.

Dapper Labs recently secured $305 million in funding from a significant group of major celebrities, including Ashton Kutcher, Shawn Mendes, Will Smith, Michael Jordan, Kevin Durant, and other notable athletes. The influx of significant capital positions Dapper Labs for future growth as it continues with its next big project with the UFC, the mixed martial arts promotion company, via an existing licensing agreement to create limited-edition digital collectibles and games in the form of NFTs.

Another highly popular NFT application is Sorare, the global soccer fantasy league powered by NFTs. Sorare is very popular around the world and has partnered with over 100 soccer clubs, including some of the world’s most prominent and popular football clubs, such as Real Madrid C.F., Paris Saint-Germain F.C., FC Bayern Munich, and Liverpool F.C. Sorare has also partnered with the MLS Players Association to bring more than 700 MLS players on to the Sorare application which is implemented through a licensing agreement announced in the summer of 2020. Sorare allows individuals to buy and sell digital soccer player cards but also allows individuals to trade player cards, build teams and earn rewards based on real performances via a soccer fantasy league.

Athletes are not just investing in existing NFT and blockchain companies but are also launching their own NFT platforms. Tom Brady, the Tampa Bay Buccaneers quarterback, has announced the launch of his own NFT platform called Autograph, which will collaborate with some of the most prominent athletes and entertainers to create digital collectibles and potentially real-life experiences. Former NFL quarterbacks Eli Manning and Peyton Manning have launched their own digital artwork collection called “The Manning Legacy Collection” in collaboration with Makersplace, an NFT marketplace. In addition to receiving the digital artwork, depending on the NFT purchased, purchasers of The Manning Legacy Collection NFTs may receive physical artwork, autographed memorabilia, and/or virtual meet-and-greets with the Manning brothers. These iconic figures join a growing list of athletes that have entered the NFT space, such as Tampa Bay Buccaneers tight end Rob Gronkowski (selling almost $2 million worth in NFTs), Kansas City Chiefs quarterback Patrick Mahomes (selling almost $3.4 million worth in NFTs), and retired NFL stars Julian Edelman and Vernon Davis.

Fan Tokens and Fan Engagement

Fan Tokens are yet another application of blockchain technology in sports, which are fungible digital utility tokens created and used on a given blockchain offering fans access and influence over certain decisions made by their favorite sports teams, VIP rewards, special promotions, and other benefits. Unlike NFTs, fan tokens may be exchanged and traded. In fact, fan tokens are traded similarly to cryptocurrency, a medium of exchange secured by cryptography, such as Bitcoin. Fan tokens have grown in popularity with fans because owners of fan tokens can have an influence on certain club matters, such as the selection of uniforms or even real-time decisions like selecting the most valuable player of a particular game.

Prestigious soccer clubs have partnered with blockchain firm Chiliz and its sports fan engagement platform, Socios, to launch their own fan tokens, and these clubs have capitalized on these novel revenue streams. In the summer of 2020, FC Barcelona launched its own fan token ($BAR) and generated $1.3 million in less than two hours after the tokens went on sale. The tokens were sold in 106 different countries and began giving fans the opportunity to vote on many different decisions regarding FC Barcelona, including the design of a mural in the first team’s locker room. Other teams have had similarly spectacular results. A.C. Milan, a Serie A soccer club, recently collaborated with Chiliz to list its fan token ($ACM) on Binance, the cryptocurrency exchange, and generated $6 million in revenue in just a few hours. Many well-known soccer clubs such as Paris Saint-Germain F.C., a French Ligue 1 soccer club, and Juventus F.C., a Serie A soccer club, have also taken advantage of the economic benefits of fan tokens.

Other sports are also offering fan tokens. In May 2020, the UFC announced its partnership with Chiliz to launch its own fan token with an aim to reach a broader audience. The UFC fan token may, among other things, permit fans to have input into the decisions for events and fight matchups. Esports organizations and teams are also getting into this space. Chiliz has recently announced its planned expansion into the U.S. with a $50 million investment, with the likely intent of developing fan tokens for teams across the five major U.S.-based sports leagues: NFL, NBA, MLB, MLS, and NHL.

Growth Comes With Risk

The relationship between blockchain and the business of sports has led to lucrative and innovative transactions over the past several years, but the future is not free from risks arising from an uncertain legal and regulatory landscape. The tremendous infusion of capital entering into the blockchain space, along with continued adoption of the technology, will likely lead to significant federal regulatory involvement. The IRS has shown increasing interest in the tax implications that arise from the buying and selling of digital assets on blockchain. Other federal agencies such as the Department of Treasury’s Office of Foreign Assets Control may decide to issue guidance on these digital assets regarding U.S. trade sanction laws; the Financial Crimes Enforcement Network may issue guidance on NFTs and the applicable Anti-Money Laundering Act reporting requirements. Intellectual property issues, such as infringement, and many other legal issues are likely to arise as the industry expands and matures.

NFT and fan token applications and marketplaces and blockchain firms need to be mindful of potential and increased compliance issues as regulators begin to increasingly issue guidance. Consequently, a business operating in this space must ensure its legal documentation includes the proper representations, covenants, disclosures, terms and conditions, and has appropriate legal representation in order to avoid significant adverse legal consequences.