House of cards: Can Sorare be classed as a gambling product?

“Quelle Fierté”, or what pride, exclaimed Bruno Le Maire, France’s Minister of the Economy, in a LinkedIn post last month highlighting four promising French start-ups and how much three of them had each raised in their latest funding rounds. “Believe me, something very big is happening right now in our country,” he gushed. At the top of the quartet Le Maire singled out was Sorare – a fantasy football game that uses non-fungible token (NFT) trading cards – after the Paris-based outfit secured $680m in a Series B funding round led by Japan’s SoftBank. Sorare hailed it as the largest ever Series B raise in Europe, taking the company’s valuation to an eye-popping $4.3bn. To put that into context, the combined market cap of Kindred Group and Betsson AB is around $4bn at the time of writing.

Yet it seems this nine-figure cash injection, and all the media attention in the technology and crypto press it garnered, may have not gone unnoticed by staff at the UK Gambling Commission’s (UKGC) HQ in Birmingham. On 8 October, the regulator issued a ‘consumer information notice’ warning the public that Sorare is available to consumers in Great Britain but “is not licensed by the Gambling Commission”. The UKGC added that it was currently carrying out enquiries into the company to establish whether Sorare.com requires an operator licence or whether “the services it provides do not constitute gambling”.

Gambling? No, sir

Sorare responded in a statement by saying it was “normal and expected” to receive regulatory questions” with a new product with nascent technologies, while adding: “We are very confident Sorare does not offer any forms of regulated gambling. This has been confirmed by expert legal opinions at every stage since the company was founded, including during a number of fundraising rounds.” So how exactly does the product function? Sorare allows users to enter its five-a-side fantasy football contests, known as SO5s, with digital cards, similar to Panini football stickers swapped in the playground. Fantasy football contests have cash prizes (paid out in the cryptocurrency ether) and digital cards up for grabs.

The cards themselves have varying degrees of scarcity and can be bought and sold with other players, with transactions and ownership verified on the ethereum blockchain. At the time of the Series B raise in September, Sorare revealed $150m worth of cards across 170 countries had been traded since January. Sorare, which makes money from ‘minting’ and selling new cards, is now partnered with almost 200 football clubs, has 6,000 licensed professional footballers, and says it has 150,000 MAUs. No wonder France’s Minister of the Economy was eulogising about the rapid growth. But why has the UKGC acted now when Sorare has been available to UK consumers since its launch in 2019?

Sorare founders Nicolas Julia (left) and Adrien Montfort

Melanie Ellis, partner at Northridge Law, says the Gambling Commission monitors multiple websites but has limited resources, so follows a risk-based approach. “This means it will take regulatory action against unlicensed operators only when the impact on consumers is sufficiently great,” she explains. “In some cases, as with Sorare, the Gambling Commission first needs to spend time and resources assessing whether the business falls within its regulatory remit.” Ellis adds: “The recent $680m fundraise by Sorare is almost certainly what triggered the current investigation, as it will have brought the operator to the Gambling Commission’s attention and demonstrated the likelihood that it has already attracted a significant number of British customers.”

Keeping stock

Anecdotal evidence would seem to suggest a number of those who were users of Football Index, the self-styled football stock market which collapsed in March after its parent company, BetIndex, had its UK gambling licence suspended, also played on Sorare. Others appear to have made the switch after Football Index went into administration. With the UKGC attracting a barrage of criticism for not suspending the licence sooner – and for licensing the product in the first place – the regulator perhaps wants to be seen to be proactive. Especially when consumers can easily spend some hefty sums on a product not overseen by the UKGC or the Financial Conduct Authority.

While the cheapest cards go for a few pounds or euros, the more desirable ones can sell for thousands, or tens of thousands. For example, a user by the name of basilp is currently selling a ‘Super Rare’ Kylian Mbappé (the first card in a limited batch of 10) for almost €45,000. Indeed, there are dozens and dozens of cards going for five figures. The most ever paid for a card was almost $290,000 for a one-of-a-kind edition of Cristiano Ronaldo. SorareScout.com, a Sorare resource website, recently suggested users spend between £200 and £450 to build a “competitive team”. And even this outlay may not be enough with the price of cards rising significantly in 2021 as more and more people join the site (MAUs rocketed 34x between Q2 2020 and Q2 2021).

You can enter those same initial cards into fantasy contests for years without spending any more money, or you can choose to play for free with the starter pack of ‘common’ cards given when signing up. These can’t be sold, and they also offer very little chance of winning any significant prizes in fantasy contests. One tactic is to spend under £100 on more of the less rare cards and try to ‘flip’ them in the secondary market. Then, repeat over and over to try to build a bankroll. Rather than the speculation aspect of the product, both Ellis and Richard Williams from Keystone Law question whether the UKGC will focus its attention on the fantasy football element as this could fall under the category of pool betting, which is regulated.

Yet these five-a-side games where you enter a goalkeeper, defender, midfielder, forward and a utility player are free to enter. Unlike a traditional DFS game found on DraftKings or FanDuel that comes with an entry fee, buying a ‘squad’ of players is classed as the entry fee on Sorare, if you like. The prize for winning a competition by accumulating the most points from your players’ on-pitch performances might be 0.5 ether (around £1,500 at the time of writing) and a rare card. “Whereas on the surface this may look like pool betting, I think there are some significant differences that takes this away from being a gambling product,” argues Stefan Kovach, an NFT evangelist and MD of consultancy ThinkChangers.

“Firstly, I think there is a very strong argument to say there is no stake, rather you are buying a collectors card of varying degrees of scarcity that has value in its own right. Sorare even with its least scarce card type keep their editions tight and their cards generally not only hold their value, but appreciate in value over time.” Kovach adds: “Critically, of course, you keep your cards rather than sacrificing them to play. On top of this, it’s worth noting that the prizes are fixed, known in advance, and are not affected by the number of entrants. And the game itself is skill rather than luck-based.”

But let’s say, for argument’s sake, the UKGC determines that Sorare does require a licence to offer fantasy sports, would one even be granted when you have cryptocurrency at the heart of transactions? Ellis replies: “A licensed gambling operator can accept payments in cryptocurrency provided it has properly assessed the money laundering risks, however given its decentralised operation, Sorare would need to give careful thought to how it could implement the licence conditions and technical standards required by the Gambling Commission if it wanted to become licensed.”

A captive audience 

Despite the warning from the UKGC and the implosion of Football Index, it’s probably not going to discourage existing Sorare users from playing. For a start, people can keep their cards forever; these digital collectibles belong to them and have actual value and utility outside the platform. It’s not like Football Index where ‘shares’ were in fact bets that expired after three years. The $680m funding round involving heavy hitters of the venture capital world will have given people increased confidence in the platform. As well as the fact ex-footballers like Rio Ferdinand and Oliver Bierhoff, as well as current French star Antoine Griezmann, are investors.

Having officially licensed so many clubs, including the likes of Paris Saint-Germain, Liverpool, Inter Milan and Real Madrid, also adds credibility. Spain’s La Liga and Germany’s Bundesliga have also recently struck licensing deals with Sorare. What’s more, Sorare has made a couple of interesting hires of late from US online gambling companies. Ryan Spoon was poached from BetMGM to be COO, while Michael Meltzer is the new head of business development after six-and-a-half years at DraftKings. Sorare insists what it offers isn’t gambling, yet it isn’t afraid to go after gambling expertise to help the expansion into the North America market with traditional US sports.

A unique Cristiano Ronaldo card sold for close to $290,000

NBA Top Shot, the blockchain-based platform to trade tokenised NBA video clips, was when the convergence of sport and NFTs really came to prominence. Canada’s Dapper Labs, the company behind NBA Top Shot, recently inked a deal with La Liga to create NFT collectibles, while the Premier League is reportedly considering launching some form of NFT. However, it is the intersection of sport and NFTs with gaming that is capturing the hearts of minds of consumers, gamblers included. “Since the gamification of digital collectibles has been getting so much consumer, investor and media interest, it’s not a surprise to see that followed by significant regulator interest,” says Andy Danson, partner at law firm Bird & Bird.

Of course, this interest in Sorare comes at a time when the UK government is reviewing the Gambling Act 2005 with the aim of updating what the Conservatives branded an analogue law in a digital age in their manifesto before December 2019’s General Election. For instance, the use of loot boxes in video games was singled out as one area of focus for the review. “It may be that any changes coming out of the review help clarify the regulatory status of these newish models,” Danson says. “In the meantime, this is a timely reminder that the operators of gamified digital collectibles need to consider very closely how the current law applies to their business models and design those models accordingly.”

Right now, the Sorare community continues to grow and, just like Football Index, users are discussing tactics on Reddit, Telegram and Discord, while YouTube channels and podcasts have sprouted up. Sure, there is friction in the onboarding process with crypto wallets and exchanges, as well as ethereum gas fees (the price paid to miners to carry out transactions), but as people become more comfortable with crypto, blockchain and NFTs, Sorare will benefit. The company talks up the fact there are approximately four billion football fans and that global fantasy sports will be worth $48bn as an industry by 2027. What’s more, the sales volumes of NFTs hit $2.5bn in H1 2021. “NFTs have enormous potential to impact all sorts of industries, in particular gaming and gambling,” says Kovach, who has worked for PokerStars in the past.

Despite all this, are regulators and governments around the world going to continue to allow their citizens to plough thousands of dollars into products like Sorare? Products that are growing exponentially in popularity, pretty much all unchecked. “The growing interest in digital collectibles certainly creates a challenge for gambling regulators,” underlines Ellis. “Not only can it be difficult to determine the boundary between some offerings based on digital collectibles and gambling, it is challenging for regulators to exercise control over operators in the decentralised environment. We know that the Gambling Commission is investing some of its income from increased licence fees in upskilling employees to understand new product types and take action where necessary.”

In an Ask Me Anything session Sorare hosted on Reddit in July, Sorare CEO and co-founder Nicolas Julia responded to a question regarding whether he was concerned about a potential crackdown on crypto and crypto exchanges by governments, by insisting Sorare merely leverages blockchain to secure and authenticate in-game items. He added that Sorare is compliant with regulations and has “the dedicated legal team and resources to comply with any potential new regulation”. While Julia continues to insist the product can’t be deemed as requiring a gambling licence, it surely can’t be long before other regulators besides the UKGC have this prominent tech unicorn in their crosshairs.