Fan Tokens: A New Foundation for Post-Pandemic Sports Engagement, Governance and Investing

FC Barcelona’s?debut Fan Token Offering?(FTO) was by most accounts a success. As part of the Spanish soccer giant’s broader?push into a more robust and interactive digital presence, its limited supply of 600,000 FC Barcelona Fan Tokens ($BAR), valued at €2 (~$2.26) each, sold out in two hours, generating $1.3 million of new capital. Within a day, $BAR had generated nearly $2.5 million in trade volume.

Fan Tokens are a finite digital asset, specific to an organization or project (team, league, game title, etc.), that individuals can buy to own. In the above iteration, provided by?Chiliz?– a?platform “for sports and esports fans to participate in, or crowd-manage, their favorite brands” –?Fan Tokens give their holders voting rights on select decisions. They are also redeemable for unique experiences such as exclusive merchandise, interactions with affiliated athletes, and access to original content. The tokens are traded in real-time with no intermediate parties at lower transaction costs than most traditional membership programs, which are limited in functionality.?

This Fan Token framework is built on blockchain, a technology scrutinized by skeptics in prior years for being ‘a solution without a problem.’ There are myriad reasons, however, why this marriage of concept and technology has legs within professional and amateur sports. These reasons, heightened by the ongoing global pandemic’s?crippling impact on live events, are outlined below.

Directing Fans to Digital

FTOs are a novel way of monetizing supporter engagement while reaching a worldwide fanbase in ways beyond traditional social media. Fan Tokens’ online existence is also a notable value add amid pandemic-induced travel bans, social distancing guidelines and sports sans audiences. These forces are already coercing a new wave of tech-resistant fans to move online or upgrade their existing presence, in order to maintain staple tasks such as grocery shopping, working, health appointments and family contact.?

By end of its initial token sale, $BAR had attracted more than 4,000 fans from 106 countries. Per pre-COVID-19 research from Juniper, the number of mobile wallet users worldwide will reach 4 billion in 2024, up from 2.3 billion in 2018. As more consumers adapt out to digital out of necessity, they will also become more receptive to making payments online too.?

Supplying Liquidity and Financial Aid

Sports and entertainment properties are alternative assets touted for their recession resistance and high growth potential. As such, they frequently attract corporate and institutional investors ranging from game publishers and media corporations to private equity firms and family office consortiums. The recent rise in Special Purpose Acquisition Vehicles (SPACs), such as?Redbird Capital and Billy Beane’s $500 million corporation, also blends institutional knowledge with readily available capital for M&A opportunities.?

While Fan Tokens do not represent equity in their affiliated organization, the concept presents an alternate route for consumers outside the institutional space, to ‘invest’ in brands to which they are most loyal.?The Fan Token framework’s scalability makes it applicable to brands large and small, including those adversely affected by temporary hiatus of professional and amateur sports or otherwise encumbered with financial instability.?

In this context, devout fans, sponsors and benefactors are offered a new means of making direct investment into sports organizations in exchange for unique offerings. For Minor League Baseball, which?officially canceled?its 2020 season, the Fan Token framework could help member teams manage revenue shortfalls, reduce layoffs and meet upkeep costs, while creating a foundation which fan engagement is maintained without live attendance.?By accepting capital without sacrificing equity, administrators remain attractive to larger investors considering an acquistion that would preserve the organization’s short-term health.

Furthermore, Fan Tokens can be issued for dedicated causes, such as supporting staff wages, buying critical infrastructure, or subsidizing tickets for disadvantaged fans. This gives investors greater control over how their capital is deployed, which provides more incentive.

Improving Stakeholder Relations?

For owners looking to galvanize fans, the voting rights component of this Fan Token framework helps secure input for select decision-making processes, such as?jersey design, player awards and philanthropic causes.?This capability is especially relevent in the current climate, as ‘The Washington Football Team’ and the Cleveland Indians?review their respective names?amid outcry from stakeholders to adopt more race-consious alternatives. Inviting Fan Token owners to play a part in the solution will help ensure they, as representatives of the broader fanbase, are receptive to the brand’s final outcome. Longer-term,?the ability to track and measure Fan Token usage will yield new data that can help inform other business development decisions.?

As an extension of marketing strategy, Fan Token holders can participate in unique events for such as National Leaderboard Leagues and Peer-to-Peer Daily Challenges. The technology draws on the?growing appeal of sports betting, competitive fantasy sports and online gaming by enabling token wagers. These wagers are enforced?by smart contracts (automated protocols that execute actions or transactions in accordance with an underlying contract or agreement).?The offerings tap into sports fans’ ‘tribal’ mentality and human nature’s individual competitiveness. By introducing fan rankings by country, Fan Token issuers leverage forces such as national pride to access, or further embed themselves within, these markets.??

Optimizing Loyalty Programs, Voting and Compliance

There is?a?tremendous efficiency gain from combining this reward-for-loyalty functionality into a framework that also accommodates voting rights and token-earning opportunities such as surveys, polls and prediction games.?This blockchain-based infrastructure can also be repurposed in markets where fan ownership of professional teams is already the norm, such as Germany’s Bundesliga, to reduce the trading and storage costs associated with traditional shares. It can also streamline the voting process to ensure maximize engagement from shareholders.?

The immutable, transparent nature of record keeping on blockchain also helps independent auditors ensure the issuing organization has not breached any domestic, international or industry regulations, such as?Anti-Money Laundering rules, economic sanctions, or?UEFA’s?Financial Fair Play?Regulations.?To mitigate the risk of fraud,?Know Your Customer (KYC) requirements?demand that aspiring Fan Token owners also present information including names, phone numbers, email addresses, residential addresses and sources of income to verify their legitimacy.?

Enabling Upstarts and Entrepreneurs

Fan Token functionality will only improve as new, platform-native sports and entertainment brands emerge on top of the technology. For example, if a tier-two city decided to form a USL Championship soccer franchise using Fan Tokens to raise capital, token owners could be tasked with strategic decisions such as drafting talent, selecting lineups, or organizing ‘friendly’ exhibition fixtures. A newly launched league, meanwhile, could invite input on matchmaking, team seedings, length of season, and promotion/relegation rules. Novel concepts like these are also applicable in esports, a market primed for rapid growth in coming years:

"Spending on esports is projected to surge at a compound annual rate of 18.3% between 2018 and 2023 to reach almost US$1.8bn. As esports gains critical mass as a business, companies are asking how they can monetise the rising level of interest…That’s a small part of the total global video games and esports market, which is expected to be worth US$162bn in 2023.”

– Andy Fahey, esports lead, PwC UK. (Monetising eSports Via Multiple Revenue Streams, 2020)

Not Without Limits

The Fan Token framework is not perfect. Converting $BAR back to fiat currency is one example.?All Fan Token types on the Chiliz platform, for example, must first convert to standard Chiliz tokens ($CHZ), a ‘master’ chain-agnostic digital currency, before they can be exchanged for USD. $CHZ is traded on various crypto exchanges, which are?subject different regulatory requirements depending on region. As a currency, $CHZ can be volatile and presents some?characteristics of illiquidity that limit its stability as a ‘bridge’ currency between Fan Tokens and USD. Furthermore, any fiat-conversion tools lacking?$CHZ compatibility would?require token owners to convert to another cryptocurrency, such as Bitcoin ($BTC), beforehand. In this sense, the Fan Token concept operates best as a closed ecosystem.

Conclusion

While FC Barcelona’s?$1.3 million sum?might be small compared to other entries on?the?balance sheet of a world-renowned sports team, it is original revenue nonetheless – a case study for procuring alternative capital during a market downturn.

The Fan Token framework?lays a foundation for the ‘fan engagement 2.0’ marketplace. As a conduit for more direct interaction with fans, at a time when many are isolated and distanced from the brands they love, Fan Tokens provide a?unique blend of commerce and compassion for issuers and owners. For organizations that are smaller, upstart or struggling to rebound, this model – coupled with effective governance – could make a significant impact in unprecedented times.