3 Feb 22
Anyone who has travelled on the London Underground over the last couple of years will have noticed the increasing number of advertisements for cryptocurrency products. Similarly, sports fans will have seen the proliferation of crypto sponsorships of their favourite teams and athletes. This may now change, however, as the UK government recently announced plans to regulate the way in which crypto products are promoted.
The government wishes to expand the Financial Conduct Authority’s (“FCA”) powers to regulate crypto promotions by proposing amendments to the Financial Promotion Order (“FPO“), which governs the promotion of financial products such as insurance and securities. The proposed changes are designed to ensure that adverts for crypto products are fair, clear and not misleading and to subject them to the same rules as other more “traditional” investment products.
This will have a knock-on impact on the sports sponsorship market, and sports rightsholders may find that the pool of potential crypto partners decreases in the wake of increased financial regulation which those partners must adhere to. In any case, rightsholders should take steps to ensure that crypto sponsorship agreements contain contractual protections to address the proposed new regulations and the potential for additional regulation of the crypto sector in the UK and elsewhere.
Restriction on financial promotions
The existing financial promotion rules prevent businesses from communicating an invitation or inducement to engage in investment activity, unless it is made or approved by an FCA authorised person (or unless certain limited exemptions apply). It is worth noting that the rules apply to any company which seeks to promote investment activities to UK based recipients, including those companies based overseas.
The government proposes to include ‘qualifying cryptoassets’ in the list of investments captured by the FPO. This is likely to include fungible tokens which can be traded between fans of clubs, with the changes designed to capture cryptoassets which are used as means of investment. However, the precise definition of ‘qualifying cryptoassets’ is still under review by the government, with discussions said to be turning on the fungibility and transferability of the relevant assets.
The upshot is that any crypto company (or indeed, any sports property) which promotes a qualifying cryptoasset must become registered with the FCA (a complex and costly process) or ensure the promotion is approved by another FCA authorised person. They must also ensure that any promotions are fair, clear and not misleading. For example, disclaimers and language such as “your investment may go up or down” should be included on advertisements.
NFTs and sports properties
Significantly, it is not currently proposed that non-fungible tokens (“NFTs”) will be deemed to be a ‘qualifying cryptoasset’. The government explained in its consultation paper that it proposes to exclude NFTs from the scope of the FPO as they are inherently non-fungible and are more akin to digital collectibles than financial services products. However, the government is monitoring the NFT market and could take action to regulate NFTs in future.
For sports rightsholders seeking to create and exploit their own NFT or crypto programme, it will be important to stay attuned to the detail of the proposed amendments to the FPO and any new related government announcements to ensure that they are aware of any unexpected regulatory issues.
The proposals are still in draft form, with the amended legislation expected to be published later this year. The government has also said that it intends to implement a six-month transition period from publication of the legislation.
Nevertheless, rightsholders looking to enter into sponsorship agreements with crypto companies are advised to seek contractual protection in advance of the government’s proposed changes, including:
- warranties from the sponsor that they have (and will maintain) the necessary authorisations to operate their business and exercise the rights;
- obligations on the sponsor to exercise the rights in accordance with applicable laws and regulations (including any new laws/regulations);
- robust approval rights over any marketing materials featuring the rightsholder’s brand assets;
- acknowledgements from the sponsor that the rightsholder will not be in breach if it is unable to deliver any rights due to changes in regulations (whether sporting or otherwise);
- where possible, indemnity protection and termination rights for the rightsholder in relation to the above.
Well advised sponsors should seek a reasonable fee reduction if the rightsholder is unable to deliver rights due to regulatory changes which are outside of its control.
The trend towards banning betting sponsorships in sport has coincided with the rise of crypto deals, but it seems that regulators are now starting to focus on crypto. The rapidly evolving regulatory landscape comes with new risks for both rightsholders and crypto companies, but the sector is likely to continue to offer lucrative opportunities for the sports industry, especially from well-funded sponsors who are able to adapt to new regulatory hurdles. In the medium to long term, increased regulation of the sector may even help rightsholders distinguish between crypto cowboys and the reputable operators.