November 25, 2021
This piece was written in November 2021 and was first published by LawInSport. The original is available here.
What do the Caribbean Premier League, FC Barcelona, Everton FC, the Ultimate Fighting Championship (UFC) and the Aston Martin Cognizant Formula One team all have in common? They have all recently launched their very own Fan Token via Socios.com.
Fan Tokens are attracting significant attention in the sporting world but what are they, how do they work and what are the potential legal issues? This article introduces the technical and legal basics, looking specifically at:
- What is a Fan Token and how does it work?
- How are Fan Tokens purchased?
- Why are clubs selling Fan Tokens?
- Legal considerations for clubs
- Legal considerations for players and agents
- The fans’ perspective
Please note that in addition to the legal considerations noted above, there will also be a number of important regulatory issues for clubs to consider. Regulatory issues are beyond the scope of this article but will considered in a separate piece.
What is a fan token & how does it work?
Fan tokens are aptly described as: “a form of cryptocurrency [usually issued by a sports team] that gives holders access to a variety of fan-related membership perks like voting on club decisions, rewards, merchandise designs and unique experiences.” Socios describes its fan tokens as “digital assets that represent your ownership of a voting right and give you access to earn unique club-specific rewards and experiences.”
But to gain a deeper understanding of what a fan token is, and the potential legal issues involved, we first need to understand the blockchain technology they rely on.
Put simply, blockchain technology is a system of recording information in a way that makes it difficult to change the information originally inputted. It is a digital ledger of transactions that is public in nature (i.e. generally available for anyone to download and verify) and updated in a decentralised manner. Blockchain is therefore referred to as using a ‘consensus mechanism’ that allows all those on the same network to collaborate and agree on the next state of the network by verifying and updating the data structure. The most common example of a consensus mechanism in a blockchain context is Bitcoin’s “Proof-of-work” mechanism, whereby public ‘miners’ expend energy competing to find a solution to a cryptographic puzzle, the winner of which gets to append the next block (containing verifiable transactions) to the Bitcoin blockchain, and claim a predetermined number of Bitcoin in return.
Socios.com is currently the main player in the fan token space (although not the only player). It has partnered with a number of national and international men’s’ football teams, including Liverpool FC, FC Barcelona and Paris Saint-Germain – each of which have their own supply of fan tokens.
The fan tokens exist on a blockchain called ‘Chiliz’ that has been developed specifically by Socios for their sports fan engagement ecosystem. The Chiliz blockchain has a different consensus mechanism to Bitcoin, based on ‘proof-of-authority’. Proof-of-authority is mostly used by private organisations that have semi-closed or permissioned blockchains to better facilitate (mainly in terms of cost and speed) a specific ecosystem. In the case of Chiliz, this means that instead of any member of the public being able to validate transactions and mine new blocks, it has its member football clubs, like AC Milan and Paris Saint-Germain, performing this role. This of course raises some interesting legal questions around whether clubs are taking on additional regulatory obligations by verifying these transactions. The Chiliz ledger is still publicly accessible though, and their blockchain explorer shows the full history and the processing of fan token transactions in real time.
How fan tokens are purchased
The native cryptocurrency on Chiliz is ‘$CHZ’, which acts as the de facto currency in the Socios ecosystem, instead of a traditional fiat currency (e.g. a government-backed currency like GBP or USD). Any purchase and sale of $CHZ (and/or fan tokens) will be stored on the Chiliz blockchain listing the purchaser, seller, value and time of the transaction in verifiable and pseudonymised form.
Before purchasing a Fan Token, a consumer first has to purchase $CHZ via the Socios website or via a third-party cryptocurrency exchange. Once the consumer has purchased $CHZ and added them to their Socios online wallet, they can purchase a Fan Token either by participating in a “Fan Token Offering” (i.e. the launch of a new Fan Token) or via the trading functionality within the Socios app. The number of Fan Tokens issued (i.e. the supply) will vary depending on the club or tournament’s fan base. However, in all cases, the total number of Fan Tokens will be capped so the number available in the market should never exceed the number of Fan Tokens initially created. The total supply caps are visible here and here.
The price of individual Fan Tokens is determined by each club / tournament organiser at the time of the Fan Token Offering. After the Fan Token Offering, the price of an individual Fan Token will be “determined by supply and demand”. In order to sell a Fan Token, a user would have to withdraw the specific Fan Token to a third-party exchange that lists Fan Tokens and then transfer the value of those Fan Tokens in $CHZ into the user’s selected currency on a cryptocurrency exchange that lists $CHZ (e.g. Binance, FTX).
Why are clubs selling fan tokens?
With the large hole left in clubs’ balance sheets following the loss of all matchday revenues as a result of COVID-19, a sharper focus is being placed on maximisation of commercial revenues. While the specifics of the Socios revenue generation model are not public, the purchase of Fan Tokens by Socios users generates income in $CHZ. Socios then converts that income from $CHZ into an agreed currency in which they will pay their partners, either on a fixed fee basis or pursuant to a revenue share arrangement.
However, clubs are now beginning to take advantage of other revenue streams that Fan Tokens may offer. Socios has signed up to be Internazionale’s front of shirt sponsor in a deal reportedly worth $24 million per season, ending the club’s long-running association with Pirelli who had been the front of short sponsor for the previous 26 seasons. Valencia agreed a similar front of shirt sponsorship deal with Socios in June 2021.
Clubs are also beginning to offer Socios activation opportunities during matchdays. When FC Barcelona and Juventus participated in a pre-season friendly in August 2021, the two captains exchanged physical Fan Token awards with club slogans written on each; the slogans on each Fan Token award had been voted on by the Fan Token holders of each club.
When explaining their decision to partner with Socios, a number of clubs point towards the opportunity for fans from all over the world, especially the more youthful fans, to engage with the club in new ways that aren’t reliant on attending matches. Everton FC’s statement announcing its partnership with Socios refers to “an exciting commercial opportunity, while also giving supporters the chance to get closer to the Club”. Crucially, “this includes supporters from around the world who may not have the opportunity of engaging with the football club regularly.”
Legal considerations for clubs
When drafting and entering into partnership agreements with Socios (or another Fan Token provider), clubs will need to consider whether the new revenue streams and opportunities being offered by Socios cut across any of their existing partnership agreements. Certain rights Socios may expect to be granted may have already been granted to other sponsors on an exclusive basis, in particular betting partners or other investment / cryptocurrency partners such as eToro (who already have agreements in place with a number of football clubs across Europe). Clubs and their legal teams will need to carefully consider any exclusivity provisions in their partnership agreements as well as any attempt to define the cryptocurrency sector as part of a competitor list.
It’s also worth bearing in mind that it is not only football clubs who have entered into partnership agreements with Socios. National associations, including the Portuguese and Argentinian football associations, have agreed partnership deals with Socios – given the corporate structure of these national associations, further consideration will be needed as to what rights the association is able to grant to Socios. Similar discussions will apply to private entities outside of football, such as the UFC, and franchise cricket teams, such as the Royal Challengers Bangalore in the Indian Premier League, who will need to consider the potential effect of their relationship with Socios on their existing commercial agreements.
The financial standing of the Fan Token provider should also be considered by the club before entering into any agreement. Given how new Fan Tokens still are, Fan Token providers are naturally newer businesses with a less traditional means of assessing financial standing – they are driven by customer numbers rather than standard income / asset metrics that tend to be used to assess financial standing. Clubs should consider whether to request payment security and/or undertake enhanced due diligence on the Fan Token provider before entering into any agreement.
For both Socios and the club, ensuring that consumers recognise the link between the club and the Fan Token is essential. Socios will generally use the club’s trademarked name when referring to that specific Fan Token in its marketing and will also use the club’s logo across its website and social media channels.
When entering into a partnership agreement with Socios, clubs will likely apply strict restrictions on how Socios can use their intellectual property. Termination of the underlying agreement with Socios would presumably also terminate the licence granted to Socios to use the club’s intellectual property. For example, if Manchester City were to terminate their relationship with Socios, would Socios still be able to market the token as a “Manchester City Fan Token” and use the Manchester City badge on its website? If not, this would likely have an impact on the value of the Fan Token. Similarly, if a club declares itself bankrupt or enters administration, the value of the Fan Token would likely be impacted – however, it is not clear what impact bankruptcy or administration would have on the rights of the Fan Token owner.
If we revisit the Manchester City example, is there anything restricting the club’s ability to switch fan token provider and take their Fan Tokens with them when they terminate their relationship with their existing provider? Again, we haven’t yet had a test case along these lines but clubs, as producers of blocks on the Chiliz blockchain, are essentially part-owners of the Fan Tokens which would (at least in theory) appear to lessen the chances of them shopping around for different Fan Token providers. Clubs could potentially re-issue their Fan Tokens on a new blockchain on a one-for-one basis in line with the value listed with their previous provider; we will have to wait and see how clubs approach this issue as the Fan Token market develops over time.
Clubs will also need to consider the potential impact on their underlying constitutional documents in light of the rights (if any) they grant to owners of their Fan Tokens. If a fan purchases a share in a club (irrespective of whether they are a supporter of that club), they are entitled to exercise certain rights in relation to the club. However, under English law, the club would be permitted to alter those rights provided it follows certain specific procedures. Currently, token holders are not granted any rights in relation to the club – however, as the Fan Token model continues to evolve, clubs may look at this as a possibility and clubs and lawyers alike will need to consider the impact it may have on the club’s constitutional documents. If a particular club decided to confer on owners of its Fan Tokens specific voting rights over player transfer policy, this could potentially come within scope of the third-party ownership rules and regulations.
Unlike a share in a club that entitles the owner of that share to a voting right, Fan Token owners are not guaranteed a voting right simply by way of ownership of their Fan Token. To the best of the author’s knowledge, there is no guarantee on the number (if any) or categories of votes a Fan Token holder is entitled to. This could therefore allow clubs to issue Fan Tokens but not permit owners of those Fan Tokens to utilise their value and influence.
Legal issues for players / agents
As the number of clubs partnering with Socios continues to rise, the chances of clubs offering to pay players their wages, transfer fees or performance-related bonuses in the form of Fan Tokens will also increase. When Lionel Messi joined Paris Saint-Germain, he was paid part of his signing-on fee in $PSG Fan Tokens. While that particular transfer was one of the highest-profile transfers of recent years, it may have set a precedent for players and their agents to be paid (at least in part) in Fan Tokens or another form of cryptocurrency.
From a regulatory perspective, it remains to be seen how these payments would be classified under financial fair play regulations.
Players and agents should be aware of how Fan Tokens may affect the fees they are expecting to receive as part of a transfer. Where a player negotiates a separate image rights agreement with their new club through an image rights company / loan-out vehicle, they will generally be paid by way of a revenue share arrangement with the club or through a fixed fee arrangement. We may well start to see that revenue share or instalments of the fixed fee being paid to the player by way of Fan Tokens or another crypto-asset which will bring tax considerations into play for players and their agents.
The fans’ perspective
The basic principle is that ownership of a Fan Token allows the owner to vote on selected matters relating to that club. The specifics of what token owners can vote on varies on a club-by-club basis but they tend to focus on subjects such as the music played after the team scores a goal in a home match, designs for the club’s social media pages and player-led takeovers of the club’s social media activity for a short period of time. For example, when FC Barcelona launched their Fan Token in June 2020, owners of those tokens were able to submit a design for a mural to appear on the walls of the dressing room at the Nou Camp; the top four designs were then put to a vote of FC Barcelona Fan Token owners to vote for their favourite. In a similar vein, holders of a Paris Saint-Germain Fan Token could vote on the design of the new crown to be placed on the top of the team’s stadium, the Parc Des Princes.
However, the introduction of Fan Tokens has not been particularly well received amongst the fans of those Premier League clubs who have recently entered into partnerships with Socios. Supporters of West Ham United encouraged the club to terminate their relationship with Socios while the Supporters’ Trusts of Arsenal FC and Leeds United responded in a similar manner when their clubs entered into partnership with Socios. The public statements from the Supporters’ Trusts of Premier League clubs in opposition to their club partnering with Socios tend to have a few themes in common:
- In the eyes of these groups of fans, the aim of the partnership is to “monetise supporter engagement – something the club should be doing for free.” The monetisation of supporter engagement is not something Chiliz / Socios denies – Chiliz describes the platform as providing “sports & entertainment entities with blockchain-based tools to help them engage & monetize their audiences.”;
- There is a lack of understanding of cryptocurrency as an unregulated product amongst the majority of Premier League fans, some of whom may be considered vulnerable: “Fans will also be obliged to enter into a cryptocurrency ecosystem; something which many may have very little knowledge of. If football chooses to bring unregulated cryptocurrency into the game, we believe that clubs also need to provide education and guidance on the purpose and risks associated.”; and
- There is no requirement for a Socios user to be a fan of the team whose Fan Token they are purchasing. For example, there is nothing stopping a Socios user purchasing Fan Tokens in Paris Saint-Germain, Leeds United and the Portuguese men’s national football team, and exercising voting rights in relation to each of those tokens, despite not being a fan of any of those teams.
With the emergence of Fan Tokens still at a relatively early stage in the sports industry, it is undoubtedly an area for clubs, fans, players and agents to monitor going forwards.
As clubs attempt to recover from the losses caused by COVID-19, new revenue streams like Fan Tokens will become increasingly attractive.
However, it remains to be seen how the sporting regulatory landscape will react to the legal challenges posed by Fan Tokens and how national governments and regulatory bodies address the rise in popularity of consumer-facing crypto products in the sporting world.
 Kevin Dwyer, ‘What Are Fan Tokens’, Coin Market Cap, published August 2021, last viewed on 4 November 2021, https://coinmarketcap.com/alexandria/article/what-are-fan-tokens
 ‘What are Fan Tokens’, Socios.com, published August 2021, last viewed 4 November 2021, https://socios.zendesk.com/hc/en-us/articles/360003236937-What-are-Fan-Tokens-
 ‘Tokens’, Explorer.Chiliz, last viewed 4 November 2021, https://explorer.chiliz.com/tokens
 Technically it is a Proof-of-Authority sidechain on the Ethereum Blockchain
 ‘Proof-of-Authority (PoA), Coin Market Cap, last viewed 4 November 2021, https://coinmarketcap.com/alexandria/glossary/proof-of-authority-poa
 ‘Blocks’, Explorer.Chiliz, last viewed 4 November 2021, https://explorer.chiliz.com/blocks
 ‘How much will a Fan Token cost?’, Socios.com, published July 2021, last viewed 15 November 2021, https://socios.zendesk.com/hc/en-us/articles/4403727820561-How-much-will-a-Fan-Token-cost-
 ‘How many Fan Tokens will be produced for each team?’, Socios.com, published July 2021, last viewed 4 November 2021, https://socios.zendesk.com/hc/en-us/articles/4403729067153-How-many-Fan-Tokens-will-be-produced-for-each-team-
 See footnote 3
 ‘Today’s Fan Token Prices by Market Cap’, Fan Market Cap, last viewed 4 November 2021, https://www.fanmarketcap.com/
 See footnote 8
 Daniele Proch, ‘Socios.com Replaces Pirelli As Front-Jersey Sponsor Of Serie A Champions Inter Milan’, Forbes, published 21 July 2021, last viewed 4 November 2021,
 ‘Valencia CF $VCF Fan Token To Take Front of Shirt Space In World First As Club Joins Socios.Com Network’, Socios.com, published 18 June 2021, last viewed 4 November 2021, https://www.socios.com/valencia-cf-vcf-fan-token-to-take-front-of-shirt-space-in-world-first-as-club-joins-socios-com-network/
 Joey D’Urso, ‘Special investigation: Socios ‘fan tokens’ – what they really are and how they work’, The Athletic, published 18 August 2021, last viewed 4 November 2021, https://theathletic.com/2774492/2021/08/18/investigation-socios-fan-tokens-what-they-really-are-and-how-they-work/
 ‘$EFC Fan Token’, Everton FC, last viewed 4 November 2021, https://www.evertonfc.com/fantoken
 ‘eToro set to dominate football with twelve new sponsorships in UK and Germany’, eToro, published 17 September 2020, last viewed 4 November 2021, https://www.etoro.com/news-and-analysis/etoro-updates/etoro-set-to-dominate-football-with-twelve-new-sponsorships-in-uk-and-germany/
 ‘Paris Saint-Germain Concludes First Player Signing Featuring Fan Tokens’, Socios.com, published 12 August 2021, last viewed 4 November 2021, https://www.socios.com/paris-saint-germain-concludes-first-player-signing-featuring-fan-tokens/
 ‘From today, Barca fans can get the first Fan Tokens to take part in Club surveys’, FC Barcelona, 22 June 2021, last viewed 4 November 2021, https://www.fcbarcelona.com/en/club/news/1691593/from-today-barca-fans-can-get-the-first-fan-tokens-to-take-part-in-club-surveys
 Socios, ‘PSG – New design of Parc Des Princes Stadium decided by fans’, YouTube, published 15 October 2021, last viewed 4 November 2021, https://www.youtube.com/watch?v=F0o6RmpoQI0
 ‘West Ham end controversial blockchain partnership’, The FSA, published 1 July 2020, last viewed 4 November 2021, https://thefsa.org.uk/news/west-ham-end-controversial-blockchain-partnership/
 ‘Arsenal’s partnership with Cryptocurrency company Socios.com’, Arsenal Trust, published 12 August 2021, last viewed 4 November 2021, https://www.arsenaltrust.org/feed/news/2021/AST-Socios-Cryptocurrency
 Words By the Board, ‘Statement on the LUFC Fan Token’, LUFC Trust, published 6 August 2021, last viewed 4 November 2021, https://lufctrust.com/article/statement-on-the-lufc-fan-token
 See footnote 19
 ‘The world’s leading blockchain fintech provider for sports & entertainment’, Chiliz, last viewed 4 November 2021, https://www.chiliz.com/en/?__cf_chl_jschl_tk__=IUH1VNGfpQfFaxrvVPiZ_DU7Xf6iRg9SNA4LB1og68I-1636027305-0-gaNycGzNCD0
 See footnote 21