Sports and NFTs - Still a business opportunity on and off the pitch?

What are the main drivers of such digital initiatives?

Fan engagement

Sports NFTs give ardent supporters fresh new ways to interact with and support their preferred teams, athletes or sports events. There are more real-world uses for sports NFTs as NFTs develop, and these are all poised to revolutionise the sector in fascinating ways.

By way of illustration, NFTs transform the idea of sports memorabilia by enabling fans to possess the cards of their favorite players and even game videos. This can increase fan engagement by giving members special benefits and occasionally even an opportunity to have a say in key governance issues.

The new generation of sports fans prefer to enjoy sports remotely, which makes these kinds of virtual ventures vital for sports teams as the live stadium participants are in decrease for the part of “Gen Z”.

New revenue stream

Whilst, traditionally, the primary sources of revenue for a sports business have been ticket and merchandise sales, media rights and sponsorships, nowadays, even in the aftermath of the Pandemic, companies and athletes tend to use NFTs to tokenise game tickets, stream live games to token holders, or plan holder-only events in the metaverse. In fact, NFTs are proving to be a very inventive way to monetise athletes’ and clubs’ assets as they can be utilised in different ways to create multiple streams of income. This is why they have gained huge popularity also in 2021.

The tricky legal qualification of NFTs

The fact that an NFT can be acquired or traded from anywhere in the world, across many different jurisdictions cutting across different legislative systems and tax regimes, makes the legal framework potentially complex. In the current state, the NFT segment is at the edge of regulation, due to its complexity and pace of development: currently there are no specific laws or regulations which cover these NFTs; however certain aspects, such as the advertising and marketing of the tokens, may be caught by non-specific regimes.

In an effort to increase the regulation, moreover the clarity concerning digital assets, in June 2023 the first piece of EU legislation for tracing transfers of crypto-assets like bitcoins and electronic money tokens entered into force  (the Markets in Crypto Assets Regulation, known as the “MiCA” Regulation), in pursuance of having a uniform EU market rules for crypto-assets. However, such legislation only applies to “securities”.

In the face of this unclear regulatory landscape when it comes to NFTs, key questions include:

• Whether jurisdictions will consider NFTs as securities (i.e. subject to securities regulations and restrictions), as opposed to assets? Indeed, the answer will also depend on how the relevant NFT is structured. 

• Will anti-money laundering regulations need to be made applicable in sales to the public?
• What are the implications of NFTs on a secondary market, and what protections can be afforded?
• The matter has concrete implications, such as under US law “rescission” rights allowing investors to request that the token issuer refund their initial investment only if the token is qualified as a security.

To give an example, the well-known creator of the NBA Top Shot NFTs, Dapper Labs, has faced in 2021 a damages claim before the New York District Court alleging that NBA Top Shot NFTs are securities and that Dapper Labs had harmed buyers by failing to register them with the Securities and Exchange Commission (SEC). While the case is reportedly still pending, Dapper Labs will now have to prove that users receive the same utility as they would do with trading cards or football stickers and that their value is purely incidental. However, the judging authority has given an anticipative opinion whereby: “Not all NFTs offered or sold by any company will constitute a security, and each scheme must be assessed on a case-by-case basis”.

In another case in the UK, in December 2021 Arsenal Football Club saw two of its promotions for “fan tokens” banned by the Advertising Standards Agency (“ASA”) for failing to comply with the UK Advertising Code. The ASA found that Arsenal were “misleading consumers over the risk of the investment, as it was not clear the ‘token’ was a crypto asset”. 

As to future prospects and other preventative measures, at least on a European level, the introduction of reverse charge has proved to be a viable option for goods with a high fraud risk, but this is only possible in B2B18 transactions, and only provided that the parties would waive (the currently wide-spread) anonymity. In an industry characterised by integrity, any possibility in fraudulent behavior or e.g. illegal betting, includes a great potential risk for breaching sports-specific regulations in addition to the obvious harm, most likely fueled by media. This is what the Swiss tax authorities made recently,

for example, by drawing up and publishing on 14 December 2021 a working document entitled “Cryptocurrencies and initial coin/token offerings (ICO/ITO) as a subject of wealth, income and profit tax, withholding tax and stamp duty”.

Key legal challenges behind the use of NFTs in sport

As noted above, many voices are now demanding new regulations for the metaverse. Why? Simply put, to protect the users when they interact in this virtual world. Let’s turn to the most relevant legal challenges that NFTs and similar digital initiatives may entail for users and investors.

To what extent can athletes’ NIL be exploited?

Professional athletes have a relatively short career playing sport, living most of their life off earnings made off the pitch, which is why commercialising their NIL is paramount. Athletes have traditionally been commercialising their NIL via endorsement deals and sponsorships by advertising products or becoming brand ambassadors, while as of late, NFTs represent a new marketing opportunity for athletes and sports stakeholders to profit from athletes’ NIL rights.

A key issue with sports NFTs is there can be significant uncertainty around whether the issuer of the NFT has the right to commercialise an athlete’s image, and if so, what rights are being sold or licensed, and whether the terms thereof align with existing contracts (such as between an athlete and the relevant club, organisation or brand).

For example, the NBA has partnered with Dapper Labs to create “TopShot”, a marketplace that digitises licensed clips from the NBA and turns them into a limited number of NFTs advertised as “Moments”. Such licensing agreements require that companies like Dapper Labs enter dual agreements with the NBA and the National Basketball Players Association. However, some popular players have leverage. Media reports on the so-called carve-out process indicate, for example, that Michael Jordan is among several players who have set limits with the National Basketball Retired Players Association on the use of their likeness, and those players typically bargain for a larger percentage of sales for any product using their NIL.

In the European football landscape, of note is FC Liverpool’s first venture into nonfungible tokens in April 2022, in partnership with Sotheby, to sell up to 171,072 NFTs as part of a collection depicting players and managers from the men’s squad as cartoon superheroes, each with details personalised to the player like a signature gesture for example:

In the biggest project of its kind from a Premier League football club, yet only 9,721—or 5.7%—were sold. Liverpool still generated $1.5m (£1.1m) from their NFT sale, however, thanks to an auction element which saw some artworks, of Salah and manager Jurgen Klopp, fetch more than $80,000 (£61,000) each.

The English Premier League standard employment contract provides, in clause 4, for clubs’ right to use, and grant to its “sponsors or commercial partners” the right to use the club’s players’ images, either individually or with not more than two other players, only “in a Club Context in connection with the promotion of the Club” and provided that any such use does not imply any brand or product endorsement by the player. To this extent, it was diriment the fact that, albeit characterised as heroes, each digital card also featured clearly the club’s trademarks, logos and distinctive signs.

Similar rules used to apply to the Italian First Division (Serie A) clubs until 31 January 2023, when the new Serie A Collective Bargaining Agreement (“CBA”) for football players entered into force.20 The new CBA revoked entirely the set of rules (the so-called “Convention” entered into between the Italian Football Association, the football players’ union, and the professional Leagues in 1981), which determined that clubs and their sponsors were entitled to exploit players’ images and to require players to carry out certain promotional activities (e.g. video or photo shooting)—provided players were featured in a club context and only as a “group” (e.g. of three or four players).

The new CBA clarified that a new set of said rules will be issued shortly.

However—pending this regulatory vacuum on club’s rights over players’ image rights—it is extremely interesting to note that, by the time this article is being drafted, Serie A clubs are rushing to adjust their employment contract forms, at least when signing relevant players, by adding in the Schedule attached thereto a number of commercial rights, which clubs provide for and require players to agree to when entering into the employment contract.

What are the rights that Serie A clubs are adding in their employment contracts?

Notably, the right to:

• Exploit (and grant the club’s partners the right to exploit) the player’s image rights for the purpose of commercialising merchandising items;
• Feature the player in videogames and/or in digital projects (such as NFTs); and
• Feature the player in the above-listed initiatives both individually and as part of the club’s squad, and either in a club context or in a personal context (i.e. without the club’s logos, trademarks or other distinctive signs featured on or in connection with the player)—thus well beyond the limits of the 1981 “Convention” previously in force.

The clubs’ progressive integration of the schedule to be annexed to the employment contract form can be explained on the back of the much-debated challenge by Swedish star Zlatan Ibrahimovic, in November 2020, in respect of the use of his “name” and “face” in the FIFA 21 video game,21 alleging that Electronic Arts (EA) has used them both without his permission and that he never allowed FIFA, FIFPro or AC Milan to carry out such initiative.

In fact, unlike the Premier League standard form, the 1981 “Convention” referred solely to club’s “sponsors”—with the ensuing exclusion of licensees or other “commercial partners”. Accordingly, absent the specific consent of the player, Serie A clubs were not entitled to exploit, or allow its licensees to exploit, players’ images for videogames, nor do the same for digital products.

In other EU jurisdictions, it is the authors’ understanding that such consent can be obtained by the licensee indirectly via the Players’ Union or by means of a collective agreement or via a League/Federation by accepting it through the athlete’s registration and acceptance of its regulations.

Trademark challenges

The global transformation through the metaverse and NFTs (non-fungible tokens), fuels the debate as to whether there is an urgent need for new regulations to adapt to these innovations, or should instead such new products adapt to the law? For the reasons set out below, the most appropriate response at this stage is the latter, at least with respect to trademark infringement.

The recent New York court opinion and order in the Hermes v Mason Rothschild dispute is the first of its kind to involve enforcement of real-word IP rights against infringements allegedly occurred in the Metaverse. The decision nonetheless suggests that IP rights would likely be enforced in the Metaverse in the same way as they would in the real world, with registration (where available for the IP in question) being an important factor for success.

Yet another highly significant legal dispute in the virtual world is still pending before the New York court, stemming from Nike, Inc.'s legal action against StockX LLC, in February 2022, claiming that the latter (a sneaker resale marketplace) had used Nike’s trademarked logos and goods to enter the NFT market.  More specifically, StockX has issued, advertised and sold NFTs bearing Nike’s trademarks at high prices, without Nike’s approval or authorization. The US sporting goods giant Nike claimed that the method adopted by StockX to use Nike’s famous logos such as the “swoosh” and the “jump man” logo constitutes, among other things, trademark infringement, false designation of origin, and trademark dilution, and that that StockX is minting NFTs to profit from Nike's goodwill and reputation.

While the outcome of such Nike dispute remains to be seen, major brands have been nonetheless seeking protection of their branding in this emerging space by filing trademarks to specifically protect virtual goods and services.

Along the same lines, Juventus FC successfully challenged the use of its trademarks in an NFT collection: another decision recently issued in Italy, in a court case brought by the Italian NFT producer Blockeras S.R.L. In the decision publicised in late 2022, the Rome Court of First Instance granted an injunction in favour of the Serie A club, ordering Blockeras to cease the use of Juventus’ trademarks. The following image was available on the Binance NFT platform, where the NFTs were marketed:

On a European level, the decision is the first of its kind regarding trademark infringements through NFTs.

Looking at the US amateur level, individual schools typically set policies aimed at prohibiting student athletes from using the school’s trademarks without approval. For example, in December 2021 the Michigan running back Blake Corum launched an NFT collection but was prevented from using any of the university’s distinctive signs. [Footnote to add: See: https://nftevening.com/blake-corum-signs-an-nil-deal-allowing-him-to-release-nfts/.>>] As a result, in his NFT, Corum is not pictured wearing an official Michigan uniform; instead, his helmet and jersey were fashioned to appear purely generic.

Risk of TPO/TPI breach in football

In April 2022, League Two Crawley Town FC were taken over by WAGMI United, a group who aim to fund the club through sales of NFTs that entitle those purchasing them to make decisions on certain aspects of club ownership. In July the club signed a player following a vote amongst season ticket holders and NFT holders on which on-field position most needed strengthening.

Looks like the use of NFTs has expanded to the point where they are now being used to give fans a say in key decisions on how their favourite team is run. Albeit the ultimate objective of fan tokens’ issuance is the fan engagement, as seen above in some cases the relevant holders have been granted the possibility of experiencing and participating in certain day-to-day decisions of the club (e.g. choosing the design of a third shirt, the captain’s armband, the team bus, the song to play in the stadium before and after a match, or even what position to strengthen).

As harmless as they may seem, fan tokens are attractive for several reasons that go far beyond the engagement between the club and fans: these assets can be traded in real-time on the blockchain resulting in a constant variation of their price like a stock exchange. For example, with the press reporting an imminent signing of Lionel Messi by PSG in August 2021, the “$PSG Fan Token” rose around 130% in five days.

Could this go as far as letting a fan token holder (i.e. a club’s third party) acquire the ability to exert influence when voting on the small day-to-day decisions of a club? Here, a fine line with the prohibition of “Third-party influence on clubs” established by Article 18b is of the FIFA Regulations on the Status and Transfer of Players exists. In the face of the clubs’ constant need for new revenue sources, the football legislator might take into account certain trends that might progressively move towards actual influence.

Jurisdiction and Enforcement

By no means should an NFT holder take for granted that it will manage to successfully apply for an injunction against the infringer. As mentioned in Section (b) here above, convincing judges to enforce “real” rights in respect of these new digital products is all but an easy exercise given the uncertain regulatory landscape.

The first worldwide proprietary injunction to freeze an NFT illegitimate sale was the Bored Ape Yacht Club NFT sale on the blockchain.

The case involved a commercial dispute over a rare Bored Ape Yacht Club NFT which the claimant, a Singaporean NFT investor, used as collateral to borrow Ethereum from the defendant (“chefpierre.eth”), a Metaverse personality whose real-world identity was unknown. The claimant had requested to the defendant an extension of time for repayment, which the defendant initially agreed to. The defendant later changed his mind and foreclosed on the NFT, which triggered a transaction to transfer the NFT to the defendant’s cryptocurrency wallet. The claimant made urgent applications to the Singapore courts for a worldwide proprietary injunction to stop the defendant from dealing with the NFT.

A number of interesting legal issues arose in the case:

•  Is the NFT an “asset”? The ruling recognises that Singapore courts can take jurisdiction over assets sited in the decentralised blockchain.
• Had the Singapore court jurisdiction? Despite the decentralised nature of blockchain and the defendant being known only by a pseudonym, the court held that it had jurisdiction to hear the claimant’s applications on the basis that the claimant was located and carried on business in Singapore and that the description of the defendant was sufficiently certain.
• Could the injunction be worldwide? The legal counsels of the claimant managed to convince the Singapore Court that a worldwide injunction was necessary.
• How could court documents be served, given that the respondent was unknown? The case is also unique as it allows for the service of court papers to be effected via social media such as Twitter, including on Ethereum’s platform.
• How can the injunction be enforced against an unknown person, namely respondent? This is a huge challenge that the Singapore Firm, Withers, is being dealing with and much will depend on the relevant enforcement jurisdiction.

From a less legal, and rather a technical-practical standpoint, it is also important to take into account the fact that enforcing NFTs injunctions is even more difficult, in light of their very nature.

As NFTs utilise various blockchains, most often the Ethereum one for its stability as a platform for “smart contracts”, immutability is one of the fundamental features of blockchain technology, therefore simply “deleting” an NFT is impossible in the strict sense of the word.

What can be the legal workarounds over this issue?

• The first possible solution requires the current holder of the NFT to transfer it to the owner of the infringed mark;
• using a “genesis” block to “burn” NFTs or other crypto assets, by limiting their further circulation on the blockchain; or
• delete from its location the image/video file linked to the NFT, making the visual representation of the NFT impossible as the smart contact will be leading to a “dead” link (albeit this option does not in practice prevent the NFT creator from restoring the file at the original location in the future, therefore reversing the initial “deletion” and carrying on the infringement).

When it comes to a sports celebrity granting his/her sponsor the right to mint NFTs featuring his/her own image rights, it is of paramount importance to take the issues set out under this Section into proper account for the purpose of drafting and negotiating the relevant purchase or licensing agreement.

The tax-legal considerations

Direct taxation

From a direct tax perspective, there is unanimity at international level on the fact that both the income obtained by the creators of NFTs on their first transfer and the income obtained by their holders on their subsequent transfer are taxable for all natural and legal persons who obtain them. The qualification of this income oscillates between the idea of commodities (the US has not yet clearly decided on this), income from the sale of financial assets, which generates capital gains (the majority view in the US and the UK) or income from intellectual property rights (the view held in many countries, including the Netherlands).

From a practical accounting standpoint, every single transaction should be recorded and stored for possible later inspection. In practice this would mean that the tax subject should voluntarily declare all of their transactions. Because of the lack of a direct line of communication between the blockchain and the authority, no process is automated, and it is recommended to seek counsel. The values of cryptocurrencies, unlike fiat currencies, are not determined by a central authority, whereby exchange rates may remain comparably volatile and unpredictable. The accounting should thus include both of the currencies used and applicable exchange rates. This places a burden on the tax subject to firstly, report the costs and exchange rates in a correct and timely manner, but moreover demonstrates the need for the authorities to be sufficiently educated in understanding the nature of such income.

Trading cryptocurrencies against fiat, however, is seen as a separate taxable transaction, under the principles on taxation of income from other sources, since it can be noted that the individual, whether natural or legal person, has made an exchange between two digital assets.

Indirect taxation (VAT)

In order to conclude that NFT transactions are transactions within the scope of VAT, not only must they be performed for consideration, but there must be a legal relationship between the creators of the NFT and their purchasers, with the existence of a proportional link between the service and the consideration. “Apparently”, the first condition is relatively easy to satisfy, as there is certainly a legal relationship between the creators who place an NFT on the virtual market and their buyers, a relationship mediated by trading platforms such as OpenSea. We say “apparently”, because, in fact, the buyer is as virtual as the NFT.

Qualifying as electronic services, as defined by the Directive 2006/112 of 28 November 2006 on the common system of value added tax (VAT Directive), the place of supply is where the recipient is established, if we are talking about a non-taxable person. If, however, we are talking about taxable purchasers, the place of supply (and therefore of application of VAT) is where they are established. This is where the confusion begins, because the blockchain ensures full confidentiality of the parties, making it impossible at this stage to determine whether or not the buyer is a taxable person and where they are established (head office, domicile, place of residence, place of consumption). From this point of view, it is not possible to determine in which country the VAT due must be collected and paid, nor can the obligations to declare be fulfilled (as there is no date for identifying the beneficiaries/consumers).

For athletes there is an additional spice, since the mere definition of an international professional athlete’s tax residency is a difficult question to answer. The OECD Model Tax Convention art.17 gives us insight as to the tax treatment of such athletes. How things change if NFTs are added to the mix is a question left unanswered.

The VAT perspective is especially important for individual athletes that have chosen to incorporate their sporting activities e.g. under a limited liability company, thus subject to VAT. The creation of tokens and NFTs may fall into the scope of activities of the company in question, thus from a tax planning perspective it is particularly important to seek adequate counsel to establish possible weak point in tax planning. Duly performed tax duties can in the best case translate into more focus on the pitch.

Key takeaways

A strong brand is an athlete’s (and sports companies') greatest asset and NFTs are offering new means to maximise the exploitation of that brand. Yet NFTs may also help young, prominent athletes build their brands by creating and selling digital content and pave the way for fan engagement opportunities by using their NIL in a new and revolutionary manner.

With that being said, currently only the newest generations of sports fans are the most active ones when it comes to fan engagement through different crypto ventures. The main challenges can be summarised as follows:

• Uncertainties in the legal and tax treatment of NFTs and tokens.
• Immutable nature of NFTs and tokens—what is put on the blockchain shall stay there without possibilities to change it.
• Possible limitations of creative material that can be used as an NFT—IP clauses in contracts and other copyright issues may apply.
• Counsel should be sought sooner rather than later to avoid being suspected of tax fraud and potential negative media coverage thereof.
• Last but not least, environmental concerns are of great relevance given the environmental impact arising from the new digital technologies.

For the reasons set out above, legal advice will be of paramount importance to protect rights holders and prevent undesired legal issues.

Co-authored by Sofia Casagrande, Legal Counsel, and first published by International Sports Law Review.