Sports and Crypto: $A Sign of things to come?

The UK Advertising Standards Authority (ASA) recently published a ruling in relation to the marketing of the Arsenal Fan Token ($AFC) (the Fan Token) by Arsenal Football Club plc. The Fan Token is a form of digital asset (otherwise known as a “crypto” asset). Arsenal’s marketing reflects the wider appetite of sporting entities to enter this area. The ASA’s ruling, however, may be indicative of the anticipated sea-change by way of increased regulatory scrutiny of cryptoassets. 

The ASA’s Challenges 

The ASA ruling refers to two advertisements promoting the Fan Token:

(i) a Facebook post dated 12 August 2021, which included a video with Arsenal men’s players, enticing fans to get the Fan Token (the Facebook Advertisement); and

(ii) a page on the Arsenal website published on 6 August 2021, titled “$AFC Fan Token: Everything you need to know” (the Website Advertisement, together with the Facebook Advertisement, the Advertisements). 

The stated objective of the Fan Token is to increase fan engagement with the football club. A holder of a token can influence certain minor aspects of the football club which the token relates to: for example, the Facebook Advertisement referenced deciding which song the Emirates stadium would play when Arsenal win. In order to purchase a Fan Token, fans are required to use a cryptocurrency called “Chiliz”.

The ASA took issue with the Advertisements on the basis that: 

(i) “[the Advertisements] were irresponsible because they took advantage of consumers’ inexperience or credulity and trivialised investment in crypto assets” (ASA’s First Challenge); 

(ii) “[the Advertisements] were misleading because they failed to illustrate the risk of the investment” (ASA’s Second Challenge); and

(iii) the Facebook Advertisement failed to mention that the Fan Token was a cryptoasset (ASA’s Third Challenge, taken together with the ASA’s First and Second Challenge as the ASA’s Challenges). 

Arsenal’s Response

Arsenal’s main response to the ASA’s Challenges was that the Fan Token’s main objective was to improve fan engagement; they were not issued for the purposes of investment or financial gain. This was supported by Arsenal’s Fan Token partner Socios.com; the Socios App included a disclaimer that “Fan Tokens do not represent financial instruments or any form of financial product. They are meant to be used for entertainment and fan experience purposes only”. 

Moreover, Arsenal contended that Fan Tokens are not specified investments under the Financial Services and Markets Act 2000. The club contended that a warning was not necessary as they did not promote the Fan Token as tradable or to be used for capital gain. In any case, the Website Advertisement did contain a warning that fans may not be able to get their money back due to the variation of the Fan Token’s value. It also recommended seeking independent financial advice if required.

Additionally, even if the ASA disagreed with Arsenal’s view that the Advertisements did not promote the Fan Token as a form of financial investment or as a way to gain money, there was no requirement in the UK Code of Non-broadcast Advertising and Direct & Promotional Marketing (CAP Code), ASA guidance or cryptoasset rulings for advertisers to explain to consumers that capital gains tax may be payable on any profits. Arsenal insisted that imposing such a requirement would place an unregulated investment beyond the Financial Conduct Authority (FCA) standards for regulated investments.

Finally, Arsenal fundamentally believed that the relationship between the Fan Token and cryptocurrency was understood by the target audience. 

The ASA’s Ruling

Despite Arsenal’s response, the ASA’s Challenges were upheld in its ruling. 

Assessment of the ASA’s First Challenge 

In the ASA’s view, the Advertisements trivialised a potentially costly financial decision as the Fan Token was categorised as a cryptoasset by the FCA. According to the FCA’s categorisation, Fan Tokens could be used as a form of investment. The “investment” characteristic of the asset, therefore, trumped the fact that the Fan Token was marketed as a fan engagement tool. 

The ASA found that cryptoassets are a complex and sophisticated investment that had frequent changes in value. Accordingly, the potential to engage with and invest in such a financial product was one that required careful thought and consideration. The manner in which the Advertisements enticed viewers, and the ease with which a fan could create an account to purchase the Fan Token was considered to trivialise this decision. The promotion of a free Fan Token, which required the consumer to engage with cryptoassets and cryptoasset services without any consideration of the risks, was irresponsible.

In relation to the lack of warning on capital gains tax, the ASA considered that viewers may be inexperienced with this type of asset and may not be aware of the liability that holding cryptoassets could lead to. On that basis, despite the Fan Token being an ‘unregulated asset’, the ASA indicated that a sufficiently clear warning should have been included. The ASA reiterated the importance of this warning despite the Fan Token not being marketed as an investment or financial product, as it was nonetheless a cryptoasset. 

Accordingly, because the Advertisements trivialised investment in cryptoassets and took advantage of consumers’ inexperience or credulity by not making the potential tax liability clear, the Advertisements were irresponsible and breached the CAP Code.

Assessment of the ASA’s Second Challenge 

The CAP Code requires marketing communications for investments to state clearly that valuations are variable, and that limitations and qualifications are presented clearly. This was required for the Fan Tokens which the ASA considered to be an investment. The Advertisements did not provide a sufficient warning to viewers (there was no mention at all in the Facebook Advertisement, and the reference to risks was not predominant enough in the Website Advertisement) that the variation in value of the Fan Token could result in a buyer losing money. 

The ASA also stated that given the scale of audience that the Advertisements could reach, not all viewers would have a working knowledge of and experience with cryptoassets. According to the ASA, such viewers would expect the exchange of cryptoassets to be regulated, while the Advertisements neglected to indicate that the cryptoassets were in fact not regulated. 

The ASA therefore considered that the Advertisements were misleading and breached the CAP Code.

Assessment of the ASA’s Third Challenge

The Facebook Advertisement failed to state that the Fan Token was a cryptoasset or that to buy one, consumers had to first purchase a cryptocurrency. The ASA considered that viewers were unlikely to understand that the simple reference to a “token” actually represented a cryptoasset. On this basis, material information for the decision to purchase was omitted, resulting in a breach of the CAP Code.

Result 

In light of the ASA’s finding, (i) the Advertisements must not appear again in the form complained about; and (ii) Arsenal must ensure that any future advertisements clarify that the value of investments in cryptoassets is variable and cryptoassets are unregulated. Arsenal was also asked not to mislead consumers by omitting material information in their advertisements and to ensure that future advertisements did not trivialise investment in cryptoassets or irresponsibly take advantage of consumers’ lack of experience or credulity. 

Sports and Crypto: a blossoming relationship

Whilst the ASA’s ruling focuses on the Fan Token, the Premier League club is by no means the only sporting entity marketing cryptoassets – Socios.com alone has partnered up with over 40 football entities (major clubs and national teams). There is a growing shift among sporting entities to seek ways to benefit from cryptoassets with early adopters simply looking at ways to increase fan engagement through different mediums.

The platform that paved the way for cryptoassets in sports was arguably NBA TopShot. That platform allows consumers to buy and trade NBA collectibles which take the form of Non-Fungible Tokens (NFTs). The collectibles on the NBA TopShot platform range from photos, highlights and GIFs. 

Meanwhile, in Europe, one of the largest sports NFT platforms is Sorare. Sorare combines the popular fantasy football model with NFTs, as each player card in a team is an NFT on the Ethereum blockchain. Sorare reportedly attracted substantial VC funding in the latter half of 2021, and has partnered up with high profile footballers as investors in an effort to boost its profile. It officially has 225 licensed clubs on its platform, including Paris Saint-Germain F.C., Real Madrid CF and Liverpool F.C. 

It’s hardly surprising that the commercial teams of these sporting entities want to enter the field. In doing so, a club or league taps into a highly valuable asset – its brand and image rights. The combination of crypto and sports has already proved to be a highly lucrative means for a sports team or league to monetise its brand. 

Shifting sands: Regulation on the horizon

However, caution must be exercised. In addition to the ASA ruling, signs indicate that regulatory intervention for cryptoassets is on its way. In January 2022, the UK government announced plans to strengthen the rules on cryptoasset promotion to protect consumers from misleading claims in the area. Specifically, the intention is to bring the marketing of cryptoassets in line with other financial products. The stated aim is to balance consumer protection and innovation. While it is clear that most unregulated cryptoassets (such as the Fan Token, for example) will be brought into the financial promotion regime, NFTs at this stage have been excluded. 

More recently, the ASA has made clear that it will continue to closely monitor and implement sanctions on the advertisement of cryptocurrencies; in March 2022 it issued an Enforcement Notice to over 50 companies which advertise cryptocurrencies, instructing them to review their ads to ensure they are compliant with the CAP Code rules.

Prospective promoters of cryptoassets in the sports industry will need to balance the commercial potential of cryptoassets with the need to comply with existing regulations and the increasingly important need to monitor future regulatory requirements. Regulators may be playing catch-up, but they’re moving fast. The increasing regulation of cryptoassets is a sign of things to come.

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