Crypto and NFTs in sports: a regulatory thicket

Crypto and, in particular, non-fungible tokens play an increasing role in the sports industry. What are the legal and regulatory implications for NFTs, their issuers and trading platforms?

Sports clubs all around the world are engaging more and more in the crypto industry – be it by means of fan tokens to make fan involvement more attractive and innovative, digital collectibles, or as another source to raise capital. As part of Osborne Clarke’s Legal Week, Tanja Aschenbeck (Partner, Head of Financial Services, Osborne Clarke Germany) and Jan Herrmann (Associate, Osborne Clarke Germany) held a webinar on the complexities of this crypto trade, tackling how one gets the asset into the token or non-fungible token (NFTs), what the current regulatory position is, and what regulatory landscape issuers, trading platforms and other service providers may face in future when planning an NFT project.

There’s a new (crypto-)kid in town

“Messi joins crypto craze as gets part of PSG fee in fan tokens” – “CryptoKicks: Nike to Tokenize Shoe Ownership on Ethereum” – “Sorare raises $680 million for its fantasy sports NFT game” – “People have spent more than $230 million buying and trading digital collectibles of NBA highlights“ – “Unique Cristiano Ronaldo NFT Sells for $290,000”…These are just some of the stories that have made the headlines recently. Crypto has invaded the pitch.

The French Ligue 1 top football club Paris Saint Germain (PSG) initiated the PSG Fan Token – a crypto token, built on Ethereum Blockchain that gives PSG fans a tokenised share of influence on club decisions. The fan token has a total token supply of 20,000,000, of which 1,288,396 were initially distributed to PSG fans via a Fan Token Offering. The remaining tokens are held by PSG. Over a linear vesting schedule of eight years, PSG releases 2,500,000 PSG fan tokens per year (stated in June 2020). PSG fan tokens can be acquired, for example, by participating in community activities as well as by purchasing directly on crypto exchanges. However, it is not only PSG’s fans who hold the fan tokens; a part – worth EUR 35 million – of Lionel Messi’s “wage package” when he signed his two-year contract with PSG was paid in PSG fan tokens, causing a rise in their value of over 130%.

Another famous project is the Ethereum-based fantasy sports platform Sorare (which just raised USD 680 million, being the second largest financing round in the crypto industry). Sorare offers a fantasy football game played with digital collectibles in the form of NFTs, associated with existing professional football players. Users of Sorare may use the Sorare NFTs to build their own virtual football team and participate in virtual football “Game Weeks”. Owners of Sorare NFTs are rewarded with further Sorare NFTs or even prize money (paid in Ether) – depending on the performance of the real-life football player in real football events.

The sums involved seem to indicate that crypto is here to stay in the sporting world.

The legal crypto jungle – what are the implications?

In their webinar, Tanja Aschenbeck and Jan Herrmann gave an insight to the legal, and in particular, regulatory implications associated with crypto tokens and NFTs. The issues they highlighted include:

What is the asset? What shall the token/NFT represent? How do I get the asset into the token/NFT?

What the token/NFT represents or embodies brings up several legal implications such as transfer of title, intellectual property questions and contractual points. In Germany, crypto projects are often advertised as “tokenised real estate”, “tokenised wine”, “tokenised art” or “tokenised classic cars”. Jan Herrmann unravelled what is really behind such “tokenised” projects.

“NFTs are ‘Utility Tokens’ and thus unregulated”

Such beliefs (or similar) were and are still often expressed in the crypto industry. This is a dangerous thesis – and Tanja Aschenbeck explained why by navigating through the regulatory thicket of the crypto world: starting with an explanation of the different token types, their typical features and how NFTs and fractional NFTs fit into those categories.

The main part of the journey takes into account the different involved parties in crypto projects – issuers, trading platforms and the further service providers involved – and the different regulatory regimes they may be subject to. In particular, the possible prospectus requirements for issuers as well as possible licence and compliance requirements for trading platforms under German regulatory law.

Lastly, Tanja gave an overview on the first pan-European regulatory framework for crypto-assets, the proposal for a Market in Crypto-asset Regulation (MiCAR). Who will be in scope of MiCAR? What obligations will MiCAR bring, and for whom? And: are NFTs within the scope of MiCAR?

Did we spark your interest? Sign up here to view the recorded session.