Cryptocurrency Fan Tokens: Dodging the “FFP” Bullet?

Sports teams are increasingly looking to other sources of revenue to stabilise their financial situation after COVID-19 lockdowns stressed many sports leagues. With the renewed rise in the popularity of cryptocurrency, fan tokens are proving to be one source of revenue that sporting organisations can readily tap into. There were reports last week that Lionel Messi’s new deal with Paris Saint-Germain will include something unusual: a signing-on fee partly paid in “cryptocurrency fan tokens”. Tokens, which are issued by a company named Socios, are used to vote on club issues and also rise and fall in value when traded online. As Messi’s Barcelona contract expired and his free agency was confirmed, the value of “$PSG” tokens soared, making real money for traders. The value of the tokens plunged once the deal was completed, but it was less reported. It is actually traders who cash them out before the prices crash and fans who are left with losses become the victims of their enthusiasm for their clubs.

AC Milan, Valencia, Inter advertised for Socios fan tokens this season, while Barcelona, Juventus and Atletico Madrid, as well as Manchester City, Arsenal and three more Premier League clubs, have also signed sponsorship deals. And yet very few people appear to understand very much about Socios, or how the tokens actually work.

Fan engagement or ‘monetising loyalty’?

Having signed numerous sponsorship deals with top clubs, Socios has quickly vanquished obscurity to achieve grand acclaim in the European footballing mainstream. The Inter deal, which replaced tyre manufacturer Pirelli after 23 years as their main shirt sponsor, earned the club around €20 million at a time when they could certainly do with the cash. Tokens from Socios have also become a part of the English football landscape, despite opposition from several supporters’ groups. Fans of Arsenal, Manchester City, Everton, Leeds and Villa have all recently been emailed about their club embracing Socios. Socios is marketed as a “fan engagement platform”, selling virtual fan tokens that give a “digital pass to the teams you love”. These tokens are held in the Socios app and allow fans to vote on club matters.

A closer look at the app reveals that the votes are not usually related to issues that matter to fans, such as transfer deals and match tactics. Instead, many votes focus on seemingly insignificant issues such as in-stadium music preferences and social media designs.

During Juventus’ pre-season friendly against Barcelona earlier this month, the two Socios-sponsored clubs invited token holders to vote on which pre-approved sponsorship slogan would appear on a trophy held by the captains before the match.

Is it for the ‘financially sophisticated’ or for the ordinary football fans?

Euros, pounds, or dollars cannot be used to purchase the tokens. Unless you are given a free token by your club, you must buy Chiliz, Socios’ own cryptocurrency, to buy tokens. Therefore, the financial risk is doubled as not only can tokens be bought with cryptocurrency, but also the tokens themselves could fluctuate in value. Therefore, only a few people can clearly explain what Socios are. The two companies are intertwined since Chiliz developed Socios. However, Chiliz is also bought and sold on exchanges without any link to football. Traders around the world set its price at their whims. In recent years, cryptocurrency has gained increasing popularity, the most popular being Bitcoin. The advocates of virtual currencies tout them as the future of finance, a way to move money and avoid antiquated banking structures. In the eyes of their critics, they are a volatile asset, and their anonymity might facilitate criminal activity. The “Chiliz white paper” released by the company itself in January 2018 said acquiring Chiliz “is only suitable for a financially sophisticated person or other persons who have been professionally advised”. It is perfectly fine to own and trade cryptocurrencies, provided that everyone involved is made fully aware of the risks. Although Chiliz indicates in its document that its tokens are not suitable for casual traders, the product is marketed to ordinary football fans. However, Socios said the white paper is not a fair representation of what they have accomplished since 2018.

How to cash in tokens?

Blockchain technology is the foundation of Chiliz and Socios fan tokens. Transactions are recorded on a ledger that facilitates the movement of money, without a central authority such as a government or bank. For example, if one person transfers €100 to another account, the bank and the recipient can see that, but a third party cannot. With blockchain, however, transactions between anonymous “wallets” can be traced by outsiders. As the value of a single Chiliz has surged over the past few months, the blockchain transactions show the company has been moving vast amounts of cryptocurrency into Binance, an online platform that enables the conversion of crypto into cash, via an intermediary account. Socios said most of these transactions are the transfers of Chiliz revenue collected from fan token offerings. Liquidation of Chiliz tokens doesn’t necessarily mean profit for the company, but rather revenue for the clubs. Like any company, the figures are declared and tax is paid on any profit.

Buy the Rumour, Sell the News

Socios has repeatedly drawn attention to the “trading volume” of Chiliz, saying this indicates “fan sentiment”. But this idea makes little sense. The PSG token surged in value before the Messi deal was confirmed, and slumped afterwards. Financial traders call this pattern “buy the rumour, sell the news” — traders will pile into an asset when they have information that they think means it will appreciate in value. Once that is confirmed, they sell that stock, cashing out their profits, and its value falls again.

This pattern is easy to observe with Socios. For example, in the days leading up to Atletico Madrid’s stunning La Liga title win last season, the club’s token rose in value dramatically. The moment they were confirmed as champions on May 22, it plunged. It is hard to understand why “fan sentiment” would decrease dramatically once a club has signed the world’s greatest living footballer, or just won their domestic league. There is nothing wrong with people trading volatile virtual assets in an attempt to make money, taking on hefty financial risks in the process but they should be informed about the risks of dealing with cryptocurrency. Although there are disclaimers in the Socios app, these are not apparent in many of the social media posts promoting tokens, nor in many club communications, which make no mention of cryptocurrency.

How does it put an Invisibility Cloak on Financial Fair Play(FFP) regulations?

Token implementation comes as a great illustration of the way the club is constantly finding ways to increase and diversify its revenue streams to continue developing as a global brand. Fan tokens have already brought in over $200 million in revenue as football clubs world over have been struggling with revenues due to the COVID-19 pandemic. Fan tokens also help clubs build branding strategies by collecting data about their fans. This is helping PSG to adhere to Financial Fair Play regulations, as the club is also making the most of other opportunities like cryptocurrency fan tokens in order to strengthen without breaching UEFA-imposed rules on spending. Fully embracing Socios.com and $PSG Fan Tokens has proved a massive success for the club. They have been able to engage with a new global audience, creating a significant digital revenue stream. Paris Saint-Germain is reaping the rewards of their bold approach and it is believed that this could be the start of a new trend as Fan Tokens and Socios.com play an increasingly prominent role across sport at the very highest level.