The rise of the Ethereum-powered, NFT-based fantasy football league operator Sorare has made it a Web3 unicorn, but its business model has also attracted the attention of gambling regulators, reports Jake Pollard.
The speed of Sorare’s rise has been breathtaking. Founded in 2018 by Nicolas Julia and Adrien Montfort, the group is now valued at $4.2bn (£3.4bn/€4.0bn). It raised $680m in September 2021 as part of its most recent funding round.
Investors include the great and the good of tech startups. SoftBank, Accel, Gary Vaynerchuk and Reddit co-founder Alexis Ohanian have all invested alongside high-profile football stars such as Rio Ferdinand and Antoine Griezmann. Then there’s the biggest of all, and arguably the best player in the world, Kylian Mbappé, who also acts as a brand ambassador for the group.
Sorare’s corporate rise has been accompanied by high praise and strong backing from opinion formers in its home country. As well as having Mbappé on board, the group is also the official Web3 token provider of the Paris 2024 Olympic Games. It is celebrated by French executives and politicians as a homemade Web3 unicorn.
Regulatory attention
Sorare, in common with fan token provider Socios or crypto exchange giant Binance, has signed myriad deals with sports clubs and leagues. This includes a recent $30m-per-year partnership with the English Premier League.
The profile Sorare has achieved, especially in the past two years, has been spectacular. As with other emerging products where fantasy gaming, NFTs, crypto, fintech and Web3 converge, it has also attracted the attention of gambling regulators such as l’Autorité Nationale des Jeux (ANJ) in France.
The GB Gambling Commission CEO Andrew Rhodes also chimed in recently. In a speech to gambling executives he said the Commission would be putting more resources into understanding whether synthetic shares, crypto-backed NFTs and other Web3-type products were relevant to gambling regulators.
This followed a warning to consumers in 2021, after the regulator began to investigate the business.
With regard to ANJ, it has been in contact with Sorare about its business model since March. The regulator decided to investigate it more closely to see whether it was equivalent to offering real-money sports betting in the way a bookmaker does or, maybe more relevant to Sorare, acting as a betting exchange.
Fantasy model
Sorare operates by issuing virtual player cards as NFTs. Users purchase these through the Ethereum platform and use them to create fantasy teams. The cards can be traded on Sorare’s digital marketplace/exchange, with their value rising or dropping depending on the real players’ performances on the pitch.
The impact that the players’ performances have on the value of the cards is what piqued ANJ’s interest. With users required to pay to enter the Sorare offering this is not surprising. As with other real-money gaming products, consumers take part in Sorare fantasy tournaments through a financial stake that can lead to financial gains or losses.
Following ANJ’s approach, Sorare chief executive Nicolas Julia said the money spent to acquire the cards does not represent a betting stake and their value is not linked to real sporting performances.
He added that Sorare players get to keep their cards and can use them repeatedly, as opposed to a betting stake that is lost forever in the case of a losing sports bet. This, he said, was another feature that distinguishes Sorare from a sports gambling offering.
Compromise agreement
In mid-November ANJ published its ruling and said Sorare had agreed to “strengthen free access” to its tournaments as a way to address ANJ’s “serious doubts regarding the legislation on gambling that this part of the offer raised”.
Sorare would not be required to obtain a sports betting licence in France, but must implement those changes by 31 March 2023. ANJ added that the “response is a transitional but essential step before the adoption of a permanent solution which requires an adaptation of the legislation to bring these new Web3-related activities within the framework of the regulation operated by the ANJ but with specific modalities”.
iGB asked Sorare how the emphasis on “free access” would be put into practice. The group said its offering would evolve “by opening up new gaming possibilities for free users”.
It added: “Sorare has always sought to innovate, and this development is part of the company’s roadmap. This change will provide new gaming and strategy opportunities for users. This will be in everyone’s interest, including current players, who will benefit as the Sorare community grows.”
Asked if it was anticipating a significant drop in revenues from its French market activities as a result, it said: “When you invent a model like Sorare’s which has never existed before, it is natural that the offering evolves and improves over time.
“Sorare is first and foremost a game. It is not presented or marketed as an investment or financial product. Today, 87% of our users play for free. Our objective is to grow the community. There is no reason the value of the cards should depreciate.”
Common as muck
The group clarified that the 87% figure refers to Sorare users being able to buy non-NFT cards, called “common cards”, that they can use for free when they join the platform. The implication of course is that Sorare users must still purchase the NFT cards that make up all its “Unique”, “Rare” or “Limited” editions. Sorare told iGB that it could not share any further details on this point currently.
The rise of Sorare is a clear case of a startup harnessing new technologies and developing a product that regulators were not prepared for. In fairness Sorare would likely include itself in that description.
The topic however is highly sensitive in France and the fact that no lawyer involved in the French tech scene was willing to comment on the issues raised in this feature testifies to that. Equally for Sorare the stakes are very high: should ANJ decide that it must apply for a sports betting licence, it could have major ramifications for the rest of its activities worldwide.
The question of player intent is another key aspect of the debate. Whether we look at it through the prism of sports betting or even financial speculation, players who take part in Sorare’s fantasy football tournaments, just as those who purchase and trade fan tokens on Socios, will do so in the expectation that the value of their digital goods will rise.
All this partly explains why those Web3 companies are so desperate to not be associated with any form of gambling (or financial speculation) and it is why ANJ expressed “serious doubts” with regard to Sorare’s business model.
As for emphasising free-play access to its products, the question needs to be asked of Sorare whether it will remove the requirement for players to purchase NFT cards to take part in its fantasy tournaments because that is the crux of the issue.
Therefore it will be interesting to see how ANJ views the company’s moves to “strengthen free access” to its tournaments when it carries out its review in March 2023.
