Will Sunderland AFC be subject to a crypto experiment?

The ownership structure of Sunderland AFC looks set to change once again, and this time radically.

If what is reportedly proposed comes off, Kyril Louis-Dreyfus (41%) and Juan Sartori (20%) would retain executive control of the club with their combined 61% shareholding, and the remaining 39% share of the club would be bought by ‘The Fans Together’.

Initially, the rumours were that some actual shares of the club might be offered out to fans as some form of a digital crypto-token, but the involvement of TFT points toward something altogether more worrying.

If the new investors planned to package shares up as Non-Fungible Tokens (NFTs) and offer them to individuals and companies anywhere in the world for actual money on a new digital exchange, this would take the use of tokens in football to a whole new level. But TFT seems more concerned with pushing its own version of fan democracy and its own crypto token.

So I’ve taken a deep dive into this world to see what we know, what we don’t know, and probably more importantly, what the club will have to explain if it is to go down this route.

What I’ve found are some major concerns with TFT, intriguing links between KLD, Sartori and the world of crypto assets, and some interesting examples of how fan ownership via crypto might actually work in practice.

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Non-Fungible Tokens (NFTs) in Football

As is set out in the video above, an NFT is basically digital receipts that prove ownership of an asset or access to a particular set of rights and privileges. Many people will have seen them being bought and sold linked to the ownership of a piece of digital artwork – a cartoon of a monkey version of John Terry, a jpeg of a famous tweet, that sort of thing.

In football, NFTs have been very controversial. “Fan Engagement Tokens” have been offered by several leading football clubs around Europe, bringing with them such dubious rights and benefits as the ability to vote on the music played in the home dressing room, but little else. They’ve basically been glorified membership schemes and/or digital trading cards – like a cross between the old Sunderland AFC Gold Card and Pokemon Go.

This has generally been seen as an explicit effort to “monetise fans” – to squeeze every last drop of profit from the lifelong loyalty of the supporters of football clubs, for the benefit of those who own and run the crypto platforms.

We have witnessed an excess collapse in the value of cryptocurrencies and NFTs collapse in recent weeks and months – people all over the world have lost fortunes big and small because of the plummeting value of NFTs.

A whole country, El Salvador, has been plunged into financial chaos after betting its future on Bitcoin. The downfall of the Monaco-based crypto platform IQONIQ left fans and clubs out of pocket.

Supporters Direct Europe, which represents Supporters Trusts across the continent, has warned about the risks involved in the football industry becoming entangled in the emerging crypto-economy:

Put simply, clubs, leagues and governing bodies should not expect supporters to risk their own money through unpredictable and unregulated digital currencies to have influence in football, nor use digital currencies to fool them into a false sense of influence in the game.

Digital currency partnerships in football commonly imply to offer influence in football for supporters without properly explaining the risk – fan tokens are prone to rising and falling in value meaning people’s money is at risk – nor the extent to what influence becomes available once buying in – which is often minor. Doing so raises serious ethical questions as to what extent supporters’ commitment to their clubs is being taken advantage of.

There is also the plot hole in all this that nothing stops supporters of other clubs buying fan tokens in your club with mal intentions to interfere and have a negative impact.

These practices are not what SD Europe recognises as genuine and meaningful supporter influence.

These digital currencies and fan token companies often run with marketing lines similar to ‘become more than a fan’ and claim to be offering ‘fan influence’. The issue here is that it feigns genuine, meaningful supporter involvement in football.

TFT have previous in this area. Bob Robinson, who White identifies as leading the Sunderland AFC project for the company, is a Vice President of non-league Bradford Park Avenue. This is how they describe themselves on their own website…

The Fans Together is a DAO (Decentralised Autonomous Organisation) dedicated to bringing sports fans together from across the globe to give them power and say in professional sports clubs.

To achieve this goal, we The Fans Together are utilising the Tangle, a Distributed Ledger Technology (DLT) created by the IOTA Foundation to create a fast, free and frictionless way for Fans to engage with their sports clubs. Through our governance structure, fans will have a real say in their club’s operations.

Anyone who owns at least one of The Fans Together’s $TFT tokens will be able to debate, contribute and ultimately decide, through votes and polls the direction of their sports clubs. Votes within the DAO are proposed by the TFT team and then token holders will be able to participate, deciding the outcome.

We have opted to use IOTA’s Tangle because of its many advantages, its fast, feeless, and energy efficient. These features are what make The Fans Together possible.

They currently own a 20% stake in Greek second-tier side, Athlitikos Omilos Episkopis, having put €200,000 Euros in the club, €170,000 of which was for two years sponsorship and €30,000 as equity, with further equity acquisitions possible in the future.

No tokens have been issued to fans as yet, and their crypto token the $TFT is yet to be put out to the public – indeed the only thing it seems to sell at the minute is cryto-based merch.

Yet the company sees their ownership of Episkopis as a big step forward for the crypto industry:

This will be an historic acquisition as the worlds first DAO to buy and own equity in a pro sports team. If ratified we will go and sign the deal at this Wednesdays home match and there will be a press conference.

Those within the fan activist movement, particularly the blog “Against League 3” and the writer Martin Calladine, have expressed their concern and scepticism about this company in the past.

Nevertheless, their White Paper proposes that their ownership of clubs is a solution to the billionaire model of football club ownership in the wake of the European Super League fiasco:

Football fans showed their outrage and used their mass influence to form a temporary solution to this problem, pressurising clubs to disband the ESL proposals. However, these owners and those akin are still present in sport and the threat of the ESL or alternative schemes continue to loom. Therefore, it is crucial to address these issues before it is too late. We, The Fans Together, believe sports club fan ownership is the solution and the blockchain provides the means.

Despite the backlash and the crash in values, sports executives clearly still love crypto. The Premier League is, according to The Athletic, partnering with one NFT platform, ConsenSys, and its member clubs have already approved a partnership that will see them get the rights to mint NFTs based on still images.

UEFA are partnering with Socios to “use their men’s club competition branding and exclusive experiences to further enhance the value of Socios’ Club Fan Tokens by awarding Club Fan Token holders with add-on Fan Tokens for UEFA men’s club competitions”.

Therefore, despite the controversy and the volatility in the whole crypto marketplace over the past six months or so, they’re not going away any time soon when we look at the wider crypto and financial technology (FinTech) space.

Photo by Jacques Feeney/Offside/Offside via Getty Images

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Vive La Difference?

If linked directly to shares, Sunderland AFC’s token offer would be subject to something significantly different from anything tried in football and would represent a groundbreaking development in the relationship between NFTs and football clubs. But this is not what would be on offer through TFT, as their White Paper makes clear right from the start:

Ownership of a TFT token confers membership and associated rights of The Fans Together DAO. It is a leisure token and carries no other rights, express or implied, other than the rights to participate, interact or transact in The Fans Together DAO.

It is important that we understand what is and is not potentially on offer. The UK regulators have classified tokens into three general types – Exchange tokens (i.e. crypto coins like Bitcoin), Security tokens (for investment in assets like art, company shares, and property) & Utility (for access to exclusive resources – including “fan engagement” or “leisure” tokens as described in the TFT White Paper).

The Louis-Dreyfus family and Sartori should be aware of these significant and crucial differences as this is an area that links neatly back to their business interests.

It was previously been reported that Kyril Louis-Dreyfus’ step-father, Philipp Hildebrand – Vice-Chair of global investment giant BlackRock – may well be involved in some way in brokering the deal that is currently on the table. It’s certain that he was in the Royal Box for Sunderland’s playoff final at Wembley last month.

The Swiss-based company and its boss, Larry Fink, have been sceptical of getting involved in crypto, but recently shifted its position due to increasing demand from its clients, particularly, according to Forbes, those related to “asset tokenization and permissioned blockchains”.

Hildebrand is also an industry advisor to the Sygnum Bank Project, which is listed alongside Mt Pelerin (see below) as one of Switzerland’s new brand of secretive crypto banks and which has its very own tokenization arm. They have recently “tokenized” pieces of art based on football history signed by Zinédine Zidane, Ronaldinho, Fernando Torres, Lionel Messi, Luka Modrić, and Kylian Mbappé.

The Premier League’s token partner, ConsenSys, also provides the underlying blockchain technology for the Swiss-based Covantis supply chain tracking system that has been developed by the Louis-Dreyfus Company and other global commodities traders such as Cargill.

If asset tokenisation was what we’re talking about here, then we’re looking at our club being used to pilot an extraordinarily innovative financial product which would fall under the second classification – Security tokens. According to the Bank of New York Mellin, a key advantage is that they provide a broader investor base:

There is a limit to the level of fractionalization possible with real-world assets. Selling 1/20 of an apartment or a fraction of a company share is not currently practicable. However, if that asset is tokenized, this limitation is removed, and it becomes possible to buy or sell tokens representing fractions of ownership, allowing a far broader investor base to participate.

A good example of how tokenization could change the dynamic of numerous assets is in the fine art market. The prohibitive prices that some artists command at auction means that only a highly restricted number of high net worth individuals that have the means to invest in this asset, with the vast majority of retail investors unable to participate. Issuing tokens that represent a fractional ownership of an artwork may fundamentally change the situation.

In many ways, linking an NFT or other form of token to something that exists in the real world is where blockchain technology has the potential to be most beneficial – tracking origins and ownership, embedding digital information, unlocking rights and privileges, and making buying and selling as easy as tapping a few buttons on your smartphone.

It could be very powerful, and shares in a beloved football club are analogous to fine art – rare, prized, emotionally driven purchases.

The difference between a token linked to shares in SAFC and those linked to “fan engagement” tokens or monkey jpegs would be that there is a tangible, real-word asset – the football club – which has a real-world value and actual income, that sits behind the token. Nobody is going to copy and paste it. The stadium and the squad exist, as does the TV revenue.

But buying a token that provides influence via a third party – TFT – is not the same.

If we were able to buy actual shares in the club via a tokenized asset, SAFC would then be “owned” by not just KLD, Sartori, and the individual or individuals who buy out Donald and Methven, but also those fans (and anyone else) willing to put in their own money. On the face of it, the more SAFC tokens an individual NFT investor owns, the more actual say that they would have in how the club is run. But this is not what the TFT token allows.

The social cachet of being an official certified SAFC owner will be able to be bought and sold freely, which will create competition between fans for who has the most influence and access, maintaining the market beyond the initial token offering (ITO). With a fan engagement token, where the actual decision making is still in the hands of the shareholders, the model would not work in this way.

And, importantly, both models would differ significantly from common share ownership via a Supporters Trust, where one member has one vote no matter how much money they invest.

Photo by Marc Atkins/Getty Images

Using this technology to enable and prove part-ownership of ordinary club shares would take our use of tokens way beyond TFT style “fan engagement”, but with innovation in financial products come unforeseen problems and a significant risk of failure.

It also, according to a report by global law firm DLA Piper, would impact the influence and ability for coordinated action by supporter-owners:

The drawback of frationalization is influence. On the one hand, as we know from observing governance dynamics in large cap, broadly held listed companies, there is a lack of influence over corporate behaviour in the absence of strategic shareholder action (eg via activist shareholder groups and funds)….

[But] In theory, a fractionalized holding system would allow activist groups and public opinion to take on some power of influence. However, this is more likely to be expressed in a negative way (demands for cessation of activities, removal of the CEO, or similar) rather than more positive influence that can come through long-standing, trusted relationships.

If the token would give a holder a tiny say in how TFT DAO uses its stake in the club and provides as yet unspecified “rights and benefits” to those holding them, the extent of these rights and benefits would be entirely in the hands of TFT.

The tokens would be able to be sold by their holder for a profit or a loss on their exchange, with the owners of the exchange presumably taking a fee from each transaction. And here is where it becomes a potential money-spinner for those who own and control the TFT toek and exchange platform.

Photo by Steven Paston/PA Images via Getty Images

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Big Questions

The TFT white paper begins with a Mission Statement and a “Fans Together Charter” (which it created and it reserves the right to change at any point):

Fan Ownership – We think supporters should be able to have a real stake in sports clubs, instead of distant and corporate ownership.

Fan Participation – We believe fans should have real decision-making power, as then the strongest influence is held by those with the most passion for the club.

Fan Engagement – We think sports clubs should have a responsibility to build a genuine, honest partnership with the fans to protect and develop the club and community.

Community Ethos – We believe sports clubs should understand they are part of a broader community and should contribute through community initiatives in charitable work and inclusivity.

Sporting Excellence – We think a culture of sporting excellence from youth teams to first team creates the perfect environment for success. We will empower clubs through excellence in coaching, support, equipment and preparation.

Youth Sports – We believe talent from academies both local and international must be developed and pathways to the first team provided.

Structuring – We think it is essential to deliver responsible and viable financial performance for the long-term prosperity of sports clubs and to build structures to protect it.

Fan Experience – We believe it is essential to make improvements to the matchday experience for all fans and stakeholders.

Equality – To ensure equality for all in terms of gender, race, sexuality and socio-economic status.

This idea will pose huge questions that the club will need to set out very clearly to fans if it does go down this route. There can be no rush to do this, and open and honest communication would be central to building the trust required.

When they say a “real stake” as part of “fan ownership”, what does that mean in practice?

Would the NFT owner actually own a full share in Sunderland Association Football Club Limited, a derivative fraction of the TFT share, or a run-of-the-mill “fan engagement” token?

Would there be anything stopping the owners of the majority of club shares from diluting the value of your token by creating more shares and TFT producing more tokens?

How this would impact decision-making or shareholder influence in the Sunderland AFC boardroom would be a vast open question that would demand clear and understandable answers.

If token holders are able to participate in “polls” around key decisions at the club or even (this is highly unlikely under the TFT model) participate in votes at the AGM, who would get to decide what topics are raised and how questions are phrased?

All of this is very new, and rather complicated stuff. The idea of breaking down bigger assets and selling them off to multiple investors will also raise parallels with the securitised derivatives that laid at the heart of the 2008 financial crisis, and other ‘fan engagement tokens” have been a pretty much unmitigated disaster so far.

An OECD report from 2021 suggests that they would, but that a “custodianship” of properly tokenised assets will be important.

Tokens issued in asset tokenisation exist on the chain and carry the rights of the assets they represent, acting as store of value. The real assets on the back of which the tokens are issued continue to exist in the “off-chain” world and, in the case of physical real assets, those would typically need to be placed in custody to ensure that the tokens are constantly backed by these assets. This points to an increasingly important role of custodianship of assets in tokenisation transactions (see Section 3.5).

Communication between the “off-chain” (traditional financial market infrastructures) and “on-chain” environments will be crucial for assets that continue to exist off the chain.

If people did buy into the club through the Security token model or gain a modicum of influence through a “fan engagement” leisure token, would there be independent information made available to all token holders in order that they can make rational decisions?

Will token holders be able to form collective organisations to work together to enact real change at the club? Would our Red & White Army supporters trust be able to buy tokens en masse?

On first reading, this seems like a subversion of fan democracy and fan ownership in order to boost a forthcoming ICO, rather than an opportunity for our fans. These people – a private tech company – would be “custodians” of our fan ownership.

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A different model might work

Is there a different route that Sunderland AFC could take, one that would be actual share ownership regulated by the UK authorities? Again, the OECD report provides an element of clarification as well as raising questions about the practical application of what is a very niche practice currently reserved for high-end financial traders in terms of Security tokens:

The decentralisation of tokenised securities, coupled with the ability to automatically transact and settle without trusted intermediaries, may be where most of the disruptive potential of tokenisation lies. Tokenised securities eliminate the need for the use of intermediaries or proxies in the distribution of dividends or votes, giving investors full control of the equity they own.

Who would control the exchange and control the ‘democratic’ system within it? What are the real-world implications in the boardroom? The decision-making process would, it must be assumed, be controlled and moderated by the actual owners of the shares – but the new consortium, Louis-Dreyfus and Sartori would always hold the majority.

Well, a regulatory framework exists in… yes, you guessed it… Switzerland.

And the OECD report quotes an example of this in action: a Swiss crypto trading company called Mt Pelerin (referencing the name of a right-wing libertarian think-tank founded in 1947 by economists Friedrich Von Hayek and Milton Freedman).

Created in 2018, Mt Pelerin runs a crypto exchange via an app and is itself entirely owned via tokenised shares. If you buy its share tokens, you get the following rights and protections:

Voting – Attend our digital shareholders meetings and vote their agenda’s items from your phone! One MPS token provides one vote.

Dividend – The MPS token provides a right to receive the dividends of Mt Pelerin Group SA, which are decided once a year during the shareholders meeting.

Protected by Swiss law The MPS token is an actual share of our company, not a derivative or a collateral-backed token. As a result, your shareholder rights are directly guaranteed and protected by Swiss law.

This company’s “Bridge Protocol”, it is claimed, enables the fully regulatory compliant buying and selling, including third-party purchases, of tokensized shares and – crucially – for the quick and cheap tokenization of the shares of existing companies, such as Sunderland AFC, through their open-source code.

Juan Sartori has also been at the forefront of the regulation and normalisation of crypto as a senator in Uruguay, yet here in the UK crypto-specific consumer and investor protections in this field are minimal if not completely absent.

In general, Cryptoassets are not regulated by the UK’s Financial Conduct Authority (FCA), the financial regulators in the UK, but the Advertising Standards Authority (ASA) has oversight of how they are marketed to consumers and “has investigated multiple adverts for cryptocurrencies which did not make it clear that the product was not regulated or protected in the UK.”

However, the regulation of Security tokens, when they “have characteristics which mean they are the same as or akin to traditional instruments like shares, debentures or units in a collective investment scheme”, is covered by the FCA in exactly the same way as paper-based shares. And the OECD report outlines experimental “sandbox” exercises have been run by the FCA, where a firm:

…used DLT [distributed ledger technology] to enable UK private limited companies to digitally represent and manage their shares and corporate governance processes. This showed the potential for DLT to improve the efficiency of operations and result in significant savings on legal costs that would otherwise be incurred by these companies.

Though very novel and innovative, it is entirely feasible – technically and legally – for tokenization of the shares in the Sunderland Association Football Club Limited to happen.

Compliance with the marketing and shareholding regulations by Sunderland AFC would require absolute clarity, and the authorities are becoming increasingly vigilant of the risks involved in the whole crypto industry.

Photo by Ian Horrocks/Sunderland AFC via Getty Images

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What’s in it for them?

It all begs the question of why a new investor in the club would do this rather than just hold the shares in the same way as everyone else and simply engage in the fan consultation processes or move to a tried and tested model of fan involvement?

The answer, as ever, may well be that they want to make money out of us – the fans blindly loyal customers of the club. They could potentially do this in a number of ways.

Firstly, through small transaction fees on the buying and selling via a platform they own and control – this would be a great way of getting thousands of football fans to download an app and being introduced into the world of crypto trading. The TFT White Paper is explicit about what this means in practice:

Our user-friendly app’s payment gateway enables participation at various levels of expertise and knowledge of the crypto world, starting from zero, where a fan can purchase TFT tokens via a paid text message or a simple debit card transaction.

Hence, the app functions as a user-friendly version of a crypto wallet where they can safely store their tokens. It also allows members to interact with the community and the project in a secure environment that looks and feels like an online gaming or betting account.

Secondly, the requirement for “retail” investors to purchase a specific crypto-currency – the $TFT, in order to buy club tokens. This is a proposed new coin in which they already have an investment, will raise the value of that coin and therefore provide the potential for existing coin holders to make vast profits due to the rise in the market, generating quick profits artificially via the “buzz and hype” around the ability to a little influence rather than by any tangible increase in the profitability of the club itself.

Photo by Stu Forster/Getty Images

There is, of course, the potential for fan investors to make money too by buying at a low price and selling at a high price, and if the club ever makes a profit (and which football clubs actually make profits, even in the Premier League?) then the token holders would, presumably, get a small share of the dividends made by TFT.

But there’s also the potential for ordinary people to lose their money by essentially gambling cash they can’t afford on the emotional hook of helping the club to get promotion and on the promise that the Premier League will bring an increase in share value.

Again, this is very new, very innovative, and very rare. Groundbreaking, no doubt… but is breaking ground a good thing to be doing with our football club?

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It’s not Fan Ownership, Jim, not as we know it

So, therefore, a crypto token-based model would not be “fan ownership” in the way anyone would currently recognise it, nor would it be anything like the fan tokens that currently exist. But the TFT model is not actual fan ownership of shares as we understand it – TFT will own the ordinary shares. The White Paper says they will use:

$TFT tokens to purchase professional sports teams and give control back to the fans. Thus, forming fan owned clubs where fans who own $TFTs may participate in club decision-making and where their opinions have weight and importance.

Anyone with a $TFT will be able to vote on club decisions and have an impact on how the club is run. There will be various types of votes, some of which will be paid and others which will be free.

We value free votes just as much as paid votes because our goal is to restore power to the common person in football. Therefore, regardless of a member’s financial situation, we must ensure that holders of $TFT can vote to govern the club.

Yet real fan-owned clubs, or clubs with an element of fan ownership, have their fan-owned shares controlled by a legally constituted, FCA regulated, democratically accountable Supporters’ Trust where one member gets one vote and club directors are able to be elected and removed by the supporters.

Now, the White Paper mentions the involvement of Supporter’ Trusts, saying that “In most cases, this will result in the appointment of fan representatives from existing Supporters’ Trusts or initiatives directly on the board and some TFT representation”.

But this is not actual fan democracy, it’s a corporately moderated engagement platform. As the White Paper says, the token will be merely a representation and an opportunity.

We will enact fan ownership by using the blockchain to give fans a representation of a stake in the club and the opportunity to vote on club decisions.

The opportunity won’t be for everyone though, they will even charge additional fees to token holders for a vote on some club decisions!

Neither is this the shadow board model of accountability (currently practiced by Liverpool) and golden share model of security over the club’s key “cultural assets” (currently in place at Brentford) model, both of which are proposed in the Crouch Report into the governance of football.

Indeed, how any token-based mass ownership model would intersect with such structures, which may be legally mandated if the government ever gets around to legislating for an independent regulator for English football (iREF), would be interesting to see.

In my view as someone who has watched with interest the development of the crypto industry over the last decade, is that we should be extremely cautious, sceptical, and wary of this proposal, but not hostile per se.

It will need our Supporters Trust to be extraordinarily vigilant and to call upon outside expertise in order to ask the right questions and interpret the answers correctly.

How vulnerable are we to this going wrong? What safeguards will be put in place to ensure that this does not harm our club’s future? How will individual investors in these tokens be protected and informed?

Photo by Leon Neal/Getty Images

It is very, very tempting when we are all so keen to see the backs of Donald and Methven to just cross out fingers and hope that this will work out for the best. It’s easy to be blinded by hype, buzz, and neophilia (indeed, the entire crypto industry – especially its darker corners – operates on hype, buzz, and neophilia, that’s how they draw you in).

This is difficult – not getting caught up in the excitement and keeping a cool head – but we have had our fingers burned in the past.

I caution you as a Sunderland supporter to assume until it is proven otherwise, that this is a means by which the global super-rich can use our fandom to distribute and transfer the risk of their investment to ordinary punters – and punters is the right word here, as these exchanges often have more in common with online gambling than fan democracy.

Asset tokenisation has the potential, at the very least, to be a powerful financial tool that provides ordinary people with a stake in the brands and companies that shape their lives as consumers and citizens.

But only if the token represents an actual share, rather than a fraction or a right to an element of a share that is still held by those buying out Donald and Methven, then it may well be a relatively harmless and interesting technical mechanism that makes it easier for us to buy a bit of our club.

Ultimately, as a fanbase, we should be asking whether our precious 140-odd-year-old institution is the right place for a “financial innovation” like this to be piloted. We cannot be dazzled by the tech or by the promise of “fan ownership” – we need to be cold, rational, and cautious.

If this story does turn out to be the plan, the club and its new investors must be open and honest about their intentions, the ways and means in which this scheme will operate, what real benefit it will bring to fans, if and how either party will make money from it, and how they plan to safeguard supporters.