Legal considerations of NFTs in sports

27th April 2022

The sports industry has always had to evolve and adapt to new technologies, often in a concerted attempt to engage with its fan base and its commercial partners. Some sports have been better at this than others and the use of non-fungible tokens (NFTs) is quickly becoming an alternative means of fan engagement.

NFTs, digital assets that are located on a blockchain, are, by their very nature, unique. This means is that it is possible to know who created the NFT, know who the owner is and see a verified audit trail of ownership established by the blockchain.

The NFT eco-system includes various industries including music, education and art, culture, gaming and sports. Here we focus on sport and highlight some of the commercial legal considerations associated with NFTs.

Sports has always had the unique advantage of connecting cultures and countries and there is huge opportunity for certain sports clubs and athletes to further engage with their fanbase and open up additional revenue streams globally. The US has so far taken the lead with NFTs and fan engagement generally; however, Europe is quickly catching up and Premier League clubs such as Liverpool and Manchester City and players such as Lionel Messi (Messiverse) have launched series of NFT artwork.

Within sports, collectibles are seen as the most obvious way for sports rights holders to engage with their fans. Collectibles, including trading cards, have always had mass appeal to fans but the fact that these can now take on a digital format backed by secure blockchain technology, offers even more opportunities for fan engagement. The launch of digital trading cards by a sports club or another rights holder may contain a number of privileges for fans, including personalised messages from a famous athlete or other types of additional content which makes them even more collectible to a fan and therefore valuable.

There is also potential for the use of trading cards in video games, further increasing their appeal. Sorare is a global fantasy football management game that has been developed around NFTs with this in mind.

Any rights holder looking to launch NFTs, should first consider whether they have the right to commercialise an athlete’s image through NFTs. They may also want to investigate an athlete’s contract in order to understand whether it caters for such use and whether they are in fact entitled to a share of any revenue generated through the creation and sale of NFTs.

Video clips and virtual highlights (or “moments”) of a game have also been sold as NFTs,  which belong to the owner and could be a GIF or video. With the well-known “Top Shots” series created by the NBA basketball league, the purchaser owns the NFT “moment”. The US National Football League has also created NFTs consisting of virtual highlights; other sports rights holders may want to develop a different model where a limited and non-exclusive licence to use the NFT is granted or where restrictions to display the NFT are included.

In addition to considering the issues with image rights, it is also important for rights holders to consider whether they can launch NFTs based on video clips by considering any exclusive rights already granted to existing broadcasting or other commercial partners and whether these take NFTs into account.

Digital autographs are another form of collectibles where an athlete’s autograph or even tweets can be an NFT. The use of blockchain to verify the authenticity of these items are particularly important.

Sports companies are also getting involved in NFTs. Nike, for example, has linked some of its trainers with digital tokens through CryptoKicks. The sale of sports trainers (sneakers) is big business and as they are very collectible some trainers can be worth a lot of money in the open market. Nike has developed a system to verify the authenticity of a trainer by using blockchain and issuing a digital token that acts as a certificate of authenticity.

Ticketing is another area where NFTs can be used. A ticket can be issued in digital format, preventing fraud and simplifying the process for a club or event organiser. In addition, the ticket can contain certain other privileges, encouraging further fan engagement which are unique and therefore, potentially valuable.

The fact that an NFT can be acquired or traded from anywhere in the world, across many different jurisdictions cutting across different areas of laws and tax regimes, makes the legal framework potentially complex.

Intellectual property (IP) laws are of particular importance to anyone that is looking to launch or trade in NFTs.

In addition, a marketplace based on a recognised and robust contractual framework also needs to develop which gives users confidence. Further, the regulatory landscape also needs to be taken into account. If it’s over-regulated, there will be little engagement by the market and if there is a lack of regulation, there will be little trust in the framework.

With respect to IP, the use of blockchains is key. Smart contracts, which are self-executing  contracts written into lines of codes, can be used in relation to NFTs created on blockchain to prove authorship or ownership as appropriate and this cannot be altered – this gives confidence to the legal owner and allows the transfer or licensing of the IP rights in a transparent manner. There are, however, risks that need to be recognised, including security breaches and theft.

In relation to a contractual framework, the terms of smart contracts should also be considered carefully, especially in relation to ownership of IP rights. If a creator is looking to retain these rights, they need to ensure that adequate protection is included in a smart contract. There are a number of other important considerations that can be included in a smart contract. These can include a mechanism to take into account any royalty payments automatically to an author or original rights holder during a subsequent sale. Other important considerations are limitation of liability provisions and governing law.

The regulatory landscape is also unclear at the moment; will some jurisdictions regard NFTs as securities as opposed to assets, meaning that they subject to securities regulations? Will anti money laundering regulations need to be considered in relation to sales to the public? What are the implications of NFTs on a secondary market and how secure is that?

As with any new commercial opportunities linked to new technologies, the market for NFTs and its underlying assets are evolving at a rapid pace; it is often the case that the legal and regulatory position will take time to evolve.