Written evidence submitted by Sorare

 

DCMS Select Committee

Non-fungible tokens (NFTs) and the blockchain

 

Executive Summary

 

        Sorare is one of the world’s leading Web3 gaming companies. Our collectibles and gaming platform is enjoyed by fans around the world, and we’re the official partners to some of the biggest clubs, leagues, and players. We have a unique perspective at the top of this emerging sector, and want to help the UK become a global hub of blockchain innovation and economic growth.

        Web3 is already growing at a rapid pace, with 2021 seeing the sector grow by an extraordinary 75%.[1] Ownership is what separates Sorare from traditional gaming, and it’s why we think our platform, and other Web3 gaming experiences, are the future of the sector. This model of gaming is set to become the standard as more and more digital services transition to the metaverse, and supporting it would play to the strengths of the UK economy.
 

        As a leading platform in the market, we want to help the UK create a regulatory framework that encourages growth whilst protecting consumers. We therefore support a bespoke and tech -neutral regulatory framework which enforces these good practices and focuses on the application of NFT technology, rather than the underlying technology itself.

        If the UK gets its approach to regulation right, it could protect consumers and support football clubs with a new source of revenue, while simultaneously supporting the UK Government with its ambitions to attract inward investment and create high-value jobs of the future.

 

About Sorare

 

Since launching in 2018, Sorare has rapidly become a global leader in the collectables market and is one of France’s largest tech unicorns, worth £3.2bn. Our platform connects fans with their passion for sports. Users can buy, sell, and trade digital sports cards with each other, and also have the option to participate in free-to-enter fantasy games. Our cards can be best thought of as the digital version of paper football trading cards, bringing a long-held tradition into the modern era.

 

Sorare was created by football fans for football fans, and we are fully committed to the future of UK football. We have partnerships with half of the world’s major football leagues, including Spain’s LaLiga, Germany’s Bundesliga, Belgium’s Pro League, and the US’s MLSPA, alongside partnerships with individual clubs like Liverpool. We are proud that the growth of our business has also allowed us to support clubs up and down the football pyramid in the UK. Partnerships with Norwich City, Millwall, Watford, Burnley, and Coventry City, as well as the entirety of the Scottish Premier Football League earlier in the year, are allowing us to provide clubs without access to major TV deals with a vital new source of revenue. 

 

This experience gives us a unique perspective at the top of this emerging industry, and we are keen to work with policymakers and Government to help create the right conditions for Web3 companies to thrive and drive economic growth across the economy.

 

The digital assets industry in the UK

 

A new product for the digital century

 

Sorare is one of the world’s leading innovative Web3 gaming platforms. Ownership is what separates Web3 games, like Sorare, from traditional gaming. Game items, such as our football cards, are actually owned by users, allowing them to freely use, sell, or swap them, irrespective of whether they participate in the game itself. To prove ownership, Web3 platforms use blockchain technology - a publicly available ledger distributed and authenticated across a worldwide network of computer systems - to make it impossible to forge ownership.

 

NFTs are opening up a new ecosystem of interoperability in the gaming world, with many platforms developing NFTs which can be shared, traded, and used between different platforms, giving them new utility to fans and gamers. This contrasts to most traditional games of the past, where in-game items cannot be traded outside that developer’s platform. We believe interoperability is central to the gaming industry's future, and this is just one example of the way NFTs stand to revolutionise digital spaces.

 

The benefit of using blockchain technology is that it allows our users to have an indisputable digital certificate of ownership, giving them full control over their collectibles to play, trade, and sell them. Blockchain technology also prevents our products from being copied or duplicated, protecting our licensors like leagues and clubs as well.

 

It is for these reasons that many new companies are using blockchain technology to build the next generation of online platforms as part of the emerging Web3 ecosystem. Web3 emphasises a bottom-up, democratic approach to technology and online communities, rather than today’s highly centralised Web2.0 ecosystem. We expect blockchain to underpin the next generation of the internet, providing the backbone of the information sharing infrastructure. This will decentralise the internet away from Big Tech and financial institutions, giving ordinary people control over their data.

 

Understanding the differences between different blockchain products

 

Web3 has developed very quickly, and uses new terminology unfamiliar to most of us, so it is not surprising that even regulators have found it challenging to understand where in the UK’s regulatory framework NFTs and other non-financial blockchain products sit.

 

Due to the diverse uses of blockchain technology and NFTs, regulating all products that utilise NFTs under the same set of rules would not create an additional level of protection for consumers or deter bad actors – but it would seriously risk stifling innovation in different creative and other non-financial sectors on which the UK relies to drive innovation and economic growth. Regulation must be tech-neutral and focus on the application of NFT technology, rather than the underlying technology itself.

 

The specific use cases for an NFT, its utility for its audience, and the market around it all change the level of consumer protection risk that an NFT poses. The nature of the NFTs in the collectibles Web3 gaming market – including Sorare digital collectibles – make these NFTs distinct from the traditional art market and even the digital art market. NFTs in the gaming environment are a particularly poor vehicle for large-scale, systematic illicit financing schemes because they are sold at retail price and all transaction information is publicly available and can be reviewed by anyone. Transactions, including for Sorare NFT digital collectible cards, are documented on the blockchain as a way to give our users transparency, including the ability to verify the ownership, authenticity, and sales history of an NFT.

 

While the transparent nature of the blockchain makes it more difficult to hide illicit activities in connection with NFTs, Web3 gaming platforms like Sorare have additional layers of protection because of the way the products are built. In Sorare’s case, we provide a secure payment processing system for our users by partnering with notable payment processing platforms like Stripe, Ramp, and Moonpay to handle credit card payments and transactions in cryptocurrencies, and with state-of-the-art anti-fraud technology providers to prevent attempts of market manipulation and unfair behaviours for our community.

 

These partnerships allow us to leverage the safeguards in the traditional financial services sector to protect our users, and these processors are subject to applicable financial and consumer protection regulations and have robust anti-money laundering, counter-terrorist financing, sanctions, anti-fraud, and Know Your Customer (KYC) systems. Bad actors seeking to use NFTs from companies that partner with reputable third-party payment processors would need to defeat the companies’ internal systems and the systems of those payment processors to carry out their illicit activity.

 

These distinctions between different types of NFT platform design means it would be inappropriate for all NFTs to be regulated as if they were financial products, and a more flexible and tailored regime is needed to take into account individual use cases.

 

The Government has already recognised the important distinction between cryptoassets used as financial products and those that are not, stating in its response to the consultation on cryptoasset promotions in January 2022:

 

Non-fungible tokens were carved out [from regulation] because fungibility – a core characteristic of a range of regulated financial services products, such as stocks and bonds - is a characteristic HM Treasury considers makes a cryptoasset significantly more likely to give rise to consumer protection concerns…Unlike fungible assets which can generally be sold more easily and quickly, the sale of non-fungible tokens typically depends on the utility or unique value it gives the holder and is more akin to a digital collector item than financial services products.[2]

 

We believe that, in order to make this distinction clearer moving forward, a new lexicon needs to be developed which makes it clearer for the average consumer what type of blockchain product they are using. It is for this reason that we don’t refer to our products using the term ‘crypto’, because that prefix has become too strongly associated with currency and financial products.

 

The potential for digital assets in the UK

 

Blockchain technology has the potential to boost global GDP by $1.76trn over the next decade, with the potential for £57bn to come from the UK alone, according to a report on the impact of the blockchain industry from PwC.[3] Not only will blockchain businesses create new jobs - even new sectors - it also has the potential to support other businesses by making online processes faster and creating a greater sense of trust and transparency in the digital economy.

 

In the UK, PwC’s research showed that the biggest beneficiaries from blockchain technology look set to be the public administration, education, and healthcare sectors - which can benefit from eliminating paper-based credentials systems, saving time and money, improving efficiencies, and helping to eliminate fraud. Meanwhile, there will be broader savings for the business services (£15bn), wholesale and retail (£13bn), and communications and media (£5.3bn) sectors by 2030.

 

The market for new businesses built on blockchain is expected to grow significantly over the next few years, representing an enormous new opportunity for economic growth for those countries that create the right environment for businesses like Sorare to scale.

 

The Government has a chance to embrace the opportunities that the post-Brexit landscape offers the UK by forging its own path. By taking an agile and flexible approach, embracing innovation and enabling inward investment, the Government can help support rapid growth in the digital economy. But it faces stiff competition overseas. High-growth economies such as the UAE, Singapore, and South Korea have committed to keeping NFTs out of regulatory frameworks for the foreseeable future, allowing the market the freedom to mature and grow.

 

Sorare wants to help the Government realise its ambition for the UK to become a global hub for startups and new businesses. We are keen to work closely with policymakers to create a framework that is fit for purpose and designed to encourage new startups in the blockchain industry, create thousands of new well-paid tech jobs, attract new inward investment, and maximise growth for the UK economy.

 

Web3 is set to become the global standard for the next generation of gaming, and is part of the general transition of digital services to the metaverse. Globally, Web3 is already growing rapidly, with Electric Capital estimating that 2021 saw the sector grow by an extraordinary 75%.[4]

 

The UK currently leads the European gaming market with the fifth largest gaming industry in the world, so supporting the emerging Web3 gaming industry would play to the UK’s strengths and offer a new opportunity for growth.[5] Gaming in the UK has a market size of £5.89bn and employs 47,000 people - most of whom are highly skilled. The number of people who play video games in the UK has risen from 33m to 36m over the past year, including mobile games.[6] By putting in place a credible but flexible regulatory framework for Web3 innovation, platforms like ours stand to benefit the UK economy, supporting thousands of jobs and boosting economic growth.

 

Other Governments have already spotted the opportunity on offer from Web3 and are taking rapid action to gain a competitive advantage. For example, Singapore has introduced tax incentives for Web3 startups[7] and has already seen success in bringing businesses across from Japan, while Estonia has already taken steps to restructure its data laws to be compatible with future developments in Web3.[8]

 

Creating a regulatory framework for growth

 

With the right regulatory approach, the UK could become a global hub for Web3 startups, supporting thousands of jobs and bringing billions into the economy. A thriving Web3 market can help the Government deliver its ambition for the UK to become a high-wage and high-skilled economy, while attracting inward investment.

 

While the relatively low-burden environment in which Web3 providers currently operate in the UK is positive, issues with the status quo still need resolving. Regulators have both been confused by the nature of the products, which has led to unnecessary and damaging interventions on spurious bases.

 

We also need to ensure that we have an outcomes-based approach that protects consumers from potential harm. We strongly condemn the practice by some, including some in the football industry, of targeting unsophisticated investors with NFT investment schemes, and we are keen to work with policymakers to design a proportionate framework to prevent this while giving innovative tech businesses the best circumstances in which to startup and grow. The UK needs a flexible and tailored regime that focuses on the application of NFT technology, rather than the underlying technology itself.

 

The UK should look to other international markets for an example of how this could be done. For instance, the EU has provisionally left the majority of NFTs out of scope of its Markets in Cryptoassets (MiCA) regime. Instead, it focuses on regulating large collections of NFTs where the majority of risks lie, given the market is currently focused on several large investors (principally as the market is very nascent). This is a proportional, risk-based approach that would enable the UK to regulate more established cryptoassets like cryptocurrencies, but allow the NFT market to develop before implementing regulation that is immediately out of date.

 

By creating a bespoke regulatory framework for Web3 gaming platforms like Sorare, instead of attempting to regulate it through ill-suited existing regulations, the UK has an opportunity to set the global standard in this rapidly growing industry, giving UK companies an advantage when expanding into other markets and attracting new investment.

 

The opportunity for the UK

 

By creating the right environment for growth now, the Government can help realise a number of its strategic objectives:

 

        Create high-value jobs of the future. With the right regulatory approach, the UK could become a global hub for NFT startups and high-growth businesses, supporting thousands of jobs and bringing billions into the economy. A booming NFT market can help the Government deliver its ambition for the UK to become a high-wage and high-skilled economy.

 

        Increase inward investment. New NFT businesses are growing quickly, attracting major investment and expanding into new markets like the UK, bringing the potential for jobs and investment to the UK economy. By creating the right environment for NFT businesses to grow, the Government can support the UK’s international competitiveness. The potential rewards here are huge, with Sorare the ultimate example of this, recently raising £520m in our latest funding round.

 

        Grow key sectors and extend the UK’s soft power. By adopting a forward-looking approach, the Government can support key sectors of the economy where the UK already has a competitive advantage, like arts and culture, entertainment, media and sports. Enabling businesses in these sectors to harness this new technology will boost growth, bring new jobs to the UK and extend the UK’s soft power around the world.

 

 

 

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[1] Electric Capital, ‘Developer Report 2021’, 2022.

[2] HM Treasury, ‘Cryptoasset promotions: Consultation response’, 2022.

[3] PwC, ‘Time for trust: How blockchain will transform business and the economy’, 2020.

[4] Electric Capital, ‘Developer Report 2021’, 2022.

[5] Global Data, ‘Video Gaming in the UK: Industry Overview’, 2022.

[6] Statista, ‘Video game market in the United Kingdom - Statistics & Facts’, 2021.

[7] Yahoo! Finance, ‘Singapore’s low taxes draw Japan’s Web 3.0 companies’, 2022.

[8] ​​Invest in Estonia, ‘Estonia is betting on Web3 – building the blueprint for others to follow’, 2022.