Everton

Chiliz, Socios…….

In recent weeks Arsenal, Everton, Manchester City and Leeds United have partnered with a company called Chiliz, who describe themselves as the leading global blockchain providers for the sports and entertainment industry. The partnerships centre on the creation of fan tokens traded on the Socios.com platform. Fan tokens are a form of cryptocurrency, ownership of which give access to  bespoke club related content and the opportunity to vote on a limited number of minor decisions relating to the club.

Blockchain is a technology, a specific type of database. It differentiates itself from traditional databases in a number of ways. Data is stored in blocks and as the name suggests those blocks are linked (or chained) together. Each time new data is added a new block is formed. The blockchain is decentralised (i.e. not stored in one place or controlled by one entity). The database is immutable meaning data entered can never be changed. Transactions are permanently recorded and viewable by anyone.

The most extensive use of blockchain to date, is in cryptocurrencies which is where Chiliz is one of the operators in this space.

So who are they, and what do they offer?

Chiliz began in 2018 raising $66 million dollars from private investors including Alexandre Dreyfus (still the CEO), Binance (well known in the cryptocurrency space), Ceyuan Ventures and a Dr Stanley Choi, the former owner of Wigan Athletic (who sold to Au Yeung with disastrous consequences). They are incorporated in Malta and the US.

Most of the money raised has been used for two purposes. Firstly the creation of “the world’s first fan engagement & rewards app, Socios.com” and secondly the creation of the cryptocurrency  $CHZ.

As of today,  $CHZ has a market cap of just over $ 2 billion. It has a circulating supply of 5,893,953,497 CHZ coins and a max. supply of 8,888,888,888 CHZ coins.

Socios.com

Socios.com is a web and app based platform allowing fans to acquire fan tokens and participate (“engage” as Socios puts it) in the content and fan polls. It is promoted as a new, exciting way of engaging with your chosen club and attempts to appeal to a global audience of tech savvy football fans.

However, the business model and the most likely unwitting, exposure to cryptocurrencies must be brought into question. As indeed should the motives of the clubs themselves.

Should fans pay for engagement?

Let’s start with the principle that fans should pay for engagement and influence. Is this really the message football wishes to send to its fans? At a time when fans largely have stood by their clubs through the incredibly difficult pandemic period, waiving in many cases their rights to ticket refunds, some clubs feel it appropriate to promote the idea that engagement and influence (however limited) comes at a cost to the fans?

Clubs already produce content that sits behind paywalls. Almost every major club now requires the purchase of some form of digital membership to reach all the content a club produces. The use of a third party (Socios.com) extends this principle further. Is this right? From my perspective, not at all.

In the summer of 2019, West Ham United announced a partnership with Socios.com, promoting fan tokens in exchange for “engagement and influence”. West Ham fans argued successfully that their club was trying to monetarise supporter engagement and the partnership was dropped in July 2020 without a token ever being offered or bought.

The West Ham fans rightly pointed to the requirement under Department for Digital, Culture, Media and Sport (DCMS) guidelines for clubs to engage with fans as a result of the work of the Government’s Expert Working Group in 2016.

The timing of Socios’ campaign with multiple Premier League and other high profile clubs, coincides with many supporters of the game working hard on a huge portfolio of ideas for the fan led review of football, and indeed clubs including Everton, represented by Denise Barrett-Baxendale, on the “expert panel” seems at odds with each other. How can we have a privately owned platform, for which the clubs and the game have no means of control, selling “engagement and influence” to fans. How is it right that the platform itself, promotes the idea of greater influence by virtue of buying more tokens? Literally cash for votes.

The principle of paid-for engagement and influence is entirely wrong. The governance of a scheme where any token holder can influence even relatively minor aspects of a club, without knowing the identity of the token holder (is the token holder a fan, a fan of an opposing club, or someone with entirely different motives?) is entirely unsatisfactory.  How can any club that truly understands fan engagement leave itself exposed to such an open-ended potential liability?

Then we have the issue of how to pay for the tokens. I have nothing against cryptocurrencies per se, they have their legitimate uses and for sophisticated investors they’re a valuable asset class to hold for multiple reasons. However, is it really appropriate to ask ordinary football fans to have to speculate with an obscure cryptocurrency? The sums of money required to purchase a token may currently be relatively small, but that’s not the point.

Just as there are no controls over the “engagement and influence” there are no controls over the future value of the tokens and  particularly the currency they are denominated in.

The attraction of Socios.com for the promoters and originators of  the cryptocurrency $CHZ is obvious. Signing up the world’s most recognised football clubs will bring large and continuous flows of liquidity, with thousands of new subscribers to $CHZ.  Association with Manchester City, Barcelona and PSG for example will rapidly increase the amount of trading in the currency. Indeed the news that Messi has accepted part of his remuneration package to be paid in $CHZ further adds to the clamour and interest in a relatively insignificant (at least in terms of market cap) asset.

The volumes traded in the fan tokens is much greater than that might be expected from the number of genuine fans who have bought the tokens. Obviously in recent days PSG and Barcelona have been big news items. Andre Dreyfus (CEO of Chiliz) confirmed more than $500 million worth of PSG tokens alone had been traded in recent days. Here’s a snapshot taken at the time of writing of just a small number of clubs. The volumes shown here are below the peaks of a few days ago:

Clearly there is a large number of institutional and/or high net worth investors driving such volume, the value of the token does not reflect fan activity but the activity of experienced cryptocurrency investors. Let’s also remember that the traders buying and selling the tokens are entirely anonymous.

With the excitement and increased interest in fan tokens you might expect the value of the tokens to keep rising. In reality that’s not the case with PSG’s token falling in value by 10% since the news of Messi’s arrival. There’s an old adage in stock market investing – sell on the news, yet football fans (retail investors in other words) generally buy after the news.

So we have an asset class that unsuspecting football fans purchase to enjoy “engagement and influence” with their club. However the value of the asset is driven not by the interests of fans, nor even the fortune of the club, it’s driven by unknown investors and traders in a totally unregulated environment.

The tokens are denominated in $CHZ. That itself is a highly volatile (in terms  of price movement) cryptocurrency adding an additional layer of risk to the token holders. Below is the chart for $CHZ against the USD

So where does this all lead us to?

We have clubs who in return for revenue and a share from the proceeds of the sale of fan tokens, are permitting a third party to sell “engagement and influence” in a totally uncontrolled and unregulated manner to their global fan base. The means by which the “engagement and influence” is acquired by fans is through a virtual token denominated in an obscure cryptocurrency and traded by unknown investors.

This is against a back drop where fans and other interested parties are looking to improve the governance of the game, improve genuine engagement (through fan forums for example) and future genuine influence through potential fan involvement at board level (as is likely to be recommended by the fan led review).

The contrast between the two could hardly be more extreme. Clubs promoting the idea of “engagement and influence” through the purchase of an extremely esoteric token in a totally non transparent market place, whilst actually what football needs more than most is for clubs to invest in genuine engagement and to permit genuine fan influence in a structured, governed and visible environment.

Football’s promotion of this platform is in my opinion, entirely unwelcome and the absolute opposite of what is required. It carries significant reputational risk for the clubs and the risk of financial loss for its fans (limited to the value of their purchases of tokens). The promoters of such products and services naturally paint an extremely positive picture of their offering. For the reasons expressed above I’d urge my own club, just as West Ham did, to reconsider its association with it.

 

Categories: Everton, Everton finances

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