Non-fungible tokens (NFTs) are making headlines again, this time in fantasy sports. In September 2021, the French start-up company Sorare announced that it had raised significant capital—$680 million to be exact—for its fantasy football (soccer) platform. What makes this new format unique is the use of non-fungible tokens (NFTs) in conjunction with fantasy sports and blockchain technology to track transactions within the fantasy league. While there may be some skepticism around NFTs, fantasy sports companies seem primed to survive and grow.
Fantasy Sports Still Reign Supreme
Fantasy sports are online gaming platforms that enable a participant to draft, sign, manage, and trade professional athletes to build their own teams and compete against other team “owners,” either head-to-head in weekly leagues or season-long “Rotisserie-style” scoring. Points are awarded based on the players’ actual performance in their real-life games. In 2019, the fantasy sports generated $2.9 billion-dollars and the sector was valued at approximately $7.22 billion. The industry shows little sign of slowing down, especially now with the introduction of NFTs to the mix. According to Research and Markets, the global fantasy sports market is expected to have a CAGR of 5% over 2020 to 2025. Opportunities for fantasy sports leagues to grow are myriad, especially as internet access and 5G networks continue to proliferate. Allied Market Research predicts that fantasy sports will reach $48.6 billion by 2027, a CAGR of 13.9% from 2021 to 2027.
The Ever-Expanding Role of NFTs in Fantasy Sports
In 2021, ,NFTs have taken an all-star role in fantasy sports, with companies making millions by issuing new cards on their platforms. These companies use blockchain technology distributed across thousands of computers around the world to record who owns which “cards” and ensure that all purchases and sales are accurate and transparent.
- Sorare. Sorare, in particular, has created a unique approach to its NFTs and fantasy football platform. The company has built a fantasy sports league centered on buying, collecting, and trading NFTs on the Ethereum The company partnered with 180 football organizations, including the European giants Real Madrid, Liverpool, and Juventus. Even current and former top European players have invested in the company, with Gerard Pique, Antione Griezmann, and Rio Ferdinand taking stakes. Since January 2021, over $150 million worth of NFTs has been traded on their platform with sales growing fifty-fold between Q2 2020 and Q2 2021. Valued currently at $4.3 billion, there are 600,000 registered users and 150,000 users who buy or sell or trade a card per month. Sorare generates revenue by issuing new cards on their platform through auctions and can also be sold on platforms such as OpenSea and Rarible.
- NBA TopShot. Since opening its doors in October 2020, NBA Top Shot has generated $500 million in sales of basketball-themed NFTs and attracted over 800,000 users. Dapper Labs, the developer of NBA Top Shots, is now worth $2.6 billion and boasts a line-up of famous investors that includes Hollywood stars, current NBA players, and Michael Jordan. Like other platforms, participants can buy, sell, and trade officially licensed video highlights of their favorite players. Purchasers don’t receive the copyright to the image—they get the ownership over the NFT only. Pursuant to an agreement with the NBA and Dapper Labs, the NFT cannot be divided or copied by the purchaser and only transactions expressly outlined in the contract are allowed. Top Shot recently sold a LeBron James highlight NFT for over $200,000.
- Ultimate NFT. The recently-formed Ultimate NFT has goes one step further. It has developed a fantasy sports platform that adds a play-to-earn system to NFTs and fantasy football. Players use their NFTs to build fantasy dynasties and collect points based on the performance of the real-life players represented in their Ultimate NFT uses smart contracts to ensure players can earn money without intervention from “centralized powers” and enables borderless transactions. Their content aims to launch in mid/late October 2021.
Legal issues relating to NFTs, fantasy sports, and leagues
- Blockchain, traceability, and smart contracts. As discussed in a previous Gamma Law blog, the blockchain is vital for tracing and tracking NFTs through smart contracts, which are stored on the blockchain. They can be used in conjunction with traditional contracts to enforce rights in connection with NFTs. Smart contracts are specific, irrevocable, automatically executing contracts that exist on the blockchain platform. Transactions are transparent, traceable, and cannot be reversed. With NFTs specifically, Ethereum is the dominant smart contract network and smart contracts are executed on the Ethereum Virtual Machine (EVM). These online, smart contracts may be enforceable under the Uniform Commercial Code – in particular, pursuant to Article 9 – as well as under contract law. Smart contacts can improve accountability in any type of binding agreement by automating the formation and enforcement of promises. At their core, they are designed to prevent cheating—whether by undermining card creator’s IP rights, illegally entering a card on the platform, or copying a player’s NFT.
- Licensing Rights. NFTs have changed the legal landscape surrounding image licensing for sports. When a piece of art or music or a sports personality is involved in an NFT, licensing rights come into play. Contracts with NFT sports cards may include provisions to protect the rights of the player, the purchaser, the creator, and the platform, and this may lead to a variety of conditions surrounding the subsequent use the NFT, including:
- Transfering permissions to a third-party
- Whether or how the creator or the player will be compensated
- How the NFT can be used by the purchaser, such as for commercial usage
- Whether the NFT owner can copy and sell the card, and if so, how the revenues would be split between the owner, creator, and player
- Whether the NFT owner can create derivatives or modifications from the card and if so, how they can use them.
- The relevant sports league and NFT fantasy sports companies enter into licensing agreements that determine the rights that are transferred with the NFTs, so any purchaser of the NFTs should fully read and understand the scope of their rights before considering actions such as copying or dividing NFTs into parts.
- Name, Image, Likeness Rights. NFTs present another opportunity for professional and college athletes to profit from their name, image, or likeness (NIL), also known as the right of publicity as well as through trademarks, copyrights, and contract law. Individual professional athletes may negotiate image rights with NFT companies or individual NFT creators. Usually, a player’s contract will determine what image rights they retain, what the league owns, and what they are free to negotiate with other companies. Notably, while a player will hold the rights to his or her image in certain jurisdictions, US courts have held that the First Amendment may allow fantasy sports teams to use athletes’ likenesses, names, statistics, and other newsworthy content without licensing or compensation.
Additionally, if an NFT contains a video or photo of a sporting event, the purchaser one might be tangled up in the legal issue of who actually owns the content—the league, the player, or the creator? Like so much in the legal realm, it depends! Sports photographers may hold exclusive rights to the photos they take during a game. Professional athletes may use personal photos that were in their possession to create NFTs. Or, the NFT company, the league, and the player’s union can negotiate rights in NFTs licensing agreements discussed previously, such as the NBA, Dapper Labs, and the NBA Player Association did for NBA TopShop.
- Gambling. Participants and investors in NFT-based fantasy leagues should also be aware of the gambling laws in their jurisdictions. The legality of fantasy sports leagues is often tied to gambling laws and laws pertaining to games of skill. Fantasy sports are often conflated with online sports gambling, and the latter can be illegal in certain jurisdictions. While the Unlawful Internet Gambling Enforcement Act of 2006 prohibits online gambling to protect consumers, it specifically excludes fantasy sports leagues because they are considered skills-based games rather than games of chance. However, state laws take differing approaches to regulating fantasy sports. Participants in a fantasy league can bet on fantasy sports games (if legal in their state), but not on actual real-life games. Sports gambling in the US still remains highly regulated and controlled, so fantasy sports participants should be aware of any platforms that offer gambling options.
NFTs and fantasy sports have tremendous potential to expand with the support of major leagues, sports clubs, players’ associations, and consumers who want to enter the NFT market. However, in order for the NFT collectors to have the best experience possible, it is important for these possible legal snags to be ironed out before thousands of new and potentially unsuspecting participants enter the market.
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