Cryptoasset Promotions in Sport

Aaron Bell Excerpts

Tuesday 8th November 2022 Westminster Hall

[Aaron Bell (Newcastle-under-Lyme) (Con)]

I beg to move,

That this House has considered cryptoasset promotions in sport.

It is a pleasure to serve under your chairmanship, Mrs Cummins. I thank Mr Speaker for granting the debate and welcome the Minister to his place. The debate was originally set to be held on 13 September, but the very sad death of Her late Majesty the Queen meant it was rightly postponed, until today. I should also mention the hon. Member for West Dunbartonshire (Martin Docherty-Hughes), who pipped me to the post in securing the first parliamentary debate on regulating cryptoassets, which took place on 7 September. That was a very well informed debate, which I read in Hansard. While acknowledging the opportunities that blockchain can present, it foreshadowed some of the issues I will talk about today.

As the Minister and I heard just last night in the Adjournment debate led by the hon. Member for Birmingham, Ladywood (Shabana Mahmood), our sports teams occupy a very special place in our communities. The fans have a special bond with their clubs that goes far beyond being a customer or a consumer. Their loyalties are passed down through generations, and the shared memories of league titles, cup finals and spectacular upsets bond families and communities together in tribal loyalties towards those clubs.

When an individual club or sport as a whole takes its fans for granted or seeks to exploit them, those bonds are not only frayed, but lasting damage can be done to the community as a whole. It is for that reason that the fan-led review, chaired by my hon. Friend the Member for Chatham and Aylesford (Tracey Crouch), is so important, as we also heard last night. It is also for that reason that I urge the Minister and the Football Association to crack down on some of the cryptoasset promotions I will discuss today. Many have been almost entirely exploitative and have traded on fans’ love for their club and on the susceptibility of some of those fans, particularly young men, to speculative get-rich-quick schemes.

Cryptoassets are the ownership of a digital entity, whether a currency or some sort of collectible. The formal Government definition is:

“A cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored, or traded electronically.”

That definition includes things like bitcoin, the currency, but also tokens that can be traded among people, which is where a lot of the current problems in sport lie.

We could debate on a moral level the fundamental value of such cryptoassets—it is my contention that many I will describe today have zero value—but what is apparent is that their value and their price is often not the same thing. Their prices can be very volatile, which is partly why they have proved so attractive in the field of speculation and in encouraging people to speculate.

In general, the crypto space is growing. There are potential economic benefits to some uses of blockchain technology and I cautiously welcome the Government’s announcement of April 2022 to

“make the UK a global cryptoasset technology hub.”

However, the field urgently needs better regulation, and the need for regulation comes from the potential risk of people losing all their money. The Financial Conduct Authority has said that consumers should regard such investments in crypto as high risk and speculative and that people

“should be prepared to lose all your money”.

The speculation surrounding cryptoassets, with prices often far exceeding any possible intrinsic value, brings to mind previous bubbles, going back to tulip mania. All of these bubbles are examples of the greater fool theory—the idea that someone might pay for an overpriced asset, knowing it to be overpriced, but they hope to sell it for even more to the so-called greater fool, to make a profit. The modern terminology used in forums to boast, by those who get involved in these schemes—the so-called crypto bros—is pump and dump, and the most effective way of pumping a cryptoasset seems to be the endorsement of a sports club or a sports star, which is also known as crypto-washing.

By endorsing these speculative assets and by letting themselves or their players be the pumpers of the assets, clubs are potentially putting their own fans in the role of the greater fool, which is something they do at considerable risk to their reputation and the long-term bonds I spoke about a moment ago.

In calling for better regulation of cryptoasset promotion in sport, there are four significant areas of concern, and I offer my thanks to the journalist Martin Calladine—@uglygame on Twitter—for the taxonomy. I will come to them in turn. They are the misleading promotion of the assets; the lack of consumer protection; the lack of due diligence by the clubs entering into deals; and the problematic nature of their attempts to monetise fan engagement with the clubs.

As I said, I will start with misleading promotion. The widespread and often misleading promotion of crypto has helped it to make it into the mainstream. It minimises the risks involved in so-called investing—in many cases, fans just spending their money on this product. Many sports teams, players and, now, leagues have made or are in the process of making deals with companies in the crypto sector and are using their own social media—clubs or players—to push these items on to people who might not otherwise have been aware of them. We know from FCA research that more than 70% of people are not very aware of what crypto is, but we also know from the same research that 10% of people, as of June this year, have held or currently hold a cryptoasset. That is up from 5.7%, I think, in January 2021, so this is clearly a growing space.

I have also talked about fan tokens: digital assets that allow holders to access a range of alleged benefits. A fan token is a fully fungible digital token giving fans some influence over certain decisions made by a sports team. Quite how valuable that influence is I will come to later, but the fan tokens themselves usually require an intermediary step of buying cryptocurrency to purchase the fan token, thus exposing the fans to the whole world of cryptocurrency and not just the alleged benefits of the fan token. Of course, both the tokens themselves and the cryptocurrency can be traded as a speculative asset.

A few years ago, barely any football clubs were doing anything with crypto. Now, nearly every single club in the top four divisions either has a crypto partner or—in a few rare cases—has turned down the offer to sign one. Cryptoassets are of course often promoted as a new and exciting opportunity, and the potential downsides are glossed over or downplayed. For example, last year Southampton football club promoted a crypto “education” website by its crypto partner, Yolo Group—Yolo presumably standing for “You only live once”. The content of that website is utterly one-sided and totally inadequate. It is just propaganda rather than education, and it is biased wholly in favour of crypto. For example, its “what is cryptocurrency” page states that €1 invested in bitcoin in 2009 is worth €60 million in 2021—without any recognition whatever that that is no guide whatever to potential future returns from any currency, let alone bitcoin or the one that it is promoting.

Socios, the largest and most famous provider of so-called fan tokens, has repeatedly marketed its products in the UK without proper acknowledgement of the risks. If we look at a recent deal that it did with three English rugby union clubs—Harlequins, Leicester and Saracens—we see that it is clearly promoting the claim that fans can access an exciting new opportunity. Only on a separate webpage, at the very bottom of the frequently asked questions does it say:

“You should not purchase any cryptoassets if you do not fully understand the nature of your purchase and the risks involved.”

Not only are those risks not identified properly, but the benefits—most notably the potential financial returns—are hyped up.

This in particular was the subject of so many complaints that the Advertising Standards Authority drew up new crypto-marketing rules with specific reference to Socios. The ASA ruled in December 2021 that Arsenal FC

“trivialised investment in cryptoassets and took advantage of consumers’ inexperience or credulity”

in a promotion of its Socios fan tokens featuring three first-team players.

Despite my misgivings about its product, I am grateful that Socios engaged with me prior to this debate, and I should say that its official position is that it does not

“market fan tokens as investments. The purpose of tokens is to give fans new ways to engage with their club, be entertained by it and to win rewards that can’t be gained anywhere else… Our marketing materials include warnings about the risks of purchasing fan tokens for any other purpose.”

In the discussion that I had with it over Zoom, it acknowledged that it has come some way, but I still feel, fundamentally, its product is not really worth anything in particular to anybody. I will come to some of those alleged fan engagement benefits later.

The second problem that I would like to turn to is the lack of consumer protection. This is still a very unregulated space—a wild west—leaving fans with no recourse if the scheme collapses or is subject to fraud. I think there is a comparison here with the Football Index scandal, which I raised in this Chamber a few months ago. I mentioned crypto at that point, which is what ultimately led to this debate today. Again, there was no recourse for people who had lost all their money. They were led into believing in something that was regulated in that case, through the Gambling Commission. It turned out it was not, and it has been a real struggle for people to get their money back. There is even less protection in this space, given that the FCA has not regulated firmly yet.

To see the impact on the consumer, we should also look at the profile of the consumers. Socios’s own data shows that 50% of its users are aged from 24 to 34. As with Football Index, those young people interested in crypto are usually men. They usually do not have a traditional finance background and they find crypto attractive because it does look like an opportunity to get rich quick. That is precisely why the companies in turn look towards sports teams and sports players alike—because they have a huge following among young men that they can sell the emperor’s new clothes to.

Numerous non-fungible token schemes, having been pumped and dumped—again, fitting in with the greater fool theory—have rapidly lost almost all their value. The investigations writer for The Athletic, Joey D’Urso, who is here today, has covered the topic very rigorously and has set out how these schemes have infiltrated top-flight and lower-league football. He has shown how so many of them have depreciated substantially in a very short space of time, to the disadvantage of the fans who were encouraged to get in at the beginning.

Of the 20 football clubs in last season’s premier league, all but one had at least one cryptocurrency sponsor, and some had several. As I said earlier, the assets are very volatile, so much so that we have seen multiple crashes of the cryptoasset bubble, most recently a few months ago. In June 2022, bitcoin was down 70% from its all-time peak in November 2021, but at least it still has some value. Compared with when the deals were originally signed, the value of nearly all cryptoassets linked with premier league clubs tanked over the course of last season. Some have gone bust completely. Companies such as IQONIQ and Sportemon Go have collapsed totally, which has wiped out the value of any investments fans have made. IQONIQ had deals with Crystal Palace, La Liga in Spain, the McLaren Formula 1 team and several leading European football clubs.

The schemes partner not just with sports clubs but, as I have said, with players. Most infamously, perhaps, the former England and Chelsea captain John Terry launched the Ape Kids Football Club NFTs on 2 February 2022. If hon. Members were not on Twitter, they might have missed that, but those were cartoon monkeys being sold, initially, for an average price of $665—that was the early peak. They were literally cartoon images of monkeys. They are all slightly different, and buyers allegedly own their particular one, but, of course, anyone can just take a screenshot and claim that they own it too. As the scheme was going well, other footballers endorsed Terry’s project. His former teammates Tammy Abraham and Ashley Cole also posted them on their social media pages. Predictably enough, within a month those NFTs plummeted in value by 90%, and Terry’s former colleagues quietly deleted their tweets of support.

It seems to me that cryptoassets and fan tokens are the only unregulated business that those in the sports industry are willing to endorse to their fans. If a club was sponsored by a chocolate bar, for example, the chocolate bar would be tested and regulated by the Food Standards Agency. More to the point, consumers of that product would be protected by the law. There is nothing like that for crypto: no trading standards, no industry ombudsman, no FCA regulation, no fit and proper persons test and, in the event of a suspected crime—some of these cases are probably criminal—no great likelihood of any police action. In fact, the closest we have come to regulation is the Advertising Standard Authority’s new rules, which I referred to earlier. It should not fall to the ASA to be an ersatz regulator in this space.

I recognise that the FCA is doing work through its cryptoassets taskforce, and that is a matter for the Treasury, but sports bodies themselves need to do more. That is why I am grateful that we have a Minister from the Department for Digital, Culture, Media and Sport here today. I am grateful for his attention.

The third issue with cryptoasset promotion in sport is the lack of due diligence by those who do deals around such investments. The large sums of money on offer, combined with the opaque nature of many of the schemes, has exposed the low quality of due diligence. Football clubs are routinely doing business with crypto schemes that fans cannot interrogate, and clubs themselves often make no effort to assess their partners’ integrity.

In yesterday’s Adjournment debate, I referenced the example of Birmingham City’s ill-fated tie-in with Ultimo GG, but perhaps the most unbelievable example is the story of Manchester City and a company called 3Key. Man City has been at the forefront of football’s crypto sponsorship revolution. This time last year, the club announced 3Key as its new crypto partner, only for it to drop the company within a week when it came out that nothing about the company—even the fact that it existed—seemed to be true.

Again, Martin Calladine had the story. He established that 3Key was actually the new name for a massive, rolling crypto pyramid scheme. Man City subsequently refused to discuss the partnership or reveal what due diligence had been done, which for Mr Calladine left some serious unanswered questions. If the club signed a deal with what was, in effect, a criminal gang, and did not take any steps to establish who it was dealing with, it seems obvious that there are money laundering issues. In his article, Martin writes:

“The question is how could City not have noticed when literally just 15 minutes of googling would’ve been enough to establish that 3Key were not who they claimed to be…They didn’t have, or wouldn’t give me, 3Key’s address, company registration details or even their telephone number. If you were a junior estate agent who rented a flat to someone on this basis, you would get fired. If City actually accepted money from 3Key without having verified their identity, then this could be a breach of money laundering regulations.

In essence, it appears that it is only by luck that Man City failed to become party to a massive fraud, which could’ve severely harmed their own fans.”

I spoke to a number of clubs in the lead-up to the debate. I wanted to establish their intentions in making partnerships with crypto companies. The official line is frequently fan engagement, which I will come to shortly, but I have been told another reason: commercial reality. That applies in particular to clubs that are not at the top table—those outside the gilded land of the premier league. We know from previous debates, and from the work that so many people have done to save their local football clubs—I think of my hon. Friend the Member for Bury North (James Daly)—that it is difficult for those clubs to balance their books. Clubs are keen to get sponsorship. One club told me that crypto companies often offer five to six times more than other companies normally would. I therefore completely understand the temptation, perhaps even the necessity, to take what is on offer, particularly for clubs on the financial brink, as many are. However, that should not mean that a comprehensive appraisal of such companies—true due diligence—does not take place.

The fourth and last problem I want to raise is the issue of attempting to monetise fan engagement. The promotion of crypto as an alternative way of letting fans contribute, through tokens, is encouraging clubs to monetise fan engagement and replace the genuine consultation that many have pioneered over the past 20 or 30 years with a deeply flawed pay-to-have-your-say model.

Many clubs and crypto businesses that I have spoken with say that their main intention is fan engagement. For example, Manchester United, which has an official blockchain partner, Tezos, provided the following comment:

“Blockchain is a hugely exciting area of technology which, over the long-term, has the ability to revolutionise the way in which we digitally engage with our fans.”

On the intentions of crypto companies, Socios stated:

“We are the leading fan engagement and rewards platform in the sports industry. Through digital utility tokens, known as Fan Tokens, we are creating a new form of digital membership for sports fans around the world.”

Sorare, a French start-up digital entertainment platform that is allegedly lining up an NFT deal worth £30 million a year with the Premier League itself, provided this comment:

“Our platform connects fans with their passion for sports.”

The crypto businesses and the clubs profess that the deals are based on fan engagement, but what do the fans think? I met the Football Supporters’ Association, which gave me the following comment:

“We’ve seen a lot of clubs and players entering into partnership with crypto providers including those selling tokens which provide ‘engagement opportunities’. We don’t think supporter engagement should be monetised—if an issue is important, clubs should consult with their fans as outlined by the fan-led review of football governance…Fan loyalty is something to be cherished, not exploited.”

When we look at the fan tokens, a large number are owned by traders and not fans of the club. There is no limit to the number of tokens people can buy and therefore no limit to the number of votes they can have, and there is no limit to the number of clubs they can hold tokens in. When we look at engagement with polls, the turnout is rarely more than 20%, and the polls themselves often cover ludicrously trivial matters. There was even one that asked token holders to vote on which player’s washbag they wanted to see inside.

Tellingly, when the decision is really important, clubs have recognised that a vote via NFT is not appropriate after all. Aston Villa announced last Friday that it wanted to redesign its crest. That is a pretty fundamental thing. I remember that when Chelsea redesigned its crest, there was prolonged fan engagement. Aston Villa has launched a vote for season ticket holders and members, despite having an arrangement with Socios. To my mind, that eminently sensible decision gives the lie to the idea that the tokens are primarily about engagement rather than speculation.

What would go towards fixing these four interlinked problems? The answer is pretty simple: better regulation. That can happen on two fronts: better statutory regulation by the Government, with the Treasury and DCMS working together, and better self-regulation by governing bodies and leagues.

The independent fan-led review of football governance, overseen by my hon. Friend the Member for Chatham and Aylesford, called for a new independent regulator for English football and made many recommendations, which I endorse. My hon. Friend sits on the Science and Technology Committee with me, and she picked up on precisely the issue I am raising today during the evidence session we held on blockchain on 29 June this year. She asked David Gerard, a journalist and author who has written extensively on blockchain:

“Given the volatility that you have spoken about and we have heard about in terms of cryptocurrency and crypto cash and the volatility in football finance, surely this will create the perfect storm or disaster of which the fans of those clubs, who are buying NFTs, for example, will be the victims.”

David answered:

“The fans end up being the victims in this financial issue; they are the public interest here.”

As politicians, we should be mindful of the public interest at all times.

Unfortunately, my hon. Friend is away on other business and was unable to make today’s debate. I know she wanted to be here. I pay tribute to her both for the fan-led review and for her tenaciousness on this topic. The Government published their response to the review’s recommendations in April 2022, saying that they would seek to implement the proposals. I note the Minister’s words at the Dispatch Box last night about the matter. It is my hope that the problems of crypto in the sport of football could fall under the remit of the independent regulator for English football.

The FSA suggested ways to address these problems at its 2022 annual general meeting, and I hope the Minister takes those away. They include engagement on common self-regulatory standards for any cryptocurrency partnership entered into by a football club, so that we see some genuine self-regulation in the sport of football; an information awareness campaign for football fans advising them of the risks to their capital; lobbying of the Government for statutory regulation—I suppose I am ticking that box today—and better due diligence by football clubs before entering into deals, including engagement with their supporters, supporters’ trusts or fan groups before they issue any promotional material aimed at their fans.

I hope today’s debate will have helped raise the profile and, more importantly, the reality of crypto in sport so that fans and, more importantly, the senior actors in this space think twice. The Premier League really should review that proposed £30 million deal with Sorare. Is that really what it thinks of its fans? If the Government are serious about looking to make the UK a global cryptoasset technology hub, they need to work with all the relevant actors across all sectors to ensure that we have both statutory regulation and self-regulation, but that need is perhaps most urgent in sport.

--- Later in debate ---

[Aaron Bell]

It was a pleasure to speak in a debate where everyone seemed to agree with me, which is fairly unusual for this place. I thank the hon. Member for Strangford (Jim Shannon) for his kind words. He is right to emphasise the impact on our constituents. That is always at the heart of his speeches, whatever the topic—and he speaks on a number of topics. He is right that the public interest point, which I drew out in the quotation from our evidence session, should be at the forefront of what we are doing. It really is about the public interest, and the public interest in this case means the fans.

I am grateful to the SNP spokesman, the hon. Member for West Dunbartonshire (Martin Docherty-Hughes), particularly for highlighting that huge growth figure—from $25 million to $600 million in one year. Goodness only knows where it will be next year, though perhaps it will go the other way, given the scale of the crash that has been happening. He also gave us another example of a company going bust—the one that sponsored Rangers and Hibernian. The truth is that there are plenty of examples. I had to cut so many from my own speech. They are all equally jaw-dropping in their way. I focused perhaps on some of the better known clubs and examples.

I thank the shadow Minister, the hon. Member for Manchester, Withington (Jeff Smith), for what he said. He is right that it is all very well our criticising the crypto firms, but it is really the clubs that we should be talking about. They should be in it for more than the money. They represent heritage and communities, and they really need to think carefully. Likewise, the Premier League needs to think carefully about what it does, because it is the custodian of the top flight of the game, and the FA is the custodian of the whole game. It too needs to think about what it does in this space.

I thank the Minister for his kind words. He is right that my motivation is that everyone should enjoy sport safely, but my secondary motivation is that clearly we will look back in two years’ time and say, “How on earth did that happen?” It is a potential scandal unfolding in real time, and it is for us as Members of Parliament to do and say something about it, which is what I am doing today. I hope that the Treasury does bring forward both the regulation and the consultation that it has promised. In the answer that my hon. Friend the Member for North East Bedfordshire (Richard Fuller) gave the hon. Member for Cardiff West (Kevin Brennan) on 22 July, it promised a consultation and legislation this year on this topic.

I look forward to the White Paper, and I hope that the Minister will find some space for crypto in it, and that he will perhaps work with me and my hon. Friend the Member for Chatham and Aylesford (Tracey Crouch) on that. I hope that he uses his good offices to speak not only to the Treasury but to the Premier League, the Football Association and so on to emphasise that they need to do more in this space.

I thank my staff for helping me put the speech together. It has been over two months in gestation, given the delay. I also thank everyone who took the time to speak with me, including football clubs, some of the crypto firms themselves, and in particular Joey D’Urso and Martin Calladine, who have been extremely helpful. They have been completely on top of this topic as journalists for a long time. The work that they have done has obviously informed my speech and those of many Members present. It is really important to have people standing up for fans and doing that hard work in the sports sector, so I pay tribute to them.

Question put and agreed to.

Resolved,

That this House has considered cryptoasset promotions in sport.