Partnering with Crypto Brands: What Are the ‘Need-to-Knows’ for Sports Rights Holders?

As sports rights holders continue to recover from pandemic-driven losses, an enticing and lucrative new sponsorship category has emerged from the crisis: crypto brands. Backed by bullish investors, crypto companies are willing to throw huge sums at sports sponsorships in order to reach the mass audience and get a head-start on their competitors. Established rights holders - including the likes of Manchester City, F1, Barcelona, UFC and Inter Milan - have all recently partnered-up with crypto brands, and only last week Manchester United became the latest to enter the space with a £20m per year training kit deal with blockchain platform Tezos. It’s a trend that’s showing no sign of stopping.

However, for sports rights holders, partnering with a crypto brand undoubtedly brings with it significant additional risk; both from a commercial and legal standpoint, but also from a wider moral and reputational perspective. Having advised on a number of deals in the space, the Sheridans Sport team have seen first-hand some of the challenges and pitfalls. This article will look to identify some of those risks and explore ways in which rights holders across the sports and esports industries can seek to mitigate them.

1.Do your due diligence – who are you really partnering with?

As with most nascent industries, there is an element of uncertainty and scepticism associated with crypto companies; and that poses a considerable reputational risk to established rights holders.

Both Manchester City and Barcelona have already experienced how damaging a crypto partnership can be if things go wrong, with both clubs forced to quickly distance themselves from their crypto partners after it emerged that City’s “decentralised finance” partner, 3Key, had no digital footprint whatsoever, whilst Barcelona’s “NFT marketplace” partner, Ownix, was called into question after a company consultant was arrested for fraud.

Whilst both clubs were likely able to rely on robust ‘morality’ provisions in their sponsorship agreements to quickly terminate the deals, the negative press and associated damage to their brands might have been entirely avoided if stringent due diligence exercises and risk assessments were carried out in advance.

2. Speak to your most important stakeholders – your fans

Crypto brands might be exciting from a financial and commercial perspective, and an opportunity for clubs and rights holders to engage with a new and digitally-native audience that is living and breathing blockchain, Web3 and the metaverse. However, it is a divisive subject for many and there is really no replacement for proper consultation with your existing fanbase.

This is especially the case for initiatives involving fan tokens and NFTs, which have proven to be a particularly contentious issue within football – one notable example being the reaction by Football Supporters Europe to UEFA’s recent deal with Socios.

3. Exclusivity – define the scope carefully

The crypto sector is evolving at a pace not seen since the rise of the internet and world wide web in the 80s and 90s, and that makes the future of the sector incredibly exciting, but also very difficult to predict and navigate. With that in mind, rights holders should be careful not to sign away too much exclusivity in a sector which is often generalised and, in some instances, misunderstood.

In this article, the term “crypto brands” has been used as a generic term to refer to all companies operating within the wider ‘crypto’ space: from crypto exchange platforms (e.g. Coinbase), to fan token offerings (e.g. Socios), NFT marketplaces (e.g. OpenSea), crypto miners (e.g. Argo) and blockchain platforms (e.g. Tezos). However, companies operating within each of those niche areas do not necessarily directly compete with each other, and rights holders should therefore take a more nuanced and targeted approach to any grant of exclusivity to ensure that they are not unnecessarily limiting future opportunities within the wider ‘crypto’ sector.

4. Compliance - be alive to relevant laws and regulations

The UK government recently announced plans to expand the Financial Conduct Authority’s power to regulate the promotion of certain “qualifying cryptoassets” - a move designed to ensure that crypto companies are brought “in line with the same high standard that other financial promotions such as stocks, shares and insurance products are held to”.

Whilst this latest development is unlikely to bring an end to crypto sponsorship deals in sport, it is nevertheless critical for rights holders to be cognisant of the evolving regulatory framework under which they (and their crypto partners) are required to operate when activating the partnership[1].

Indeed the UK Advertising Standard Authority (ASA) has already shown an appetite to regulate in this area, having recently declared Arsenal’s promotion of Socios fans tokens (featuring first team players Ben White, Calum Chambers and Kieran Tierney) as “misleading” and “irresponsible”, as “the ads trivialised investment in cryptoassets and took advantage of consumers’ inexperience or credulity”.

Clubs and esports teams in particular should also be aware of the sporting regulations imposed by the relevant governing bodies, leagues and tournament operators. Esports teams, for example, should be alive to the fact that Riot Games have strict regulations relating to the promotion of crypto sponsorships at Riot-sanctioned events. In order to mitigate this risk, rights holders should ensure that there is provision in the sponsorship agreement clarifying that they will not be in breach if the delivery of the sponsorship rights is prohibited by applicable sporting, advertisement or government regulations. Ideally, they should also have a right to terminate the deal.

5. Financial security – think about how the deal is structured

As is widely reported across mainstream media, cryptocurrencies are extremely volatile assets; and the companies operating within the crypto sector are often no different. It is therefore important for rights holders to ensure that their crypto partner is “good for the money”, particularly when dealing with early-stage start-ups.

Rights holders may look to mitigate the risk of non-payment by agreeing a favourable fee structure whereby a significant portion of the sponsorship fees are front-loaded / payable upon signature, with robust termination rights in the event of non-payment. Further, depending upon the value of the deal, rights holders could alternatively insist on a letter of credit whereby a bank agrees to take on the risk of non-payment.

Rights holders should also be wary of accepting payments in crypto, as the volatile nature of cryptocurrencies means there is an inherent risk of the sponsorship fees depreciating in value over time.  

6. Other Considerations

When negotiating a sponsorship agreement with a crypto brand, rights holders should also give careful consideration to other ways in which they can mitigate risk. This may include, for example:

Ensuring that the rights holder has robust approval rights in respect of any advertising or marketing materials created for the purposes of activating the partnership;

• Reducing the term of the deal, or perhaps agreeing to a shorter initial period with a rolling term thereafter;

• Insisting that the rights holder has a right of approval over any public statements announcing the deal (it is important that rights holders are able to control the narrative and ensure that the right message is being put across to supporters);

• Ensuring the crypto brand gives appropriate assurances regarding its intellectual property (it would be reasonable to expect the crypto brand to warrant that the rights holder’s use of its IP won’t infringe third-party rights); and

• Ensuring that the rights holder has robust termination rights (including in respect of negative publicity, non-payment of the fees, and non-compliance with approval provisions etc.).

Conclusion

Crypto sponsorships are undoubtedly a new and exciting opportunity for sports rights holders, with obvious financial upsides and the attractive commercial opportunities associated with tapping into a younger and more diverse audience that is embracing the world of Web3, blockchain and the metaverse. However, those opportunities need to be considered in the round and weighed against the considerable legal and reputational risks associated with such partnerships; risks which are only likely to increase as governments, advertising regulators and sports governing bodies look to crack down.

[1] NFTs, for example, are not included in the government’s latest crackdown measures, but that’s not to say they won’t soon be brought within the FCA’s remit.