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This article uses a lot of terminology related to cryptocurrency, web3, fan tokens, and NFTs. If you aren't familiar with them, I do attempt to explain, but you may also find this glossary of terms useful.
The COVID-19 pandemic has bluntly exposed the material precariousness of pretty much everything in the world, and both professional and amateur sports have taken the same path through the pandemic as everything else. Nowhere is this more apparent than in the United States, where unhindered capitalism has created an economy and society that is unsustainable for most people to live in healthily unless they are already rich. This was of course the case before the pandemic, but it was wildly exacerbated by the events of the last 2 years, and exposed just how much of the stability in our day-to-day lives is essentially held together with masking tape and wishful thinking.
The increasing popularity of cryptocurrency as the pandemic rages on takes this brazen disregard for human health and safety to a new and chilling nadir. The resources that are going towards crypto and non-fungible tokens (NFTs) are being expended at a time of mass global crisis to the detriment of individuals as well as the environment – and the efforts to obfuscate that reality amount to complicity in the crisis itself.
Cryptocurrency is "mined" by computer processors generating heavy amounts of cryptographic code in order to "discover" an encoded block. An NFT is essentially a digital image which someone can "own" as a result of a cryptocurrency transaction, and the receipt is then encoded into that cryptocurrency's blockchain for public reference. The same principle as an NFT can also be applied to things that are not images – really any cryptocurrency transaction can be associated with any digital file, or perhaps with nothing at all except a concept or benefit.
The ownership of cryptocurrency or any associated token (such as an NFT) comes from the code that makes up the receipt, code that is typically generated with massive amounts of energy and computational power, since much energy is required to mine cryptocurrency. The ownership, then, is not inherently attached to any thing or object. It's more an agreement or understanding among people who collect and work in crypto that this ownership is a real thing. There is no proof except the code itself, and that code can easily be stolen (such as if your crypto wallet is compromised or hacked), or the desired NFT or token that was promised for the code may not be produced. NFT investment scams are called "rugs" or "rug pulls" and these have become increasingly common over the last year or so along with other security issues and infrastructure concerns around cryptocurrency more broadly.
"I guess most people would think of [an NFT] as a digital image that you would have rights to, or people might assume that you have rights to. But it's difficult to confirm that you actually own the thing, because at the same time, as you claim to own it, it can be infinitely reproduced, and as many people who want it can have it," explains Paris Marx, host of the podcast Tech Won't Save Us and author of the upcoming book Road to Nowhere from Verso Books.
On top of that, the "currency" that is used to obtain an NFT isn't really a currency, either. "When it comes to a currency, you would kind of want a relatively stable value with something like that, which you do not have. You would also want it to be usable for many transactions, which cryptocurrency isn't either – in the sense that you can't actually buy very many things with it. One of the best ways to describe it is as an asset or a security, in that it is kind of like an investment vehicle." And, Marx adds, people are currently getting away with trading crypto in a highly unregulated fashion – and this is by design.
In European pro soccer, cryptocurrency is already deeply entrenched. Part of that has to do with the fact that sports betting and gambling are already a huge part of European soccer space, so high-risk sponsorships are baked into the culture. In December 2021, though, the Premier League opened an investigation into cryptocurrency's involvement in club sponsorship, noting that over half of the League's teams had a crypto sponsorship, with total cryptocurrency sponsorships in the League totaling over £20 million. The United Kingdom is currently considering a ban on certain types of sports betting advertisements in soccer, and crypto is viewed as something that will fill that gap. While current sports betting sponsorships will likely remain active and part of jersey branding until at least 2023, many clubs are getting ahead of the issue by developing lucrative partnerships with crypto businesses. Between 2020 and 2021, there was an increase of 285% in the number of crypto sponsorships in UK soccer.
In Europe and in the UK, "fan tokens" have become increasingly popular and are the main way that soccer fans are getting involved with cryptocurrency. I spoke to writer Martin Calladine, author of the books Fit and Proper People and The Ugly Game, which focus on ethics in soccer and sports business, about how fan tokens function.
In short – fan tokens are small cryptocurrency tokens which typically confer the owner with voting rights in fan polls. "[A fan token] is a digital asset, so it's not shares in the actual club, but it is a tradable digital entity which is backed by the company's cryptocurrency," Calladine explains. Most fan tokens are sold by a company called Socios, which also has a presence in the United States as a sponsor of the New England Patriots as well as many NBA and NHL teams, but they do not offer fan tokens in the United States yet, possibly due to legal issues. "Their plan for each of their clubs is that they mint a certain number of these tokens, perhaps put 10 or 20 million per club, and they make a certain proportion of those available initially which you can buy usually for £2 or €2. Then they typically set about 10% of those tokens for sale initially. Those then become available for trading, so people can buy or sell those. And if you own a token in a given club, it entitles you to vote on their business. Although the things that you can vote on are exceptionally limited. So for example, for one team, you are able to vote on the goal celebration music that they would play. They also had an opportunity to name the road around their training ground. At the lower end, you have some really, really embarrassingly feeble stuff – like you're able to nominate which player you would like to see inside their wash bag in the changing room."
Unlike an NFT, where a person is buying proof of ownership of an "exclusive" image, a fan token is essentially just a branded piece of cryptocurrency. Socios fan tokens are backed by their own cryptocurrency, which is called Chiliz ($CHZ). Once somebody buys a fan token, they essentially own Chiliz, which fluctuates in value just like any other cryptocurrency on the market. On top of that, though, the value of each club's individual Chiliz-backed token fluctuates as well depending on how people are trading them.
The reality is that the fan token marketplace has become its own beast. Despite the pitch about fan engagement as the benefit of these tokens, very few people who are purchasing them are actually using them that way. "The turnout on these fan token polls can be very, very low. So even for clubs like Barcelona or Man City, some of the biggest clubs in the whole world, they generally have fewer than 20% turnout in the polls, sometimes less than 10%," says Calladine. It doesn't matter to clubs whether fans actually use the tokens or not, since they aren't actually offering something of significant value to token owners. Other than the polls, fan token owners might receive small discounts on merchandise or tickets. But otherwise, the clubs are cleaning up on the tokens alone. Initial token sales are usually split 50/50 with the club, and they also split transaction fees that are incurred when people trade the tokens. Whether they are used or not, they become a source of passive income for both the club and for Socios.
The amount of passive revenue to a club isn't groundbreaking, but it's still essentially making millions from absolutely nothing, facilitated by an unregulated third party in the form of the fan token distributor. "They've done it because they say it is a zero cost," says Calladine. "We we built the app. We do all the marketing, we pay for it ourselves. All you've got to do is sign on the dotted line. Let us use your team's brand and we'll split the profits 50/50 with you." Some, but not all, of Socios' fan tokens can be traded outside of Socios' fan token app on other crypto exchanges, and there is evidence that the fan token marketplace is being used to manipulate broader cryptocurrency markets and conduct pump and dump schemes.
Calladine described Lionel Messi's move to Paris Saint-Germain from Barcelona as an example of the speculative market. As soon as it became evident that Barcelona couldn't afford to retain Messi and that PSG was one of the only clubs that would be able to sign him, the price of the PSG fan token started to surge. "They doubled in price in about three or four days. And then when the deal was announced, or about an hour before the deal was announced, massive sell-offs started. And within 24 hours the price had almost backed down to where it was," he recalls. "The same thing happened in Madrid in May last year," he continues. "Atletico Madrid, having not won [the La Liga] title in four or five years, were in a position to do so. And in the month before the end of the season, their tokens absolutely rocketed. When they had only one game to win the title, the price went from about 30 Chiliz up to about 180. And it peaked at 75 minutes into a 90 minute match – so before the title was confirmed. And then again, after a massive sell-off 24 hours later, it was back down to where it was."
As documented by Joey D'Urso at The Athletic, coordinated buying and selling of tokens was taking place on a mass scale in Telegram channels to manipulate the price of the PSG token during the Messi signing, and similar behavior would explain what happened to Atletico Madrid's token as well. At the time of this writing, the main Telegram channel for Chiliz traders has 9,577 members, which is close to the number in August 2021 when D'Urso published his investigation. Current hype in the Telegram channel day-to-day is about "Chiliz 2.0", an upgrade to the Chiliz coin which would have additional features, which has been talked about for months but has yet to materialize. Socios is also beginning to foray into NFT space with its partner organizations by creating "in-game NFTs" which represent particular moments in matches.
"What makes it so alarming is that Socios do not limit the number of tokens you can hold in any club or the number of clubs in which you can hold tokens. So if this was genuinely about engaging fans, you'd say, okay, you could only hold tokens in one club at a time. And we'd probably limit the number you can have. There is none. So you see patterns of massive buys and sells in clubs, completely unconnected with their on-field performance," says Calladine. As a result, the notional value of each type of fan token varies massively. The highest-valued fan tokens are PSG and Man City, because they are among those that can be traded outside of the Socios marketplace. Those are also big budget organizations with winning records in their respective leagues.
But some tokens belonging to smaller clubs are also valued very highly, and appear to just be speculation vehicles for crypto traders. One example given by Calladine is the Levante UD token in La Liga. Levante haven't won much this year, but their token was, at the time of my interview with Calladine, valued more highly than Leeds United and Aston Villa which are much larger clubs having much better seasons.
The way the Socios fan token marketplace functions is pretty obviously vulnerable to widespread abuse. "It's clearly designed to attract money as a crypto recruitment tool. It's clearly open to abuse by traders. The way it's used in practice evidently suggests that the tokens do not reflect people's genuine feelings about their football clubs. And we have clear evidence of that," Calladine explains. "Often you can have situations where your tokens have gone up in their notional value against the cryptocurrency they're denominated against, but because the cryptocurrency itself has crashed in value against real money, you can still have lost money. Football fans are being asked to notionally invest in an unregulated high risk product which is not determined by football value... the whole system is bizarre and incomprehensible and evidently not designed to deliver any utility to football fans."
Of course, there are many traditional partnerships between crypto exchanges and sports teams and leagues. Just this month, one was inked between Crypto.com and the Australian Football League, which makes the Singapore-based exchange the "official cryptocurrency exchange" of the League, as well as its women's counterpart league, and gives Crypto.com exclusive naming rights to AFL games. Crypto.com also paid $700 million USD in 2021 for the naming rights to the arena previously known as Staples Center in Los Angeles. These types of partnerships place crypto firmly in the normal sponsorship space – but these partnerships also incentivize sports fans, athletes, and team/league employees to participate in what is essentially unregulated securities trading. The normalization of cryptocurrency via traditional sponsorships has very quickly led to the normalization of the high-risk NFT and fan token marketplaces for everyone.
One way this is normalized is by treating sports NFTs as a type of collectible, similar to a trading card. By framing it as an actual asset, an NFT might seem more stable and valuable than a fan token. Trading card manufacturers such as Topps have their own NFT marketplaces. But what's different about an NFT is that you cannot hold it, and your ability to take care of it is limited by the network infrastructure it is hosted on, which you don't have any control over. "A trading card is a physical object that is going to stick around, that you can take care of," says Paris Marx. "It can be physically maintained for that period of time, regardless of how technology evolves. Whereas with a sports NFT, it's really dependent on, I would argue, this really flimsy infrastructure that has just been set up by people who are seeking to profit in the short term off of these things, but that we can see will not last for the long-term."
The hype generated by the NFT market specifically has led to celebrity athletes such as Rob Gronkowski selling NFTs of their own likenesses on OpenSea (probably the most well-known NFT marketplace). Other NFT marketplaces such as Dapper Labs are forging exclusive partnerships with leagues such as the NBA and NFL.
"A lot of people think that when you buy an NFT, you're buying this image file effectively. But what is actually on the blockchain is usually a link to that image file that is hosted somewhere else," Marx explains. "And so when you're purchasing it, you don't know what it's going to happen to the infrastructure that that link is pointing to down the line. There are already people who have bought NFTs and then a certain period of time later, they click their link and it's not there anymore, or the image file has changed. The image is not actually on the blockchain because blockchain is an incredibly inefficient technology, especially when using these kinds of proof-of-work and even proof-of-stake systems. So it's really energy-intensive to update it. It's just hard to see how this thing stays valuable, even if we accept the argument that people are getting this just because they would like to have a digital file. And for some reason, you know, they can't just download it to their computer. They need an NFT of it. There's no guarantee that it's going to remain accessible for years or decades down the line. Whereas a physical object will, if you take care of it properly."
The crypto and NFT world hinges on this proof of cryptographic ownership – code that otherwise has no utility or experiential value. Professional sports organizations already operate on a principle of monetizing things that don't exist or have inherent utility – naming rights and advertisements and sponsorships being the bread and butter of that economy.
A CBS Moneywatch article from November 2021 sings the praises of the growing market for NFTs, but also gently cautions against their soundness as an investment, quoting Loyola Univeristy business professor Zach Binkley, who states that the real value can also come from something attached to NFT ownership, such as an exclusive benefit. NFTs themselves are not tangible and don't have any inherent value, since images themselves can be captured and reproduced infinitely online. For fan tokens, the value is even more ephemeral, since it entitles them to votes in polls and very little else except the notional value of Chiliz. For an NFT or fan token to have any inherent value, it requires buy-in on the concept of "digital scarcity" and ownership of a digital asset itself.
Absent a consumer's buy-in to that concept, the NFT or fan token marketplace can be used to exponentially inflate the value of something like a game ticket or merchandise if those are added on as an exclusive benefit. The example Binkley gives is an NBA promotion where fans who could present ownership certain exclusive NFTs would receive 2 tickets to a Milwaukee Bucks game. Similarly, in December 2021, the Seattle Kraken NHL team offered five sets of exclusive NFTs that would confer the "owner" with additional items and benefits, such as game tickets and jerseys.
I asked Paris Marx whether there was any potential utility for cryptocurrency and NFT technology, other than to manufacture and monetize digital scarcity, and what the risk are to smaller, private individuals who get involved in the NFT marketplace: "There are a lot of people who argue that anything crypto is effectively a pyramid scheme, because these are virtual tokens – they're not really connected to some sort of productive asset that is producing anything that is going to be sold and generate extra revenue," they answer. "Whatever money flows into the cryptocurrency or the NFT space is what is inflating it. And if the money stops coming in, then it stops growing and starts to deflate. So you need more people coming in, and the people who are going out are being paid by the people who are coming in, effectively. Because you always need more money to be coming in to keep inflating the market and the value of these things. Obviously the risk there is that generally the people who are going to be hurt from these sort of structures are the people who come in after the initial excitement or growth. The wealthier people, as always, will be the ones who get out early, and who are less likely to sustain significant losses from it."
Calladine also expressed concern about how crypto speculation's worst effects will be felt by the poor, particularly in countries with economic instability where crypto is seen as a potential alternative to shore up their life savings. "They find countries where there are collapsing economies, where people are seeking alternative stores of value, and where they are also football mad. And they sign clubs and they sign players. In places like Mexico, people are moving away from buying lottery tickets to buying cryptocurrency because people who are trying to shore up their life savings are moving into these currencies. And some of them are losing a lot of money." (There is a concerted effort by cryptocurrency company Bitso to grow the crypto market in Latin America; they claimed a 95% market share of Mexican cryptocurrency users in June 2021.)
Calladine points out specifically that many people in Turkey were buying Chiliz and Socios fan tokens thinking that it would help them during the financial crisis with the Turkish lira, but instead, the price dropped dramatically. To this day, many discussions surface on Reddit and Telegram questioning why Turkish crypto users are so wary of Chiliz, and downplaying their losses. Crypto remains extremely popular in Turkey despite the risks due to the struggling lira. "The companies know this in my view and are purposely exploiting, and that's the real risk. It's not a few fans in England losing a few tens of pounds. It's some of the poorest people in the world losing their life savings."
The cryptocurrency/NFT and web3 movements are just the latest attempt to begin what is essentially enclosure of digital "space" in order to monetize it. The Internet, which was originally designed for academic and government use in the 1970s and 1980s, was not built with profit in mind. The last 30 years or so have been an ongoing attempt by capitalists to shoehorn profit models into Internet technology, and in some ways, they have succeeded, by ensuring that a web presence is essentially necessary to conduct commercial business. E-commerce was the natural outgrowth of stores and companies having "read-only" Web 1.0 presence in the early 1990s. The Web 2.0 movement that followed was a re-orienting of the Internet towards user-based services and targeted advertising based on individual consumers' behavior. While none of this is new to consumer capitalism, it was not what the Internet itself was designed to do. Web3 is a further attempt to shift "the commons" of Internet space, increasingly found on social media sites owned by corporations, into something even more restrictive, where identities and purchases can be tied to increasingly complex "proofs" created on cryptographic blockchains.
It is important to remember that "the economy" is an invented concept that has very little relation to how people are actually doing day-to-day. Cryptocurrency and NFT ventures are an attempt to create a new economy out of whole cloth – and likewise, it doesn't have any real relationship to tangible reality, which is why they are a perfect fit for web3. As Paris Marx put it: "[Web3] is the next stage of an attempt by capitalists to find a way to profit from the internet. The way that they are seeing to do that is to build kind of a payment layer into the Internet, through the use of cryptocurrencies instead of the traditional banking system. And naturally that's something that they control instead of the state."
But the technology is inefficient, clunky, and prone to exploitation. And the idea is exploitative and limiting in the first place.
There is a new story seemingly on a daily basis about cryptocurrency or NFTs being stolen or hacked. For example, on January 18, 2022 it was announced that $15 million USD had been stolen from Crypto.com users in the form of Ethereum tokens, which are now being laundered through a cryptocurrency "mixer" in broad daylight – despite the public nature of the blockchain, it's "trivially easy" (in the words of software developer Molly White) for a bad actor to obfuscate their identity and get away with laundering or stealing massive amounts of money. Sometimes the origins of the companies and exchanges themselves are shrouded in secrecy. Man City notably partnered with a crypto company called 3Key, which was quickly revealed to not actually exist or have any known executives, and had to sever the partnership once this was exposed. Whether due to complicity or ignorance, Man City almost definitely got involved in some kind of front for something, and exposed their employees and fans to that risk.
Crypto and its associated projects like fan tokens NFTs are called assets, but because they can't be physically secured, they are essentially impossible to protect if you wish to actually exchange them or use them for services. "They are collectibles, pure speculative objects with zero intrinsic value. If you buy a stock, you own a portion of a business; if you buy a house, even if the price goes down, you still have a house. If you buy a Bitcoin, you have nothing but the title to a piece of computer code that can do absolutely nothing for you except to the extent that someone else can be induced to pay you money for it," writes Hamilton Nolan for In These Times about cryptocurrency. The "experience" of the token is solely tied to its speculative cryptocurrency value. The image linked to an NFT can just as easily be right-clicked and saved, screenshotted, or photographed.
The marketplace is completely divorced from the labor that creates it (artists, developers, network engineers, hosting providers, hardware manufacturers). It is also completely divorced from the experience that its products claim to provide. Ownership is meant to be the experience itself. The concept is inherently limiting, and offers nothing to consumers beyond the idea of exclusivity and the promise of scarcity. Any sports organization that pays lip service to ideas of inclusivity and social justice, or claims to care about sustainability and climate change, ought to be aghast at the ideology that is behind crypto, web3, fan tokens, and NFTs. But their willingness to dive headfirst into this volatile and exclusionary space reveals the true nature of their motives – it's all about these short-term financial gains, whether they come from partnerships with crypto exchanges or selling and sponsoring tokens themselves.
A FAQ about the Seattle Kraken's NFT offering is telling as it tries to get ahead of possible questions and concerns. It states that the NBA used its Top Shots NFTs to "support the league during COVID restrictions" to the tune of $200 million USD. It also takes great pains to describe how the Orange Comet NFTs are "net-zero" and do not have negative effects with their massive energy consumption. Marisa Ingemi did further research into their claims for The Seattle Times, but found that most of their claims about "carbon offset" can't be independently verified, and that the Avalanche coin that Orange Comet's NFTs are built on uses "46 U.S. households worth of carbon" – which is a tiny fraction of the carbon emissions by Ethereum and BTC, but still seems like a hell of a lot of juice just to make code that does nothing but manufacture scarcity. Of course, crypto can be exchanged, so someone who wants a Kraken NFT and has Ethereum can trade their Ethereum for Avalanche to participate in the project – thus negating any claim that Orange Comet might be able to make that their NFT transaction was fully carbon neutral. "Cleaner" crypto props up and perpetuates the same practices as other cryptocurrencies and factors into the same marketplaces and exchanges.
These arguments are very much along the lines of "my t-shirt stating that my cryptocurrency doesn't damage the environment is raising a lot of questions which are answered by my t-shirt." On a planet where we are already experiencing the dire consequences of climate catastrophe caused by human-generated carbon emissions with no end in sight, the craze around using any significant amount of energy to create something so utterly pointless for the sake of profit feels inherently predatory. Note also that the Kraken play at Climate Pledge Arena, which is owned by Amazon, and that every page of their website has a link in the upper right corner to The Climate Pledge, a website where Amazon and other companies can state that they have "joined the Climate Pledge" while doing, evidently, nothing else of value to significantly reduce carbon emissions except buying electric vehicles and tossing money at forest preservation projects. "Net-zero carbon emissions" is essentially a boondoggle project for mega-corporations who want to act like they are "doing something" about climate change.
It would be easy to forgo an cryptocurrency-based project and avoid all of the difficult questions that come along with it, and maintain a performative commitment to sustainability and environmentalism and justice – except, apparently, the short-term profit potential is much too sweet to pass up.
This constructed economy is based on digital goods – which do not exist – and "currency" (really, unsecured assets in the form of inefficient code which is being created at great energy cost) which can really only buy a digital good or be traded for a different unsecured code block. Most digital goods that we already buy, such as ebooks or streaming subscriptions, have an access-based value proposition that hinges on convenience and quality. Artists and other content creators have already been selling original artwork online since the dawn of the Internet, in both physical and digital form. The NFT and fan token marketplace doesn't do anything that hasn't been done before except figure out how to extract additional value from something that is already inherently extractive but which itself produces nothing. The value proposition is highly distorted – whether you believe NFTs are art or not, the logic of the system should raise questions.
But as with other aspects of society and business, sports are a convenient pathway for propagating ideological and societal norms. And right now, it's becoming increasingly normalized for private citizens to engage in unrelated securities trading on crypto exchanges and NFT/fan token marketplaces for assets that simply do not exist.
As Emily Stewart wrote for Vox in a retrospective on the Beanie Baby craze, which also touches briefly on NFTs:
The problem with bubbles is that even if at some point it becomes clear what’s going on, it's impossible to gauge when the bubble will burst. If bubbles were predictable, people would start to sell early, and the bubble would self-implode. Obviously, they don't. And what was in the bubble really never goes away. The objects themselves don't disappear.
Except NFTs, fan tokens, and cryptocurrency can disappear. These assets have already been disappearing, because they are not objects, and the objects that they are stored on (such as hard drives and servers) are not designed to last forever or provide perfect redundancy. Traditional currency is a construct, too, but there are legal systems theoretically designed to protect people from fraud and theft. But crypto becoming regulated in the same way as traditional currency would deflate its speculative value as an asset, and reduce the hype around fan tokens and NFTs as a commodity.
On January 21, 2022, the price of Bitcoin dropped precipitously, a 9% daily loss and 40% lower than its peak in November 2021. As regulation from the SEC becomes an ongoing conversation, and the value of so-called stablecoins settles, crypto itself might become more legitimized as a financial security, but it will be an uphill battle to stop the speculation and exploitation currently endemic to the marketplace. Much like the Internet was not designed to facilitate commerce, cryptocurrency was not designed for regulation or transparency.
The volatility is what makes it potentially profitable. That volatility, combined with the exploitation and inequity inherent in web3, and the environmental damage caused by cryptocurrency, makes it extremely concerning. But since profitability in sports is already tied to a shadow economy of advertising and sponsorships and labor exploitation, crypto and NFTs/fan tokens are a natural fit in the industry as we know it, and will likely remain so until the economy around sports is radically reshaped, or until the bubble bursts. The consequences of that will be irreversible pollution and, in some cases, personal financial ruin. Every organization that hops on the crypto bandwagon is complicit in its environmental destruction and exploitation of vulnerable people. But sports teams and leagues will still get their profits in the short term, and the games will play on – until they can't anymore.
(Photo: Shubham Dhage/Unsplash)
Filed under: cryptocurrency; nfts; post-capitalist sports future; features
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