By James Newman, Co-Founder and Co-Head of perfORM Due Diligence Services and Quentin Thom, Co-Founder and Co-Head of perfORM Due Diligence Services.
Amid major investment, prolific spending on sports sponsorship and plummeting markets, it hasn’t always been easy to keep pace with the fast-moving cryptocurrency sector.
The last few months have seen companies file for bankruptcy and bitcoin hit its lowest level since 2020 in a greatly unregulated sector where opportunity and risk never feel far apart. For sports organizations looking to enter the complex world of crypto, it presents a unique commercial challenge.
“We’ve seen those risks manifest themselves in so many ways,” Quentin Thom, co-head and co-founder of PerfORM Due Diligence, tells SportsPro. “You’re dealing with highly unregulated, fast-growing organizations that are very difficult to understand.
“We’ve seen lots of examples of, almost, livid activism from fans around the commercial decisions teams have taken.”
Crypto has been identified by sponsorship executives as a significant growth opportunity and some of the most prolific spenders, such as Crypto.com and FTX, signed deals worth hundreds of millions of dollars. However, cracks are already starting to appear.
In July, the Voyager Digital platform filed for bankruptcy, casting doubt over its lucrative sponsorship deals with the likes of the National Women’s Soccer League (NWSL), the National Basketball Association’s (NBA) Dallas Mavericks and Nascar Xfinity Series driver Landon Cassill. There is some irony in that part of its NWSL tie-up included Voyager educating the league’s players on crypto to support long-term financial opportunities. Prior to that, crypto-based fan engagement platform Iqoniq, which boasted deals with LaLiga, EuroLeague Basketball, the McLaren Formula One team and English soccer’s Crystal Palace, went into liquidation.
As the ‘crypto winter’ sets in, US sports franchises such as the Los Angeles Angels and Washington Wizards reportedly lost out on major sponsorship deals with crypto firms. Crypto.com and Coinbase, which has also invested significant sums in sports partnerships over the last 12 months, have laid off chunks of their workforce.
Then there is the environmental impact to consider. Crypto requires a hefty amount of electricity to compute, a situation sport needs to address as it simultaneously works to do more to tackle the climate crisis and meet ambitious sustainability targets.
It has resulted in what Thom describes as a “medley of risks” for those trying to make sense of crypto. It is a complicated space that has got very big very fast, initially providing plenty of opportunities for sports leagues and teams globally. The temptation, especially given the revenue holes created by Covid-19, has been to cash in quickly, often at the expense of proper process.
To ensure that vetting stage is carried out effectively, PerfORM exists to conduct reviews of virtual asset service providers (VASPs), giving clients the confidence and knowledge required to assess potential crypto partners. Services from the London-based company, which launched in 2019, include a deep dive into how organizations protect their assets in the event of a bankruptcy or broad-based restructuring.
Boiling it down, PerfORM is able to present key information around the structure of an organization, how it is staffed, how it deals with and protects customer assets, disaster recovery, cybersecurity and business operations.
“We go and perform a robust operational due diligence review,” says Thom. “What’s that? Well, it’s a lot of information gathering, sometimes through data rooms, sometimes through other means.
“It’s about listening, understanding and verifying. Doing interviews with people, walkthroughs of processes and procedures, speaking to service providers and taking references. Doing various other procedures that ultimately culminate in a research report, which is typically 40 to 50 pages.
“It is an operational biopic, if you like, full of qualitative and quantitative information to help the sports team make an informed decision.
“While the VASPs themselves can now hire us, they can’t change the content of the report. They can’t manipulate whether things are said positively or negatively. But they do get to see the report and check it for factual accuracy. Then they can distribute it, through us, to these sports teams free of charge.”
The so-called ‘ODD’ report is not a one and done. Firms like PerfORM aim to update its findings at least annually for its clients given the changing nature of the sector.
“The crypto space and the firms that operate in it are in a completely new industry, operating in a largely unregulated and volatile environment,” says James Newman, Thom’s fellow co-head and co-founder.
“Operational due diligence is an essential, new tool that can be used to understand what that crypto business is. It’s not background checks, although we know firms that can perform those on individuals and business entities. It’s not performing KYC [Know Your Client] or anti-money laundering checks on individuals. It’s not mergers and acquisitions.
“It’s more a case of looking at that firm, looking at the business, looking at its structure and comparing that with our deep understanding and knowledge of the space as to whether they are of an institutional standard.”
Manchester City are one club to have found themselves under the microscope over such standards. The Premier League champions suspended their tie-up with 3Key Technologies last November after facing questions over the company’s legitimacy.
Embarrassingly, it transpired 3Key’s website had no contact details, registered office or company number, while its named staff appeared to have no digital footprint. City will be hoping to have better luck with their expanded OKX deal, which was announced earlier this month.
“What we’re seeing in crypto right now is a taste of the volatility,” says Newman. “There’s certainly going to be a few lumps and bumps along the road.”
Given the amounts crypto brands have been willing to spend on sport, it might be tempting to force through deals, especially if sponsorship executives are under pressure from above to generate more revenue. According to Newman, however, the risk does not outweigh the reward.
“Failing to do due diligence is going to put you at a significant disadvantage,” he says. “With the VASPs, you can get under the bonnet, you can look at what they’re doing.
“From a business, commercial and organizational perspective, you can understand which are those that are really pushing the envelope in terms of financial risks to themselves, potentially regulatory risk, potentially headline risk.
“There is a distinction between what we would call traditional crypto process and operations versus those that are much more technical and complex. As a result, what we’re seeing in the market right now is that those complex crypto organizations are the ones that are getting into trouble.
“In times of stress, we’re at that point where that tide is now going out. You’re really getting to see who’s wearing swimming trunks and who isn’t.”
PerfORM does not see itself as a thorn in the side of crypto businesses, however. Newman and Thom maintain they want to enable commercial opportunity rather than prevent it. The pair simply believe sports organizations should have access to a reliable, go-to service so they are able to operate in a more informed and safe way.
“We’re here to add potency to the process,” adds Thom.
Considering the industry’s appetite for innovation and new technologies, the growing presence of crypto within sport should not come as a surprise. Still, leagues, teams and athletes are facing a steep learning curve as scrutiny intensifies.
“Within this industry, you really have to understand the technology and how this works in order to understand the business,” notes Newman. “That really does mean going back to scratch, really understanding the fundamentals of crypto, of digital assets, of how it works.
“The beauty of what we’re doing here is that we’re supporters of the crypto industry. In the discussions that we have, with the targets that we’re reviewing, we’re showing the information that we’re finding. That in itself acts as a catalyst for standards to improve and provide confidence to others looking to invest or be involved.”
It may well be that sport’s ongoing relationship with crypto proves to be a false dawn. Newman and Thom, though, believe that the dynamic is still in its early stage. Inevitable change further down the line means organizations will have to be prepared to react appropriately in order to negate financial or reputational damage.
That means there is an element of education that needs to take place in sport that perhaps isn’t required so much in other industries.
“Investment managers, for example, they’ve had dedicated fund products in the crypto space now for some time,” says Thom. “Even banks who have commodities and exchange traded platforms that have been going around for decades have added crypto. They’ve got some sort of track record of learning or being part of the journey of crypto and digital assets in their own way.
“For sports, it feels like it’s brand new. So that’s the stark difference here. Yes, you’ve seen all these fantastic deals that have been going on, but that education is very real time.
“Other sectors, quite frankly, have a little bit more insight and exposure through their established work in this space.”
Having peaked at US$3 trillion last November, the crypto market has fallen to around US$1 trillion, with the drop-off compounded by the collapse of the stablecoin TerraUSD in May. By way of comparison, traditional finance is worth approximately US$40 trillion.
Calls for crypto regulation continue to ring out. For Newman, it is a question of ‘when’ rather than ‘if’ that arrives. And with that will come extra responsibility around business conduct.
“Regulation is absolutely necessary,” he says. “The vast majority of those in the crypto space welcome it, but they are somewhat at different stages along the timeline of preparing for regulation.
“I don’t think regulation will be a panacea for volatility. But I think it will be the foundations that are necessary in order to hold up the crypto industry to the stresses and strains that it will be subject to, just like any other commodity or asset.”
In that respect, various bodies have already waded in. In December, the UK’s Advertising Standards Authority (ASA) investigated whether adverts promoting Socios fan tokens by Premier League outfit Arsenal took advantage of consumers’ inexperience or credulity and trivialized investment in crypto assets. The watchdog also looked at whether the adverts failed to illustrate the risk of the investment and did not make clear the token was a crypto asset, which could only be obtained by opening an account and exchanging with another cryptocurrency.
The ASA concluded that the adverts ‘trivialized investment in crypto assets and took advantage of consumers’ inexperience or credulity by not making clear that CGT [Capital Gains Tax] could be payable on profits from investing’. It added that ‘the ads were irresponsible and breached the code’.
As for what to look out for in the crypto sector in the near future, Thom expects “a lot more growth” as well as various “loud growing pains”. Web 3.0 and the metaverse are also set to have a bigger part to play.
“It’s going to continue to be very busy,” he continues. “I think you probably will see some consolidation of VASPs. And I don’t think that’s necessarily all because of market stress. I think that could be quite strategic.
“So, you will probably see some very large groups becoming top tier, so to speak, in certain elements and having reputations associated with that. Hopefully, you’ll see the emergence of our kind of work more noticeably associated with those groups demonstrating best practices.
“You’ve got to accept that there’s going to be a bit of volatility as well in terms of workforces. There’s definitely going to be a bit of a journey. But, long term, I think you’re going to get continued participation and acceptance by the institutional community, which we work very closely with.
“All of this is going to be helped by a better understanding, further adoption and proportionate, regulatory approach adopted by governance and governments in this space, which should lead to very positive outcomes.”
About perfORM:
James Newman, Co-Founder and Co-Head of perfORM Due Diligence Services is a 23+ year ODD professional across multiple asset classes responsible for ODD on investment managers, funds, managed separate accounts and service providers including administrators, custodians and prime brokers.
He is a regular speaker at events and leader in the field of ODD. Prior to establishing perfORM, James held the role of Global Head of Operational Due Diligence at Barclays Wealth where he was responsible for developing and leading operational risk assessments across the bank’s retail and non-retail investment product offerings. He was co-Chair of the Manager Selection Committee where he had veto rights over all alternative investment allocations. He is a regular speaker at events, including GAIM. It was at Barclays that James led an allocator delegation to negotiate fund corporate governance standards with the Cayman Islands Monetary Authority and pioneering private equity ODD in 2012, an industry first. Before joining Barclays, James created the operational risk platform at Liberty Ermitage Group in Jersey and in London, where he successfully vetoed an investment in Madoff in 2008, preventing significant losses and reputational damage to the firm and its clients. Before becoming part of the hedge fund allocation team, James was the Finance Director and Compliance Officer in London responsible for managing financial and compliance affairs. James has a BSc degree from Loughborough University and is a Chartered Certified Accountant.
Quentin Thom, Co-Founder and Co-Head of perfORM Due Diligence Services is a business development professional with a strong background in ODD and an extensive senior global network across Investment Managers, Allocators, Service Providers and Trade Associations. He is the former EU Head of Global Prime Finance Consulting at Deutsche Bank, where, as a fully FCA regulated equity salesperson, he focused on the delivery of institutional investor ODD ‘therapy’ and readiness consulting, plus cutting-edge industry content for alternative investment clients and prospects, ranging from start-up hedge fund managers to the largest groups in the alternatives industry. Quentin, a regular speaking at events, has over 20 years’ experience within financial services; he was UK Managing Director of a leading independent ODD certification provider for Investment Managers, where he worked with and reviewed some of the largest alternative investment managers across the industry, whilst also meeting and educating Allocators across the globe of the importance and practice of ODD. Quentin has also gained extensive consulting experience including while working for one of the ‘Big 4’ accountancy firms. Quentin has an Economics (Hons) degree from the University of East Anglia (UEA).