Cryptoasset Promotions in Sport

– in Westminster Hall at 4:40 pm on 8th November 2022.

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Photo of Aaron Bell Aaron Bell Conservative, Newcastle-under-Lyme 4:40 pm, 8th November 2022

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 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 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 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 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.

Photo of Jim Shannon Jim Shannon Shadow DUP Spokesperson (Human Rights), Shadow DUP Spokesperson (Health) 5:00 pm, 8th November 2022

For the second time today, I am pleased to serve under your chairmanship, Mrs Cummins. I congratulate Aaron Bell for leading the debate, and for his contribution to last night’s Adjournment debate on the financial sustainability of football clubs in England. It was an excellent debate. The Minister was there to respond to it, and I know that he is biting at the bit to respond to this debate, too. I am genuinely pleased to see him in his place; we have all grown fond of him, and we know that we will be more than pleased with his response.

I spoke in the recent Westminster Hall debate on the regulation of cryptoassets. It was clear from the contributions of all Members that there are real concerns surrounding the impact that “online money” can have on society. There is uncertainty; people have invested and been caught out. I understand that the figures for crypto investment are higher as a proportion of the population in Northern Ireland than anywhere else in the United Kingdom. There is an interest for us there, although I am not aware of any football teams or other sporting organisations in Northern Ireland that are involved. That does not mean that they are not, of course; I am just not aware of them at the moment.

As the hon. Member for Newcastle-under-Lyme rightly stated, cryptoassets are becoming more prominent in sports, which are a major source of enjoyment for many in the UK. It is great to be here to discuss these issues. The hon. Gentleman has an incredible interest in and knowledge of this matter, so I am pleased that he has set the scene so well. Sports as an industry has realised the potential that cryptocurrencies and blockchain technologies can bring to further monetise fan engagement, attract sponsors and engage a global market in ways that were unimaginable decades ago. However attractive that may be, it is not always safe, and that is what I want to focus on. I know that the hon. Gentleman has already done so, and we look forward to the Minister’s summing up.

As far as I am aware, there are currently no sports clubs in Northern Ireland enabling the use of cryptoassets; I stand to be corrected, but I am pretty sure that that is the case. As of 6 August, Oxford City became the first football club in the United Kingdom to accept bitcoin for matchday tickets. In March this year, as the hon. Member for Newcastle-under-Lyme referred to, Manchester City announced a global partnership with one of the world’s largest crypto exchanges, OKX. We have seen incidents in the past where similar online products, such as bitcoin, have proven dangerous but at the same time appealing, as they pose as get-rich-quick schemes. It is a bit like doing the lottery on a Saturday. If anyone is as successful as I am—I have not done it for a long time—they will never get anything.

In 2021, Football Index went bust after its contractor suspended operations, and it was revealed that customers could lose up to £90 million. I remember that well; it was incredibly scary. For some people, it was a get-rich-quick scheme, but it did not work out. Similarly to cryptoassets, these types of investment companies sound fantastic in theory, as people are told that they will make money quickly and profits will increase over time, but it becomes clear that that is not always the case; indeed, many end up losing their life savings. As the hon. Gentleman referred to, and as he reinforced in last night’s Adjournment debate, many in sports clubs find themselves in incredible difficulty. Many clubs were mentioned last night—the Minister mentioned some of them—and there is a need to have them regulated.

Our sporting industry in the UK is so loved by so many. In my constituency, crowds gather every weekend to watch local football matches, and teams of all ages compete in different leagues, tournaments and cups. We have seen the excitement of fans ahead of the 2022 World cup. There are massive calls for a greater review of the Gambling Act 2005, and for a deeper look at blockchain technology—the quicker the better—which allows participants to review transactions made in digital currency without the need for a central clearing authority. Something is just not right about that, and I hope the Minister will listen to our concerns and give us some encouragement.

We have the Financial Conduct Authority to ensure that things are done correctly, but sometimes, as technology advances and rolls on, it is hard to keep up with all the things that are happening. Unfortunately, the promotion of cryptoassets by sports teams poses new, unheard-of regulatory challenges. The Chancellor must take that into consideration and ensure that cryptoassets are brought into financial regulation. I think that might be a solution; it would certainly give us some peace of mind. Some athletes in the United States are already getting part of their salary in digital money or shares. Cryptoassets must be held to the same high standards for fairness to consumers.

Let me conclude my contribution to this worthwhile debate by saying that this is an issue that we must aim to address UK-wide. The issue will be dealt with at Westminster but it is important that the regional Administrations are kept on board. The Treasury must put the correct provisions in place to ensure our constituents’ financial security. Cryptoassets are becoming incredibly popular, and not just in sport; many employers are considering them as a payroll method—talk about taking a chance with your pay on a Friday night. If we cannot stop this, it is important that we at least take the correct steps to ensure that it is done in the right way.

I am pleased to see the Minister in his place, but the discussions need to take place with the Chancellor and the Minister with responsibility in DCMS. I hope that the Chancellor will maintain regular contact with DCMS Ministers and with the economy Ministers in the devolved Administrations to ensure that all efforts are made to keep up to date with cryptoassets and their impact on our sporting industries. We cannot rule out, either, the role of the Home Office and the police in this matter—I think it is at that level. Some people have done well out of cryptoassets, but many people have not. We need to protect them, and protect the clubs, too.

Photo of Martin Docherty Martin Docherty Shadow SNP Spokesperson (Industries of the Future and Blockchain Technologies), Shadow SNP Spokesperson (Foreign Affairs Team Member), Shadow SNP Spokesperson (Defence Team Member), Shadow SNP Spokesperson (PPS to the Westminster Leader) 5:07 pm, 8th November 2022

It is good to see you in the Chair, Mrs Cummins. I thank Aaron Bell for securing the debate, which is important not only because it dovetails with the debate that I secured two months ago, but because I agree with most, if not everything, that he said.

I began my speech two months ago by declaring my interest as chair of the all-party parliamentary group on blockchain, which has done a most excellent job of examining and understanding the blockchain—or, as I like to call it, distributed ledger technology. I remind Members who were not in that debate—Jim Shannon was—that cryptoasset promotion in sport was one of the first things I touched on.

Something of a watershed was reached during the January Super Bowl in the United States, as cryptoasset ads took up a large chunk of the lucrative half-time advertising. The adverts starred such Hollywood luminaries as Matt Damon and Larry David. A cross-platform, cross-interest advertising nirvana was reached as some of the most trusted personalities were crossed with some of the most trusted brands in American life. The cryptoasset companies that paid for those lucrative spots surely hoped that would impress the hundreds of millions of viewers in the United States and across the world.

Although I used the Super Bowl as my example in my previous speech, I could have gone for other examples closer to home. After the National Football League, the most lucrative sports competition is the English premier league. As the hon. Member for Newcastle-under-Lyme alluded to, there is no shortage of crypto sponsorship there, either. Most if not all clubs have tie-ins as a secondary or main sponsor. Quite simply, sports teams provide perfect synergies for advertisers. Unlike most institutions that command national and international respect, they are open to commercial partnerships, exchanging the cachet that their brand commands among millions of people for handsome pecuniary rewards.

It would be fair to say that issues of morality or due diligence have not always come to the fore when making commercial partnership decisions, as exemplified by the hosting of the world’s largest sporting tournament this month in a tiny yet fabulously wealthy sliver of the land in the Persian gulf, or in the way that one of English football’s most traditional clubs was purchased last year by a group close to the Saudi royal family. I would not ask Members to just take my word for it. The Financial Times, in an article examining the relationships between sports and crypto, said that

“the love affair between sport and crypto appears to be a perfect match, as franchises can deliver a wider audience within the demographic that digital asset players want to reach.”

The article also came up with the astonishing figure of $600 million spent by crypto firms worldwide on sports sponsorship last year, which is up from just $25 million the year before. That is an incredible growth that really demands further examination by anyone interested in issues of consumer protection and good governance, as the hon. Member for Newcastle-under-Lyme mentioned. The risks are obvious, and I will quote the Financial Times article from 27 May one last time to demonstrate that.

“Ronan Evain, executive director at Football Supporters Europe, a prominent fans group, pointed to the risks of ‘an unregulated financial product’. He said teams and players backing crypto assets were ‘considerably irresponsible’, as such tie-ups were aimed at ‘building the legitimacy of the product for an audience that wasn’t necessarily familiar with it’.”

That essentially gets to the nub of my debate in September —the grey areas that are allowed to flourish in the regulation vacuum, the lack of clarity around so many of the products that are being offered, and then the resulting fertile ground for the outright scams that will inevitably follow.

To give just one example, the—how shall I put this—lack of attention to due diligence given by many sporting brands has already resulted in pretty shocking examples of fraud. Take the example of Sportemon Go, something that described itself as an

“NFT-augmented reality sports trading platform” when it signed deals to appear on the kits of two Scottish Premiership teams, Rangers FC, which I know the hon. Member for Strangford supports, and Hibernian FC, which I know my right hon. Friend Ian Blackford is a big fan of. The company collapsed earlier this year after seeing the value of its proprietary “SGOX” token reduced to zero.

That is far from the only example of bizarre cryptoassets being lent a sheen of respectability by our own beloved sporting brands. The Guardian reported last year a press release from English champions Manchester City that trumpeted:

“We are excited to partner with 3Key”, which I think the hon. Member for Newcastle-under-Lyme already mentioned,

“in their journey to simplify the decentralised finance (DeFi) trading analysis user experience through the power of football to engage with our fans with a range of content and activations.”

While that sounds like the marketing babble that most sports fans are used to, the real story was that 3Key lacked what could be called a digital footprint. It was unclear what services and products it sold, and where it was regulated. Websites associated with the company then went offline, and the club had no choice but to suspend the partnership. I could go on, but we have also heard plenty of examples from elsewhere today. I think there is a broad agreement that something needs to be done.

The Financial Services and Markets Bill, which has just finished in Committee—I was on the Committee myself—could have been one such avenue for regulation. However, to go back to the arguments that I made in my own debate two months ago, there is no legislation needed to clamp down on the worst excesses and sharp practices employed by some of those companies. That said, particularly when it comes to sports clubs—and individual athletes, a subject I have not really mentioned—there is plenty of evidence to suggest that the Government could be doing a lot more to protect institutions that ultimately command so much respect in our communities from the worst excesses and temptations that these sorts of bubbles can bring.

There is only one professional sports team in my constituency of West Dunbartonshire, Dumbarton FC—or the Sons, as they are commonly known—and they are celebrating their 150th anniversary this year. There used to be two, but my hometown team of Clydebank FC folded in 2003 after poor financial decisions were taken by the previous owners, so I know, at first hand, the importance of these brands to communities. Thankfully, the Bankies are now climbing up through the leagues and got into the Scottish cup last year, for the first time since they folded, and I was delighted to be there.

We need to make sure that our communities and constituents are protected from the worst excesses of what I would call unregulated capitalism. When the Minister, whom I congratulate on coming back into Government—I know he is all over this and crypto is way up there at the top of his agenda—rises to his feet, will he therefore highlight the broad range of existing legislation that can deal with fraud and advise how the Government intend to work with sporting bodies across these islands to better understand why they are falling for this fraud and these scams? If necessary, as mentioned by the hon. Member for Newcastle-under-Lyme, perhaps the Minister could also lay out whether existing regulations need to be improved or new regulations need to be added to the statute book to protect consumers. I know that Members on the Opposition Benches would at least support him on that.

Photo of Jeff Smith Jeff Smith Shadow Minister (Digital, Culture, Media and Sport) 5:15 pm, 8th November 2022

It is great to see you in the Chair, Mrs Cummins. I congratulate Aaron Bell not only on securing the debate, but on what I thought was an excellent speech that really set out the issues. I completely agreed with most of his speech, including, sadly, his criticism of the club for which I have been a lifelong season ticket holder, Man City. We have not covered ourselves in glory on this issue.

Some 2.3 million people in the UK apparently own cryptocurrency or cryptoassets, so it is no surprise that lots of sports teams have seen the financial opportunities and signed up for lucrative deals with the sector. In the USA, crypto sponsorships have been established across Formula 1, the Ultimate Fighting Championship and Major League Baseball, with major venue sponsorships as well. In the UK, most premier league clubs have some sponsorship links with cryptocurrency businesses and some clubs have launched their own non-fungible tokens. As we have heard, the Premier League has just signed a multimillion dollar deal with a blockchain company, Sorare, to deliver its own NFT collection. Alongside several major European teams, six premier league clubs have partnered with the company Socios, which markets itself as a fan engagement platform and also has links with rugby union. By purchasing fan tokens based on blockchain, fans are told they will have more of a say and can vote on club decision making, mostly on issues around the match day experience and so on.

There is a key question here for the clubs, not the businesses. The businesses are just in it for the money, but the clubs should be in it for more than that. In the wake of the fan-led review, if clubs really want to engage with fans and give them a say on these issues, they should do so. Why can they not do that without requiring their fans to sign up to spend money on cryptoassets? In this day and age, it is not hard for clubs to carry out that kind of engagement. Is it, as many of us suspect, just another way to exploit the loyalty and wallets of football fans?

Labour believes that fans should as a right have a say in the direction and decision making of their club, and that they should not have to invest in a cryptoasset to earn that right. I was reassured many times by the Minister’s predecessor, Nigel Huddleston, that the Government are on board with all the recommendations in the fan-led review. When they come forward with the White Paper and the proposals, I trust that we will see some opportunities to clamp down on this kind of business and really promote genuine fan engagement by the clubs.

In December 2021, analysis commissioned by the BBC estimated that more £262 million had been spent on fan tokens through Socios. Some producers of football NFTs and fan tokens state that these cryptoassets were never intended as investments, which is fair enough. However, that is certainly not always made clear by all producers. It is clear that some people have felt encouraged to purchase these tokens as investments. If so, they are taking a risk. We have already heard about John Terry’s Ape Kids Football Club NFT collection, which was promoted by a number of high-profile football stars, and how the NFTs crashed in value and lost about 99% of their initial price. Several footballing figures have advertised NFT schemes on social media and then had to retract or delete their posts when the schemes nosedived and fans lost money.

As fan tokens are usually linked to volatile cryptocurrencies, which they provide an incentive to invest in, and are influenced by supply and demand, the value of those NFTs has fluctuated wildly. In November 2021, the crypto market was at its peak, with a valuation of almost $3 trillion; by June 2022, it had lost more than two thirds of its value. As we have heard, fan tokens pushed by premier league teams have often tanked in value. I do not think we have heard about this in previous contributions: the Advertising Standards Authority recently upheld a ruling against Arsenal for its promotion of Socios fan tokens in an advert. It found that the club

“trivialised investment in crypto assets and took advantage of consumers’ inexperience or credulity.”

We need some action and we need regulation. Labour is not advocating a ban on the ownership of cryptocurrencies. We recognise the opportunities they can create for our economy when done right. Proper regulation of cryptoasset promotions marketed to sports fans is clearly needed, as the hon. Member for Newcastle-under-Lyme set out.

I have some questions for the Minister. First, as I have asked many times of his predecessor, can he tell us when or if—I hope it is when—he will bring forward proposals for the independent regulator? Does he foresee an independent regulator of English football having any role to play in the regulation of cryptoassets in football? It might be that the FCA is the appropriate regulatory body. The FCA has indicated that it is working with the Government to target financial promotions and advertising in crypto as a priority. Can the Minister set out a timeline of when those reforms will happen and what the legislative vehicle for doing so will be?

I will conclude with an aside. In the week of COP27, we should probably note that cryptoassets are really bad for the environment. They require huge amounts of power and powerful computer calculations to verify the transactions. They are very carbon-intensive. Will the Government be clear with supporter bodies about at least the environmental impact of crypto technologies? I do not want to let COP27 week go by without mentioning the detrimental effect of crypto.

The clear message from across this Chamber today has been that this is a really worrying development for football fans. It is not something we need necessarily, unless the clubs and businesses are out to make money and at the expense of football fans. Regulation is clearly needed. That is the message from Members today. I hope the Minister will take that on board.

Photo of Stuart Andrew Stuart Andrew Assistant Whip, The Parliamentary Under-Secretary of State for Digital, Culture, Media and Sport, Parliamentary Under-Secretary (Department for International Trade) (Minister for Equalities) 5:21 pm, 8th November 2022

It is a pleasure to serve under your chairmanship, Mrs Cummins. I thank my hon. Friend Aaron Bell for securing the debate. It is clear that he and I share a passion that everyone should be able to enjoy sport safely. That is ultimately one of the things that has motivated him to secure this debate.

We both understand how important it is to protect the integrity of our sports as well as the fans, who are their lifeblood, frankly. In my first few weeks in this job I have been learning an awful lot, but I would say that in the last hour I have learned even more. I am certainly grateful for the focus on this very important area. It will be informing a number of areas I am currently looking at.

It is a privilege as the Minister for Sport to be able to champion a sector that means so much to so many fans across the country, plays such an important part in local economies and has such a rich history in each of our communities. We would all agree that for those reasons and more we should ultimately encourage innovation in sport. Innovations that can harness emerging technologies, providing both new commercial opportunities for sport and greater engagement for fans, should be embraced. That being said, any such innovations should be implemented responsibly, in line with any relevant regulation, and with transparency in how they are advertised and promoted.

As I mentioned in last night’s Adjournment debate on the governance and financial sustainability of English football clubs, fans are the lifeblood of sports clubs. That is why they were the first people I met when I took on this role. I met representatives from the Football Supporters’ Association as well as a number of club supporters’ trusts. I listened to their perspectives, because their needs must be understood and protected and should be central in any decisions we take. That way, we can ensure a sustainable, thriving future for sport in this country.

As part of the Government’s ongoing work on football regulation, we are committed to breaking the cycle of inappropriate ownership, financial instability and poor governance practices. I join my hon. Friend the Member for Newcastle-under-Lyme in congratulating and thanking our hon. Friend Tracey Crouch for the amazing work she has done with her review.

However, engaging with fans’ groups goes wider than that, and the growing interest in, and promotion of, cryptoassets issued by sports clubs should clearly keep fans at the forefront. The enthusiasm of fans for sports memorabilia and collectibles is not new, and it is no surprise that this enthusiasm remains undimmed in the digital age through new technologies. It is clear to see that there is a hugely positive potential for cryptoassets in a fan market, with such a latent appetite for merchandise, memorabilia and other opportunities to show one’s colours.

A number of sports clubs and competitions have taken early steps into partnerships with cryptoasset businesses, or in developing their own assets. As we have heard, fan tokens have the functionality of making fans feel more immediately involved in their clubs on a digital platform by giving them a vote on matchday music or entering them into draws for signed shirts. Non-fungible tokens bring traditional collector opportunities into the 21st century, with opportunities to purchase digital cards. That can be at club level or relate to evolving digital assets that chart a team’s progress, such as the recent product launched by the sponsors of the 2022 World cup. Sponsor relationships can be as responsibly explored as any other corporate partnership—none of these alone represents a significant risk that needs to be mitigated—but as we have heard today, not all projects launched by the sector thus far have delivered on their potential or done so in a transparent manner.

As I have said, any promotions of cryptoassets in sport should have fans’ interests at their heart and must be transparent about any risks, and the sector should be mindful of that as it looks to further develop its digital offers. Cryptoassets should not be viewed in isolation from their wider relationship with a club’s fan base and our normal expectations of responsible corporate relationships. It is reassuring to see that clubs are being held accountable on that point—for example, as we have heard, the Advertising Standards Authority ruled that some of the adverts promoting Arsenal’s fan tokens through their partnership were “misleading” and “irresponsible”, with insufficient warnings of the risks involved.

My hon. Friend the Member for Newcastle-under-Lyme mentioned the incredibly damaging collapse of Football Index, which is an example of the four main problems that he has highlighted. Our independent review into the regulation of Football Index identified lessons to be learned by the Gambling Commission and the Financial Conduct Authority. The commission has taken action, including strengthening its approach to novel products.

As we have heard, cryptoassets can come in many forms, ranging from cryptocurrencies to non-fungible tokens. It is important to note that the Government are taking action on the regulation of cryptoassets and their promotion. In July, the Government set out our vision for the future of the financial services sector, which included a plan to ensure that the UK remains at the forefront of technology and innovation. That was one of the four key components of the vision, with the ultimate aim of building a financial services sector that continues to be one that the rest of the world looks towards.

The global and UK cryptoasset markets have evolved rapidly in recent years. In 2021, the FCA estimated that 2.3 million people in the UK hold cryptoassets—up from 1.9 million in 2020. The Government see enormous potential in this innovative market, which needs to be carefully balanced against the risks. We have set out our firm ambition to make the UK a global hub for cryptoasset technology and investment. We want to ensure that firms can invest, innovate and scale up in this country, and we have announced a number of reforms that will see the regulation of cryptoassets and aspects of tax treatment evolve. Our clear message to cryptoasset firms is that the UK is open for business, and these announcements are in line with our objective to create a regulatory environment in which firms can innovate while, crucially, maintaining financial stability and regulatory standards, so that people can use new technologies both reliably and safely. That is essential for continuing confidence in the financial system.

The Government established the cryptoassets taskforce in 2018, consisting of the Treasury, the Bank of England and the Financial Conduct Authority. The taskforce’s objectives include exploring the impact of cryptoassets and the potential benefits and challenges of distributed ledger technology in financial services, and assessing what, if any, regulation is required in response. To protect consumers, the FCA has banned the sale of cryptoasset derivatives to retail consumers. The Government launched a new anti-money laundering and counter-terrorist financing regime in this area in 2020. The Government will continue to monitor the wider cryptoasset market and stand ready to take further regulatory action if required.

The Government are taking action on the regulation of cryptoasset promotions. In January 2022, the Government published a response to a consultation on proposals to bring certain cryptoassets into scope of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, which would ensure those promotions are fair, clear and not misleading. The measure aims to improve consumer understanding of the risks and benefits associated with such purchases and to ensure that promotions are held to the same standards as financial services products with similar risk.

The Government have been clear that UK authorities are committed to supporting the growth of the sector in a safe and competitive manner. Certain cryptoassets are already subject to FCA financial promotions rules. A wider array of unregulated cryptoassets, such as bitcoin, are not subject to similar regulation for financial promotions. The Government’s proposed measure to expand the scope of the financial promotion order to capture qualifying cryptoassets will bring most of these unregulated cryptoassets into financial promotions regulation. That forms part of the Government’s staged and proportionate approach to such regulation, which is sensitive to the risks posed and responsive to new developments in the market.

As is already the case in the application of the financial promotions regime, the Government set the regulatory perimeter while detailed rules for the regime are determined by the FCA. The FCA’s consultation on its rules closed earlier this year and it will carefully consider representations from firms. The Government will continue to closely monitor market developments and stand ready to take further legislative action if required.

In summary, the cryptoasset market is an emerging and rapidly evolving one. This innovative market has huge potential, but that must be balanced against the risks. The Government are actively monitoring the cryptoasset market and stand ready to regulate where necessary. The same is true for cryptoassets in sport. There is potential for cryptoassets to enhance fans’ experience of sport and make them feel more a part of the clubs they love. However, their use by clubs must be responsible and transparent about any risks involved.

I absolutely recognise the four main problems that my hon. Friend the Member for Newcastle-under-Lyme highlighted. Misleading promotion, consumer protection, due diligence and fan engagement are interconnected factors that must be considered and addressed in the context of cryptoasset promotion in sport. The Government are happy to engage with the FCA and others on these issues in relation to our work on football governance and in respect of sport more broadly.

The Government will continue to monitor the use and promotion of cryptoassets in sport and will factor this into our considerations around the wider market and its regulation. I will certainly raise the important issues that have been highlighted today with my Treasury colleagues. I assure Jim Shannon that I will ensure that the issues for Northern Ireland are highlighted. I will come back to Martin Docherty-Hughes on the current legislative options that may be available following the meeting I have with him.

I knew that I would be asked about the publication of the White Paper. As I said last night, it is a priority for me. I get how important this is to fans. I hope Jeff Smith will understand that, as a new Minister, it is important that I get this right and take the time to consider all aspects that have been raised. We are committed to reform, and that will come. Once again, I thank my hon. Friend the Member for Newcastle-under-Lyme for leading this very insightful debate. He has certainly given me even more to consider as I make preparations for the White Paper.

Photo of Aaron Bell Aaron Bell Conservative, Newcastle-under-Lyme 5:34 pm, 8th November 2022

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 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, 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, 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 Richard Fuller gave 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 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.

Sitting adjourned.