Fintech/Cryptocurrency/Analysis/ European football clubs jump into crypto with Socios ‘fan tokens’ Socios ‘fan tokens’ – what they really are and how they work By Ben Munster in Rome 25 October 2021 Socios's Locker Rooms enable fans at non-partnered clubs to buy fan tokens to push teams to adopt them in full Socios's Locker Rooms enable fans at non-partnered clubs to buy fan tokens to push teams to adopt them in full \Fintech Starling Bank cuts customers off from crypto-related payments By Amy O'Brien 22 November 2022 Fintech/Cryptocurrency/Analysis/ European football clubs jump into crypto with Socios ‘fan tokens’ Socios ‘fan tokens’ – what they really are and how they work By Ben Munster in Rome 25 October 2021 It’s August 2021. A blazing day in Rome. Italians explode into impassioned chants as the giallorossi of the home team storm the grounds of the Stadio Olimpico. Kick-off, half-time, the final whistle. AS Roma prevails over some obscure Turkish team. There’s maybe one concession. The fans go wild. Some drink. Others sing. Yet more unlock their phones and blow their hard-earned cash on a faddish cryptocurrency tied to their team’s fortunes… wait, what? It is a weird time in Italian — and European — football. Lockdowns struck teams catastrophically, stifling revenue from match-ticket sales. European clubs reportedly haemorrhaged €1.1bn in total. As a result, they began to seek out moneyed investors, with Saudi Arabia’s purchase of Newcastle FC being one recent example. Over the past few years, clubs have also embraced support from the newly wealthy cryptocurrency industry, which has quickly cottoned on to the enormous revenue potential of football’s online fandom. Among the most prominent of these companies is a startup called Socios, which has led the way in melding the footballing and crypto industries together, setting off a wave of imitators. While beneficial in some respects, the new drive for crypto-sponsorship raises questions about the potential dangers of sporting organisations being exposed to the patchily regulated crypto markets. “We should have failed but we didn’t — we just had the right time to deliver what we had” Socios, which is based in Malta, lets fans purchase blockchain-based tokens tied to specific teams across a broad spectrum. Clubs involved in the programme range from prestige teams like PSG and AS Roma to local unknowns. Owning a token gives fans a say, through a vote, on certain cosmetic aspects of a team: how free spaces on the kit are filled, say, or which songs players sing on winning. At the pandemic’s height, fans of a Turkish team voted, with their tokens, to install thousands of cardboard cutouts in the home section of its stadium. Each cutout represented a fan who could not make it to the game; it was effective, if eerie. The company was founded by the Frenchman Alexandre Dreyfus, a former online gambling tycoon now based in Malta. Dreyfus — a large, lean man with a shaved head — says business has boomed over the past year, mostly thanks to the pandemic as well as random luck. “We’re not a crypto company that wants to change the world and change the financial industry,” he says. “We should have failed but we didn’t — we just had the right time to deliver what we had.” Alexandre Dreyfus, founder of Socios Socios says that since 2019 it has pulled in around €200m in revenue from token sales, which it has shared with around 90 clients. Stadiums across the continent now feature Socios on giant billboards, along with other ascendant crypto-sports companies like DigitalBits. A few months ago, Socios secured a deal with Inter Milan (the token is €INTER), replacing a three-decade-long sponsorship deal with Italian tyre manufacturing behemoth Pirelli. It is even making inroads into privately owned English clubs, for whom ideas of collective ownership come less naturally. Sifted understands that a deal with another major Italian team is in the works. How does it work? Socios pays clubs a minimum sum out of pocket as well as a portion of the revenue generated through staggered sales of the Fan Token (converted into euros). For an initial period, tokens are sold at a fixed price, after which they go on the market. If the initial sale achieves a bare minimum, Socios reaps profits from the subsequent trading fees and takes a cut from the sales of each token; around 50%. The rest goes to the club (in tokens or cash). From this point, tokens are released in batches over the course of years until a limit is met, designed to reflect the maximum possible number of fans a given club can have. There are also mechanisms to discourage token hoarding; clubs can choose to limit the number of votes a person has, regardless of the amount of tokens they hold. Why would a team want to do this? For one, it’s a way for a team to raise money without fundamentally altering its corporate structure; unlike, say, an equity sale or a SPAC. Dreyfus says the token also gives clubs an international reach — and source of revenue — that goes beyond things like merchandise and video content. It is a monetisation of fandom itself. “Clubs realised that they needed a new source of digital revenue” “There were questions for teams, especially during Covid, which was, ‘How can I engage these fans, what can I offer them, how can I monetise them,” Dreyfus says. “For obvious reasons, match revenue couldn’t really increase, and the space on a jersey limits sponsorship opportunities. Clubs realised that they needed a new source of digital revenue, but people are not always inclined to buy content — archives, behind-the-scenes clips.” Meanwhile, the nebulous idea of “engagement”, he says, is “scalable globally”, and turns “passive fans into active fans”. The upshot is an expansion of the notion of what “participation” in a club in the digital era means: if you don’t buy a token conferring partial ownership of a club’s victory chant, how can you call yourself a genuine fan? This is what crypto facilitates: it allows clubs to take these rather abstract, cosmetic vectors of engagement and package them into exchange-traded derivatives. So think of the Fan Token as a financialised alternative to the typical currency of online fandom — profitless likes, comments and clicks. In Socios’s case it is a genuine, or at least aspirant, currency: each Fan Token lives on a blockchain protocol called Chiliz, a clone of the Ethereum network. Blockchain protocols work by spreading the record of who has what token across thousands of computers, or nodes. This means they are not accountable to an individual who can tamper with the network. However, while Ethereum asserts the sovereignty of its currency, ether, by having thousands of individuals verify each transaction, Chiliz, the copy, delegates that function to a select group of private stakeholders. The eventual aim is to make each club a stakeholder. For Dreyfus, building Chiliz as a fork of Ethereum inoculates fans against that network’s less savoury elements, while retaining the sense of sovereign ownership. “Clubs don’t want their token on an Ethereum Mainnet where suddenly there’s a DeFi [decentralized finance] scam from Asia, or a gambling company using their brand,” he says. The crypto-football nexus is also something of a lucky break for Dreyfus; there is apparently a demographic overlap between fans of both things. Socios’s Locker Rooms enable fans at non-partnered clubs to buy fan tokens to push teams to adopt them in full Concerns There are inevitable concerns. Clubs clobbered by coronavirus are in a uniquely vulnerable position. When, in July, Inter Milan agreed to take on Socios as a sponsor, it was recovering from a Covid-inflicted loss of €245.6m, as well as the loss of its longtime sponsor Pirelli. Its Chinese owner, Suning, is caught up in the turmoil around the Chinese property company Evergrande. While Dreyfus stresses that revenue from Socios constitutes a tiny portion of a club’s intake, any new money for these clubs, at the moment, can look like a lifeline. So when they receive an offer from a business in the cash-flush world of cryptocurrency, they might not properly assess, or even understand, the risks. And those risks are not insignificant. Before Socios inked its sponsorship deal, wealthy Inter fans were trying to organise a more substantial version of the collective ownership model that Socios provides an alternative to, hoping to rescue the club from its financial quagmire. One of the organisers, former IMF chief Carlo Cottarelli, raised concerns that the Socios deal would expose fans to the volatility of the crypto markets; the relatively illiquid Fan Token markets are especially prone to wild swings. For instance, in the space of one year, the Fan Token for PSG increased by 1400%, allowing Lionel Messi to pocket a €5m paycheque. Dreyfus says that the price movement, which doesn’t exhibit the correlation to bitcoin that many small-cap crypto tokens do, is often a “mystery”. It doesn’t necessarily even correspond to the value of a given team, meaning wealth in Fan Tokens can be precarious. “If fans are unhappy then they’ll sell their tokens — the market is the market.” But Dreyfus fears not. Sure, the markets can be volatile, he says, but he believes only seasoned crypto traders would invest heavily. Further, Socios studiously avoids saying that tokens could appreciate in value, and is regulated in every jurisdiction it operates in. Hopefully Dreyfus is right, though it is worth noting that even among crypto investors one third don’t understand how it works. “It’s not the issuer that’s responsible for price action between people,” Dreyfus says. “If fans are unhappy then they’ll sell their tokens — the market is the market.” It may be true that fans won’t invest their life savings into these tokens. But the upshot of the business model is that the clubs — which are paid upfront — have, in effect, pushed the risk on to their fans. Further risks Moreover, players far bigger than Socios are stepping into the Italian footballing world, which is increasingly exposed to the chaos of the crypto markets. Binance, a major crypto exchange, is one of those players. Unlike Socios, Binance operates in a legal grey area and is under huge pressure from regulators worldwide (it is not authorized at all in Italy and much of Europe). Based, according to its CEO, “nowhere”, Binance is the new €10m-a-year sponsor of SS Lazio, Roma’s historic rival. Binance offers a wholesale copy of Socios’s Fan Token mechanism, but in this case fans are encouraged to trade on Binance’s high-octane crypto exchange, which features the option to engage in potentially deleterious high-leverage trading. Even among crypto investors, a third don’t understand how it works DigitalBits, a California-based developer which issues its own crypto token, is another big sponsor in Italian football. Over the past few weeks the DigitalBits token’s value has peaked, though it is at the backend of a ruinous plummet; the token is now the 148th most valuable, worth around $0.5. DigitalBits pledged €33m over three years to Roma, complementing Socios’s deal. Italian coverage of the news displayed scant understanding of what the company actually does. It looks like the trend will only gather pace. The crypto exchange BitMEX recently announced its own lucrative sponsorship deal with AC Milan — never mind that last year the exchange’s founder was arrested by the FBI. Dreyfus is somewhat sniffy about these competitors, arguing that his company has a genuinely football-related business model, while the others mostly offer crypto tokens and high-risk trading. Evidently, his model does work, and given the pace of Socios’s expansion so far it’s not hard to imagine that it could scale still further. It may even crack America: just last week, the company announced a partnership with basketball’s Los Angeles Lakers. Regardless of who emerges victorious, it is clear that a considerable amount of money is now flowing from the world of crypto to the world of football, often by means of companies that befuddle the general public. It’s something of a gamble, given that these cash injections come from frequently unregulated and potentially volatile cryptocurrency companies, meaning that clubs — and fans even more so — effectively take on the risk of the sponsor. And in crypto, that’s a lot of risk. Ben Munster is based in Rome and writes about Italian tech and startups for Sifted. He tweets at @Ben_Munster Related Articles Why ‘crypto families’ are flocking to Portugal By Pedro C. Garcia Click here to read more Renewable energy companies have a lucrative new side hustle: mining bitcoin By Freya Pratty Click here to read more Top dog from LVMH joins French crypto startup Ledger By Marie Mawad in Paris Click here to read more How long can fintech firms resist crypto FOMO? 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