Blockchain company, DigitalBits, recently missed its initial 3-year sponsorship payment to Inter Milan. Imminent legal action following this instance and many others of its kind serve as a perpetual reminder of increasingly precarious, yet desired partnership with cryptocurrency firms. Beyond industry susceptibility to fraudulent practices and reputational vulnerabilities, the volatile nature of the crypto market poses financial risks to entities scouting sponsorship deals. As such, with cryptocurrency entities approaching USD 5 billion in sponsorship deals, failure to conduct operational due diligence into potential partners bolsters vulnerability to a plethora of unexpected risks.
The opportunity becomes the issue
Over recent years, sponsorship executives of sports entities have identified significant growth opportunity in partnering with cryptocurrency firms. For illustration, in November 2021, digital platform crypto.com acquired the naming rights of the NBA’s Los Angeles Lakers’ Staples Center as part of a 20-year, USD $700 million deal. In March 2021, Cryptocurrency exchange FTX similarly signed a 19-year, USD $135 million deal for naming-rights of the NBA Miami Heat’s home venue, now FTX Arena. Despite the clear financial benefits in partnering with these companies, however, risk inherently lingers when operating in an unregulated sector.
DigitalBits, previously a sleeve sponsor for Inter Milan, is currently the main shirt sponsor for the 2022/2023 season. In September 2021, the Italian football club announced a three-year EUR 85 million partnership with Zytara Labs, the entity that owns DigitalBits. As a result of a failed payment, Inter Milan is seeking to limit DigitalBit's brand visibility, removing associated marketing assets from its official website, billboards on the side-lines of its stadium as well as from their women’s first team kit. Beyond reputational brand damage, potential revenue loss will likely further aggravate Inter Milan’s already fragile financial status. Italian news outlets have reported that the club is already considering legal action against the cryptocurrency entity.
DigitalBits’ issues with Inter Milan, unfortunately, did not come as a surprise. In January 2022, fan engagement platform Iqoniq – who sold cryptocurrency tokens amongst other products – went into liquidation, despite having transacted in numerous sponsorship deals with the football team’s Real Sociedad and Crystal Palace, as well as the McLaren Formula One Team. Moreover, in July 2022, cryptocurrency platform Voyager Digital filed for bankruptcy, despite having signed 2021 partnerships with the NBA’s Dallas Mavericks and the United States Women’s National Soccer League. In the latter's case, ironically, the platform was due to provide crypto-investment financial education to the players. In 2023, a court ruling allowed Miami Heat to terminate their sponsorship after FTX’s collapse in November. Athletes such as the NFL’s Tom Brady, the NBA’s Stephen Curry and tennis star Naomi Osaka also faced lawsuits for endorsing FTX.
The risks of a sponsorship deal with a cryptocurrency firm
Cryptocurrency is a novel industry; most brands operating in the space are inexperienced and still testing market feasibility. Beyond the financial risks posed against entities operating in volatile markets, crypto assets appear highly susceptible to fraud and manipulation, as well as money laundering and terrorism financing risks. As such, crypto-involved brands have very little resonance with fans. Members of these entities, consequently, struggle to create a sense of emotional connection with customers.
Sports companies who fail to conduct operational due diligence with respect to potential partners remain vulnerable to a host of unexpected risks. As governments, sport governing bodies and regulators look to crackdown on cryptocurrency entities, risk capacity will only increase. According to Nielsen’s 2022 Global Sports Marketing Report, blockchain companies are projected to reach USD 5 billion in sports sponsorship by 2026. As such, it is essential that sports entities mitigate and anticipate the risks of partnering with crypto entities; seeking assistance from specialists who can assist them with making informed decisions.
What can be done to mitigate these risks?
The warning signs associated with most of these entities can be previously mitigated. As such, comprehensive pre-engagement due diligence can prepare sports entities for adversities that may arise from their commercial relationship with these companies.