With the pandemic separating fans from their stadiums and sports clubs from their revenues, fan tokens are now big players in the game, helping teams generate revenue and bringing fans together again.Though stadium seats in some countries have been filled with paper cut-outs of fans to present a well-intentioned yet creepy facade of normality during the pandemic, the distance between the teams and their followers has grown farther apart. One solution is found in sports fan tokens. Through fan tokens, many fans are able to feel a more direct connection to their teams — emotionally and financially.Broadly understood, fan tokens are digital assets connected to the fan experience. They come in two distinct varieties — fungible and nonfungible.So far on the fungible side, dozens of European soccer teams are associated with actively traded “fan currencies” or “fancoins,” whose sales have brought in over $200 million in Covid-year revenues. Unlike nonfungible tokens where each token is unique, each unit of fungible tokens like Bitcoin, Ethereum, or Dogecoin is the same as any other — like dollars.Malta-based blockchain sports firm Chiliz and its fan engagement platform, Socios, are the undisputed market leaders pushing the fungible fan token/fan currency business model with the help of over 160 staff. With a new office in New York, Chiliz is looking to further disrupt the sports industry through partnerships with the likes of National Football League (NFL), National Basketball Association (NBA), National Hockey League (NHL), Ultimate Fighting Championship (UFC) and more. Fan tokens are taking the sporting world by storm. (Pexels) In five years, Chiliz and Socios’ CEO Alexandre Dreyfus imagines “hundreds, potentially thousands, of major sporting organizations and some of the biggest entertainment franchises from film and music fully embracing” fungible fan tokens as “a core part of their digital engagement strategy.” This means that the potential of the fan token phenomenon goes far beyond professional sports, and can be expected to impact other areas of entertainment including music, with Kpop Fan Token as an early example.From passive to activeFan tokens, Dreyfus believes, will “transition passive fans into active fans through transactional fan engagement,” giving the sports teams in the post-physical world “a powerful revenue stream.” Soon, the company will be adding NFT’s to their strategy as a likely next step, considering entertainment figures like Paris Hilton have already done so. He adds:“We believe fan tokens are the biggest new trend in the industry and that this will be widely recognized as we add hundreds more partners in the future and millions more fans embrace them.”Fungible fan tokens, however, have no clear precedent. These fan currencies are forging a new path. In blockchain terminology, fungible fan tokens are termed as “utility tokens,” an apt description as they have undeniable utility as part of “gamifying” the fan experience. Purchasing and using tokens allows fans to materially show their support and congregate in online communities where they can play a small part in running the club by voting for proposals (regarding things like what music will be played during a match), join draws for merchandise and even interact with the team directly. Juventus fan Giuseppe Bognanni told Reuters that, “It’s nice that the song you voted for is the one you hear, and you think, ‘I participated in that.’” Priority entrance for @socios Fan Token holders at San Siro. @chiliz #bemorethanafan pic.twitter.com/1xxIQcdtrI— Alexandre Dreyfus (@alex_dreyfus) September 16, 2021 But, are fan tokens a genuine way for clubs and fans to interact, or are they just a way of squeezing fans for extra dollars?Though securities regulators are yet to strike, many in the sports industry are suspicious of the fan token trend. One of these is Malcolm Clarke, chair of the U.K.-focused Football Supporters’ Association, who suggested that fan tokens might amount to little more than clubs “trying to squeeze extra money out of supporters by making up inconsequential ‘engagement’ online polls.” It’d be unsurprising if they were — particularly after sales at Europe’s top 20 revenue-generating clubs dropped 12% to 8.2 billion euros ($9.9 billion) in the 2020 fiscal year.But Jorge Chemez, an Argentinian football fan of the national team, is bullish on the Chiliz project “because it’s applicable in a lot of ways and to all kinds of sports, even eSports — every human likes at least one type of sport, the potential is infinite.” He figures that while most sports fans are not likely to embrace tokens, those that do will be able “to be closer with their teams.”“Socios gives you privileges, like Inter Milan fan token owners were invited to a VIP sector to watch the football match”The phenomenon of sports clubs raising money through the sale of cryptocurrency is sure to continue to spread around the world as the incumbent platform Chiliz encounters new competitors and business models. Do fungible fan tokens represent a new type of indirect equity in the teams (or celebrities/groups) themselves? Fungible fan tokensFungible fan tokens are generally marketed as “utility tokens,” implying that the tokens have concrete use cases. This concept of utility tokens dates back to the initial coin offering (ICO) boom of 2017 when companies began raising money by releasing cryptocurrencies to the public in a way comparable to stock offerings. On the regulated securities market, these are known as initial public offerings, or IPO’s, and cryptocurrency issuers used the “utility token” designation as a way around securities laws, as tokens with use cases were arguably not securities. Some early use cases included accessing proprietary services or online communities, and for gameplay. In contrast to “security tokens,” “utility tokens” attempted to avoid being seen as investments. Digital currencies of all types are often released via initial exchange offerings, or IEOs, directly from an exchange where trading is to commence. Are fan tokens a legitimate way to involve fans in clubs, or simply a money making exercise? (Pexels) Today, fungible sports fan tokens are launched as utility tokens via an IEO. The Chiliz platform is the biggest actor in this sector, selling fungible fan tokens for its native CHZ, the Chiliz platform token, in what they term a fan token offering, or FTO. Though fan token use is largely confined to Chiliz’ Socios app, Turkish exchange Bitci offers a rival fan token platform and has signed deals with the national teams of Spain, Brazil, and Uruguay in addition to Mclaren F1. Despite Bitci’s inroads, Alexandre Dreyfus, CEO of both Chiliz and Socios, is not worried about losing its dominant market position, asserting that “we don’t believe we have competitors, we have only those trying to compete.” Sale is over! Rangers Token pre-sale is completed!Thank you to all our investors who bought Rangers Fan Token, which has sold out within seconds! @RangersFC#BitciTechnology #Bitcicom #Bitcicoin #RangersToken pic.twitter.com/bfwVLOKNhw— Bitci Global (@bitcicomglobal) July 5, 2021 Socios’ tagline “influence your team and get rewarded,” invites comparisons to governance tokens for decentralized autonomous organizations, or DAOs, which also come with voting rights. An up-and-coming example of this may be found in The Krause House DAO, which has a roadmap to purchase a “fan owned” National Basketball Association (NBA) team after reaching a treasury valuation of $2 billion.The crucial difference with the DAO’s plan is that fan tokens, as they exist, currently do not include collective ownership of any sports club’s assets, nor are fans likely to be given the ability to make material business decisions regarding important things like the signing of new players or coaches.And despite the “utility” function of fan tokens, it seems impossible for buyers to not at least partially see their fan tokens as investments. Even the prominent risk disclaimer on Chiliz’ IEO portal states that “users are strongly encouraged to carefully consider their investment objectives” when participating in the IEO. The same sentiment has been echoed by competitor Bitci’s CEO Alan Tan who made it clear that “these tokens will also be an investment tool.” Fan concernsThere have been technical problems that left fans disappointed — Chemez, for one, is upset because although Socios is a sponsor of the Argentinian national football team, he has struggled to get fully verified via his mobile phone provider in order to purchase tokens. “You can’t be the official sponsor of the Argentinian football national team and leave Argentinians out of it,” he complained.Even when verified, users such as Thomas Ragauskas have been left disappointed after being unable to purchase tokens during an FTO because the amounts of tokens offered were limited and sold out within 17 minutes.Ragauskas describes that although he set up an alarm to ensure he did not miss the event, he was forcefully logged out five seconds after launch due to what Socios described as a technical issue. “The system threw me off the app, and there was no possibility to get back in the app,” he said, adding that when he did manage to get back in three hours later, all the tokens were gone. “Presale price was €2, and now it is €7. I wanted to buy 250 coins.” Dreyfus, Socios’ CEO, is aware of the issues, saying that “a few growing pains are unavoidable” when bringing millions of fans to the platform. With new staff being added, he is confident that platform-related issues will subside and the firm will be able to “deliver the best possible experience for our users.”“The velocity at which the business grew this year, especially over the summer, with multiple major new partners and fan token launches on a weekly basis meant that we had to move extremely fast to keep up.”Lion’s share — tokens as club equity?When Lionel Messi, one of the best-known soccer players in the world, signed his two-year deal with football club Paris Saint Germain (PSG) after 21 years with Barcelona, a “significant” portion of his $30 million signing bonus was paid in $PSG tokens. This was a point of pride for the club, which boasted that Messi’s tokens “instantly ties him with millions of Paris Saint-Germain fans around the world.” Messi’s overall share of the tokens is small, however, considering the supply cap of nearly 20 million tokens gives it a market cap of over $500 million. : Lionel Messi becomes first player in the world to receive Fan Tokens as part of signing package with @PSG_inside.$PSG ⚡️ $CHZhttps://t.co/4Fzm6HGTFG— Socios.com (@socios) August 12, 2021 So, what utility can PSG tokens have for Messi, arguably the star player of the team? It’s unlikely that he will care to vote for “a motivational message on the wall of the dressing room,” nor trade tokens for “personal video calls” with his teammates or himself. The only thing he can do is hold them, hope that they increase in value, and eventually sell — perhaps after his 2-3 year contract is up.As a business, PSG has invested heavily in bringing Lionel to the team and it makes sense for the club to align incentives with him, in the same way that a company is likely to give freshly poached executives golden handcuffs in the form of generous equity packages. Last week, we gave away 150 tickets/experiences to Fan Token holders, games, etc … That’s 20 a day, that’s 7,000 a year. It’s just the beginning of @socios investment in fan experiences. #bemorethanafan— Alexandre Dreyfus (@alex_dreyfus) August 28, 2021 But, why part with stock when you can hand out hype-shares? Hype, after all, is the currency of entertainment. As the star, Messi is able to get fans hyped up which translates to club revenues in the form of ticket sales, broadcasts, merchandise and probably PSG by reason of association. With this “hypequity,” Messi is financially rewarded for raising the team’s brand power. This would come as no surprise to the club, which lauds “the hype surrounding the latest signing” as the cause of the latest surge of “interest” in PSG.Daytrading sports teams?Sports betting is big business, with the global industry pegged at $203 billion and supporting nearly 200,000 workers across 30,000 businesses. The online fantasy sports market, at about $8 billion, is a smaller but growing force. With this in mind, it seems obvious that there is massive potential in combining the online community aspects of fantasy sports with “crypto betting” and sports.Though the premier place to buy fan tokens is the Chiliz Exchange where they are traded against the native CHZ tokens, other “traditional” cryptocurrency platforms have entered the game. After partnering with Chiliz, Binance has listed several top-trading tokens like FC Barcelona fan token (BAR) and Atletico Madrid fan token (ATM), vying for new users who hope to become crypto traders after being introduced to the asset class through their favorite teams. The ability to easily rotate fan tokens positions as one does with stocks or any other tokens invites users to trade actively, a practice implicitly encouraged by the stock market atmosphere of the Chiliz exchange. If you didn’t know better you’d think chiliz.com was a regular crypto exchange. Chemez agrees, noting that “if you are smart you can make money with the fan tokens, even if you are not even a huge fan.” He considers long-term holding the CHZ token, along with occasional fan token trading, a viable strategy.Though it is clear that each club targets its own fans in the IEO’s, there is nothing stopping speculators and traders from entering the market — who we might see as a new breed of sports better.But, there are concerns about merging the two worlds, as people who are not equipped to understand crypto markets may be involuntarily thrusted into a potentially addictive gambling experience. Advocacy group Clean Up Gambling has described Socios-style fan tokens as a “gateway into speculative cryptocurrency,” making clear the implication that speculative cryptocurrency is a bad thing.On the other hand, depending on how the sector evolves, the development of a proxy stock market for sports teams would have huge implications for the entire industry, as privately owned sports clubs might suddenly begin to resemble public companies, with token holders representing a new type of stakeholder in the overall business. Players who do not traditionally receive equity could receive large portions of their bonuses in locked team-specific tokens whose vesting schedules could influence their loyalty to the team long after their contracts expire.As entities to which anyone around the world could indirectly invest without barriers, sports clubs that can generate enough hype could graduate from regional and national players to become truly international entities in the way of multinational companies. Things become really interesting when DeFi, crypto games, decentralized social media, JPEGs, and community/social/fan tokens become composable with *each other*.— Qiao Wang (@QwQiao) August 29, 2021 The rise of fan tokens also opens up additional doors to a digital and decentralized future we do not yet understand. Consider the DAO-fication trend, whose proponents foresee decentralized autonomous organizations operating on the blockchain as serious competitors to the modern corporation, meaning that pre-existing communities of fans — cryptographically organized fans — could be a great foundation for unknown future transitions.Wild valuations, mild scarcityBut, that’s a long way in the distance and at present, fan tokens seem like an uncertain bet for seasoned crypto holders. Though the circulating supply and total market cap are key metrics, the Chiliz platform does not readily display such information making it difficult for traders to make informed judgments. According to CoineGecko, only a small portion of the full issuance of fan tokens has been released into circulation. About 7.5% of FC Barcelona’s 40 million BAR tokens are in play, which means that at the current market value of $16 per token, the club is sitting on over $600 million in unissued tokens — theoretically adding about 10% to the club’s $5.76 billion valuation, or roughly an entire year’s revenue. The number is even more extreme in the case of Paris Saint-Germain, whose $440 million in tokens adds 18% to the club’s $2.5 billion paper valuation — and there’s no guarantee the clubs won’t keep diluting the supply to infinity. It is fascinating to consider how this may impact the true valuations of sports teams in the future, and what regulatory changes the fan token trend may inspire.Many questions remain for how various types of fan tokens can be expected to revolutionize the entertainment industry in the future, but it is clear that they represent a new front of disruption in line with macro trends inducing digitization, gamification and globalization.While such tokens present fans with many new ways of interacting with the teams that they love, one is left to wonder what aspects of sports this progress leaves to history. With easier to reach global fan bases and active markets reacting to daily team progress, will the sports teams of tomorrow be able to hang on to their local roots, or will they become global actors with little connection to their old hometown glory?