How to be on alert to the dangers of fraud and counterfeiting

Non-fungible tokens (NFTs) are experiencing spectacular growth thanks to the new opportunities they offer for interaction and monetization to fans, clubs and athletes in the sports industry.

Platforms such as NBA Top Shot, which allows users to own key moments in basketball as NFTs, generated nearly $500 million in sales and had over 800,000 registered accounts a few years ago.

The initial enthusiasm for NFTs quickly faded after scandals over speculation and fraud shook user confidence. For this sector to reach full maturity, there must be stricter regulation and enhanced security practices.

Beyond the promises of these new markets, the challenges in terms of security and regulation are considerable. If the sector wants to have sustainable growth, it must answer a crucial question: how can the healthy and secure development of these rapidly expanding assets be ensured? The adoption of NFTs in the sports industry continues to grow, but the regulatory framework must evolve to support this expansion.

As professors at Polytechnique Montréal and HEC Montréal and researchers at CIRANO, our research focuses on social networks and new technologies.

The rapid rise of NFTs in the sports industry

NFT sales exploded in 2021 with record transactions such as the sale of a digital artwork by artist Beeple for US$69.3 million (C$96 million), and Twitter co-founder Jack Dorsey’s sale of his first tweet for US$2.9 million (C$4 million).

In the world of sports, a dunk by LeBron James during a game between the L.A. Lakers and the Sacramento Kings sold for US$208,000 (C$289,000) on the NBA Top Shot platform. The concept of owning a unique, authenticated, and verifiable moment on a blockchain has attracted a new wave of investors and fans willing to spend considerable sums of money.

In 2021, another dunk by Lebron James sold for US$210,000 (C$292,000).

The appeal of NFTs in the sports industry lies in their exclusivity and digital rarity.

A NFT establishes indisputable ownership of a digital asset, whether it’s a player card, a video clip, or even a virtual souvenir of a sporting event. This blockchain-centric market enables absolute traceability and paves the way for additional revenue streams for clubs and leagues.

For example, NBA Top Shot completed more than three million transactions in 2021, the majority of which were microtransactions ranging from $10 to $50, while only 1% of transactions exceeded $1,500.

Opportunities and new revenue streams for clubs

NFTs and fan tokens (fungibles) offer unprecedented opportunities to sports clubs to generate revenue and build fan loyalty.

A fan token is similar to a club “share,” and each fan can own a small part of it. The price of the token depends on factors such as the value, profit or popularity of a club, which change with the club’s successes or failures over time. Football clubs such as Paris Saint-Germain, Atlético Madrid and FC Barcelona have launched their own fan tokens, which allow fans to buy a symbolic “share” in the club.

These tokens also allow fans to participate in smaller decisions, such as choosing the team’s uniform or selecting the songs played during match breaks. NBA Top Shot, meanwhile, has enabled NFTs representing sporting moments to be sold at astronomical prices, thereby capturing the interest of collectors and investors.

But the enthusiasm of fans shouldn’t mask the realities of the market. Despite significant volumes, there is a notable concentration of value in a small number of accounts: 9% of accounts hold 80% of the market value of the $41 billion worth of NFTs traded on the Ethereum blockchain. These inequalities serve as a reminder that, despite their apparent accessibility, NFTs can exacerbate market dynamics that already exist in the world of art and physical collections.

Risks: speculation and security

The spectacular success of NFTs in sports nevertheless has a downside.

Cases of fraud, counterfeiting and market manipulation are on the rise. Among the most worrying techniques is the “rug pull,” where creators abruptly abandon a project after artificially inflating the value of NFTs.

A recent example is the Eternal Beings collection, promoted by American rapper Lil Uzi Vert. Shortly after encouraging his millions of followers to invest, he deleted his posts, causing the value of the tokens to plummet.

Price manipulation

The phenomenon of wash trading, a practice that involves making artificial transactions to manipulate prices, is also a major problem.

In 2021, a report by Chainalysis revealed that 110 wash traders made nearly $8.9 million in profits by manipulating the prices of their own NFTs. Although they are documented, these fraudulent practices operate in a regulatory gray area.

To date, few regulations specific to NFTs have been put in place, although some countries, such as France, have begun to take action. In October 2023, the SREN law authorized the testing of games with monetizable digital items, including NFTs, for a period of three years.

The path to effective regulation

The current regulatory framework for NFTs in the sports industry is still in its infancy.

In the United States, the Securities and Exchange Commission (SEC) has filed its first charges against non-compliant platforms. Impact Theory, a podcast studio, was fined for raising $30 million through unregistered NFT sales.

In the European Union, regulators are also beginning to explore how to integrate these new assets into their financial oversight frameworks. In May 2023, the European Union adopted regulations on markets in crypto-assets (MiCA), establishing a harmonized regulatory framework for crypto-asset issuers and related service providers.

Although MiCA doesn’t specifically target non-fungible tokens (NFTs), the regulation stipulates that issuing crypto-assets in large series or collections may be considered an indicator of fungibility, thereby making these assets subject to the provisions of MiCA. This approach aims to prevent regulatory arbitrage and ensure appropriate oversight of emerging NFT markets.

The future of NFTs in the sports industry

NFTs in the sports industry undeniably represent a new frontier for clubs, fans and investors. They create new experiences and transform the way we perceive and consume sports.

However, increased regulation and enhanced security practices are necessary for this sector to reach its full maturity. At a time when speculation and fraud threaten user confidence, regulators must ensure that the promises of NFTs are fulfilled without giving in to abuses.

With appropriate regulation and increased user awareness of the opportunities and risks of NFTs, this segment could become an essential pillar of the digital economy. By balancing innovation and stakeholder protection, NFTs in sports have the potential to generate substantial economic opportunities while transforming the sports ecosystem to make it more inclusive and interactive.

This article is republished from The Conversation under a Creative Commons license. Read the original article.