NFT (or non-fungible token), is a token that cannot be exchanged with another token. In contrast to Bitcoin, which is easily exchangeable, NFTs are unique tokens with their own set of properties. In other words, NFTs cannot be interchanged with something else. NFTs have recently popped up in the creative world and are now trending in the sports world. Sports NFTs, which can include digital trading cards, signed sports memorabilia, or video clips, continue to grow in popularity. For the sports business, NFTs offer countless potential applications, as collecting plays a major role in fan culture.

NFTs are turning out to be an innovative way for sports fans to engage with their favorite athletes and sport club; especially on the digital platform at a time when in-person sporting events are still limited by the COVID-19 pandemic. Sports clubs and players have millions of fans and followers on social media and are a scale to check their relevance and success rate in the present world. A player gets better bargaining power in their commercial deals depending on their presence on social media and number of people they can influence.

Another way of utilizing a sports-body presence on social media is through a sports talent management agency which provides advertisement and endorsement opportunities for players and then makes money for the sports body. This system of monetizing one’s popularity includes middlemen, who may at times not make the right decisions for the sports body. This is where NFT comes in. The idea behind NFT’s and monetizing oneself is one can actually change and remove some of these middlemen and directly serve their own fan base.

NFT are not only limited to traditional sport but have also found huge demand in the Esports department, where NFTs can be based on highlights from esports competition, player images, and other digital collectibles including perhaps a key weapon used to win a competition, other esports-related memorabilia, or esports-related artwork. NFTs can also be used for ticketing to live events and much more.

In Indian sports, Socios.com, an organization dealing in Sports fans tokens announced a partnership with three IPL teams – Royal Challengers Bangalore, Punjab Kings and Kolkata Knight Riders. Through the platform the fans win and collect various digital tokens, receive VIP rewards, unique features etc.

Given that the NFT market is worth millions of dollars, there are a lot of legal questions to be answered. So what does the law have to say about NFTs and sports? 

Legal Issues of NFT

●      Legal Validity

The biggest issue of NFT Trading in India is the ambiguity regarding the legal validity of cryptocurrency in India as NFTs can be traded only in the form of cryptocurrency. Although Supreme Court of India in its judgment in Internet and Mobile Association of India vs. Reserve Bank of India as well as the Central Government in a statement in early 2021 has allowed cryptocurrency trading and transaction, there is no clarity with respect to legality of cryptocurrency as well as in this case about NFT trading in India, which deters public feeling while making trades in NFT. The legality of NFTs in India is uncertain and adding to the chaos is the belief that trading in NFT is not permitted under the Securities Contract (Regulation) Act, 1956 .The legality of NFTs in India is uncertain and adding to the chaos is the belief that trading in NFT is not permitted under the Securities Contract (Regulation) Act, 1956.

If a particular NFT relates solely to an existing asset and it is marketed as an assurance for authenticity of the ownership of such asset, reckoning it as a security (derivative) would be improper. It should be rather governed by the general principles of contract. On the contrary, fractional NFTs which have come into existence due to exorbitantly priced NFTs, which most people cannot afford, may be termed as a security.

In the sports industry, since the fan following of an athlete usually goes up with time, the value of any memorabilia associated to an athlete is bound to be more than its purchase price, provided the performance and popularity of the athlete stays on the positive side of the graph. So, from a legal point of view, NFT would be regulated and considered to be legal in India if the NFT is seen as an investment bound to increase in value over time. If promises pertaining to return on investment are made then NFTs will resemble a speculative investment rather than a digital collectible, and therefore, could be deemed as a security in India.

·       Licensing

Licensing is a contract between a minimum of 2 parties wherein the licensor agrees to allow the licensee to share the rights enjoyed by the former subject to consideration by the latter. Since Sports NFTs represent the digitalized form of a moment, game videos, collectible cards, Video Clips, GIFs, Photos, Personal files, Equipments, trophies, ticket stubs, tickets for meet & greet and digital autograph (collectively hereby referred to as arts), hence the most important legal issue would be to deal with the rights associated with these NFTs. NFTs in a legal sense represent a license to commercialize the digital media associated with the NFT as long as the underlying copyright (primary ownership) is retained. Thus, for the platforms involved in the trade of NFTs, it would be important to remember that while the ownership of the NFT might be owned by the purchaser of the NFT, they might not necessarily be the owner of the arts being digitalized. 

In case of sports, the licensing of rights might be more complex due to ambiguity in the actual number of entities (like game publisher, teams, leagues, players, the tournament organizer and potentially others) involved in the arts. Anyone creating sports based NFT needs to ensure that they have all of the necessary rights from the right entity or entities.

·       Copyright Law

An NFT does not confer upon anyone a copyright title of an original work. It is merely a cryptographically signed receipt that you own a unique version of a work. The maker of the art still owns the copyright on the art, the person who paid millions for a NFT of the art only owns a copy of that, which is just a digitally signed screenshot of it. Predictably, the NFT craze has brought with it a host of spammers and infringers. These tend to be entities that are grabbing digital URLs and other digital content and releasing NFTs based upon them. This is possible because anyone can create an NFT for anything. Copyright owners of works linked to NFTs without authorization will likely send takedown notices to sites that host such content, and to marketplaces that promote the sale of such NFTs. If the underlying work is consequently taken down, or if the relevant copy is deleted, the link to the NFT can get broken, and the NFT may then represent proof of ownership of a copy that no longer exists.

In legal sense, a purchase of a NFT only gives the ownership of the Digital token and not of the associated art, unless there is a written contract between the seller and buyer of the NFT, assigning the copyright of the art to the buyer. This means that the buyer of the NFT has no legal right to make copies, sell, license, or transfer the rights of the NFT or the associated right. If in absence of consent or a contract from the seller, the original owner of the NFT and the art can file copyright takedown notices. The Buyer also has equivalent obligation to seller to assure that the seller is the actual owner of the art, the NFT and all associated rights. Copyright law would also play an important role in NFT trade due to rise of counterfeit NFTs in the market, as even though the buyers may have the resources to purchase the NFT but would not be able to deep dive into whether that particular NFT or the associated art is actually owned by the seller or not, especially when there is a provision for anonymous trading in the NFT market.

·       Contractual Issues

Many sports organizations already have entered into agreements in place with a dedicated partner to help them in regulating digital tokens for the leagues or its associated athletes. The products covered by these agreements do not currently feature NFT technology, but every sport organization needs to have a close look at them first. Specifically, it needs to look at the rights granted that could be used for NFTs. One may mention NBA Top Shots as one of the established brands for digital trading player cards. But beyond such partnership, sports organizations need to look for other partners such as EA Sports in the gaming industry. They already have certain card- and player- based sections on their sports video games but there is a potential to create a blockchain integration to enable specific NFT on players or on cards. There is a thin line between traditional rights granted under the name of “digital cards”, or “fantasy partnerships” and what could become a new asset category around NFTs and the same need to be given more attention by the leagues administration.

·       Money Laundering

Money laundering refers to act of transforming the proceeds of illegal activities and transactions to legitimate money or forms of assets. The purpose of money laundering is to disguise the illegal origin of the revenue and to misrepresent the source of money being shown as a legitimate earning. INTERPOL in its financial crime report on Money Laundering defined Money Laundering as: “any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources”. The rampant growth of new blockchain technology and the high price tags associated with the NFTs, there is a high chance of Money Laundering taking the face of a normal crypto trade. Money Launderers could recruit co-conspirators to manipulate the price of NFTs for their own advantage, buying NFTs at a low price, pumping up prices by generating their own artificial demand for the NFT and dumping the NFT along the way. The wild price volatility of a NFTs an easy mark for manipulation. Sports NFT could potentially become the next frontier for money laundering by crypto-criminals. A simple method of legitimizing illicit income is to present income as the result of a profitable venture or other currency appreciation. Given that the value of Sports NFTs can change in seconds as seen in the NBA Top Shot NFT and given the frantic and heated crypto marketplace, there exists no baseline. Thus, even the most profitable, erratic or lopsided trading activity could appear ordinary, bona-fide or typical. Money laundering via online auctions and sales, gambling websites, and virtual gaming sites, where ill-gotten money is converted into gaming currency, then back into real, usable, and untraceable clean money, has grown significantly over the last several years. 

Conclusion

NFT is still an emerging concept. Thus, sports clubs, leagues, athletes, or investors dealing with NFTs must consult a securities lawyer. They must validate that there are no possible difficulties with an NFT’s strategy irrespective of whether it is considered a security and subject to securities regulation or not. The hype around NFTs is understandable and appears to provide a creator-friendly platform that gives consumers an access to previously unavailable scarce digital assets that gives them a sense of connection with the sportspersons. As NFTs grow in popularity, sports leagues and individuals will have more options to sell themselves, and thus, they must be prepared to deal with legal implications.