Welcome to the Wild West – how crypto fever clouded business judgment

Serious questions of regulation and due diligence are raised in a fascinating new book about crypto and sport.

You don’t need an affinity for or knowledge of sport to be both fascinated and concerned by how parts of the crypto industry have tried, often successfully, to use global sporting brands to hook unsuspecting and informed customers.

From the DAO whose central proposition was that it could get 80 million of the 260 million adults living in the US to put in $50 to buy marquee NFL franchise the Denver Broncos, to leading English Premier League club Manchester City’s signing of a deal with a company that did not exist, to the NFT organization whose CEO would only be interviewed online wearing a hoodie, baseball cap, dark glasses and a mask, the tales that can be told only serve to strengthen the description of this new trading space as ‘the Wild West’.

Journalist Martin Calladine has spent the last few years following the crypto industry’s attempts to use sport, and in his book No Questions Asked he tells an extraordinary story of how billions of dollars of investments have been lost in largely unregulated businesses. The tale should worry anyone concerned about the way we do business, and about the effectiveness of regulation. As he says in the extract reproduced here: “From an investor perspective, honest failure and deliberate fraud look largely the same when they hit the bottom line – which is why we regulate financial services products as heavily as we do.”

Manchester United fans know what it’s like to be marketed to. Their club is the king of partnerships. As well as the usual official automobile and insurance partners, they have an official ‘global mattress and pillow’ partner and an official ‘hotel loyalty’ partner. After that, things start to get niche. They have an official ‘medical systems’ partner (MRI scanners) and an official ‘electrical styling’ partner (shavers and beard trimmers). They even have an official ‘Percussive Therapy Device’ partner (massage guns).

On this basis, it’s reasonable to imagine that most Manchester United fans probably shrugged their shoulders at the 2022 announcement that the club had accepted £20m ($25.3m) from a company called Tezos to be their official blockchain partner. The company was, it claimed, “different to other blockchains in that it can seamlessly evolve, with regular updates designed and approved by its global community of users and developers”. The aim of the partnership was, apparently, to “introduce Manchester United fans to Web3 technology through the Tezos blockchain“.

But what if no one knows what any of that means? What if Manchester United had no idea either? What if, 18 months later, the fans who were “introduced to Web3 technology” found that their investment had lost over 80% of its value? What then? What responsibility do football clubs have for the activities of their commercial partners?

Historically, the game has encouraged the idea that the answer is, basically, ‘None’. Despite the gushing press releases that clubs put out when businesses sign on the dotted line, the attitude is generally that, alcohol aside, if it’s legal, it’s fair game. The fallback position, if a sponsor disgraces itself, is the logic-chopping distinction that, while the club was sponsored by the brand, they ‘didn’t actively promote it’.

Crypto casino

A classic of the genre was Everton’s response to the behaviour of their gambling partner Stake, a so-called ‘crypto casino’. One Wednesday morning in August 2022, the company tweeted out an incentive offering $10 credit to the first 2,500 customers who logged into its app. There was one qualifying criterion: you had to have wagered at least $5,000 in the previous seven days. Yes, you read that right: five thousand dollars in the last week.

It’s hard to know which is worse: that Stake encouraged people who’d wagered the equivalent of $260,000 a year to log into its app and start gambling or that the company has so many problem gamblers that, just 11 minutes later, it tweeted to say that the full $25,000 bounty had been claimed.

Stake was widely criticised for the promotion, but what really embarrassed Everton was that the promotion had been marketed as a celebration of the club’s victory the previous night in the Carabao Cup. The tweet carried the words, ‘Everton road to glory’ and an image of three of the club’s players.

Around the same time, a lawsuit was filed in the US by a former investor in a company that had grown into Stake. He alleged the company’s founders had cheated him out of, in effect, his stake in Stake and he was demanding $400m in compensation. The company denied everything, dismissing the validity of the case.

Everton’s response to all this unfortunate publicity was not to cut ties with Stake, nor even to issue a public rebuke. Instead, they let it be known, off the record, that Stake would not be allowed to use Everton imagery in future promotions.

Just a few weeks later, Stake was at it again, celebrating the start of the NFL season with a $5 free credit for anyone who’d wagered $4,000 in the previous week. A few days after that, it advertised a crypto lottery, where people who’d wagered $1,000 would be in with a chance to win a share of $50,000. All prizes would be paid in Bitcoin.

Everton rode out the controversy and eventually the criticism subsided. By the time of the FA Cup third round, Stake found another club to take its money, paying Gillingham for space on their sleeves in their game against Leicester. At the end of the season, the company was mooted as a potential new front-of-shirt sponsor for Chelsea, before a fan backlash caused the club to reconsider the deal.

It illustrates a major tension within crypto: the industry wants to behave like an unregulated start-up while also being allowed to encroach on the territory of heavily regulated financial services providers.

Disreputable and irresponsible as Stake’s behaviour may seem, it is at least notionally regulated by the UK Gambling Commission. (Like the Asian-facing bookies, it has a UK licence through an Isle of Man white-labelling shop.) Crypto by contrast was the only product or service football clubs were advertising to their fans which, bar the ASA’s right to prevent the rerun of infringing adverts, was unregulated. If it was a chocolate bar sponsoring your club, it would have been checked by the Food Standards Agency. If it was a car, it would be NCAP safety tested. If it was a credit card, it would be regulated by the FCA and the company would have all manner of operational and disclosure requirements. But with crypto, there’s no trading standards, no industry ombudsman, no FCA regulation, no fit and proper persons test and, in the event of a suspected crime, no great likelihood of police action.

Crypto company collapse consequence’s

If a crypto company collapses through mismanagement or simply runs off with your money, there’s nothing you can do. If you accidentally send your crypto to the wrong address, it’s gone. If a crypto company locked your account and, for whatever reason, couldn’t or wouldn’t unlock it for you, there is no industry body to help you. Assuming you even know who owns and runs a crypto firm – and, as we shall see, this is often not the case, with many preferring anonymity – you have no guarantee that they have been vetted by anyone or that they have any relevant skills or experience. If they’ve done time for fraud, or they’re a member of an organised crime gang, you’ll have no easy way of knowing.

Fans aren’t idiots; they know that their club doesn’t really believe that their sponsor is the best at what they do. But, even if they aren’t aware of it, the fact that they live in a rules-governed society like the UK means fans expect that the people on their favourite team’s shirt won’t simply be able to rip them off without consequences.

This just isn’t the case with crypto and, for this reason, it doesn’t seem to me adequate for football clubs to disclaim any responsibility for the partnerships they struck. Time after time, crypto companies signed deals with football clubs and then just made things up as they went along, exploiting the opportunity to misinform people for profit, without fear of any comeback.

The irony of crypto’s barely regulated status is that, while it gives the companies freedom to cut corners, bilk customers and break promises, they know that regulation matters to customers and they can exploit this to falsely reassure potential investors.

A DAO based its pitch on persuading 80 million of the 260 million adults living in the US to put in $50 each to buy the Denver Broncos. Photo: Dustin Bradford/Getty Images

In January 2022, Norwich City FC – who were then still in the Premier League – unveiled a new partner, Scallop, which was offering a product that it claimed would allow you to manage fiat money, crypto and NFTs from one app, backed by a Visa debit card. It was to be available to consumers and businesses and was, apparently, licensed and insured.

Norwich’s commercial director said: “They’re truly innovating in the banking space and we’re excited to work with them to educate and promote new ways of banking to our fanbase.” To the jaundiced eye, ‘new ways of banking’ might’ve sounded like a euphemism for ‘speculating on crypto,’ but Scallop were keen to explain that they were different. For here was a ‘DeFi bank’ that was regulated.

Its website said it was licensed to provide “crypto activities in the EU,”, “fiat and crypto activities” in Canada and that it had a US “Money Services Business” number. You will be aware that neither Norwich City nor the UK more generally resides within any of these three jurisdictions.

That’s okay, though, because press releases from August 2021 said that the company had an “electronic money institution” licence pending from the UK FCA. The website of Scallop went one better, with a November 2021 FAQ claiming that it was already “accredited by the FCA”. This was undermined somewhat by the website footer displaying no licence number and the company’s ‘whitepaper’ – the crypto version of a corporate brochure – which was dated 2022 and said approvals were “pending”.’”. The Scallop Ts&Cs, meanwhile, said that the company was “in the process of applying for a licence as an EDM Agent.”

Here then was a company, which Norwich were backing to “educate and promote new ways of banking to [their] fanbase” which was simultaneously licensed, soon-to-be licensed and in-the-process-of-applying-to-be licensed by the UK financial services regulator. Later the company would claim that it had/was-getting a licence through an FCA-regulated payments provider.

The company was also pitching itself as a ‘DeFi bank,’ which is problematic because the word ‘bank,’ like doctor or engineer, is a protected term, the use of which is controlled by law. I tried to contact Scallop to ask about this, but the company did not publish a phone number or email address on its website. Tucked away in its white paper, I found a general contact email address, but that bounced back as non-operational. By looking up the names of the company’s senior staff and googling for press releases, I was able to find the email format for the company and send some questions to three or four of its top execs. I received no response. (It’s an iron law of crypto that you can measure how dubious a scheme is by whether it publishes, and responds to contact by, an email address and phone number.)

Next I DMed the company’s Twitter account with questions about the company’s regulatory status. Instead of being given a clear answer, as I’d expect from a regulated financial services organisation, my heart sank when, instead, I was invited to join their “weekly Telegram AMA, where our CEO will address all your questions”. Telegram is an encrypted messaging app. Crypto AMAs (Ask Me Anything) for anyone who has not had to sit through one, are like chatroom cult meetings, where thousands of people pitch softball questions to the great leader who will then cherry-pick the ones they want to answer. I asked to be excused from the AMA and requested they simply explain their regulatory status to me. The response was, ‘Scallop used in Twitter handle because we are a bank for Defitokens where store store Defi tokens like Food bank or water bank”.

I asked if Scallop had independent legal advice showing its use of the term bank was acceptable and, if so, whether I could see it. Scallop claimed it did have such advice but declined to share it, claiming, “we are not bunch of random guys doing thing things with out right advice”.

Feeling like I’d gone as far as I could with the company, I called the Bank of England, which oversees the Prudential Regulation Authority (PRA), the body responsible for governing the use of the term bank. They asked me to put my concerns in writing and then passed my query to the FCA.

The FCA replied that the company wasn’t “authorised or regulated by us and therefore shouldn’t be providing any regulated financial products or services within the UK”, and that “if the firm has claimed to be based within the UK and/or regulated by the FCA, this strongly indicates that they could be operating a scam”.

The real kicker, though, was that the FCA said that as “their business falls outside our remit … our rules don’t apply to them”. The PRA echoed this, explaining, “as Scallop is neither authorised by the PRA nor related to a PRA-regulated firm, we are unable to intervene”. In other words, while ‘bank’ is a legally protected term, because crypto firms weren’t regulated by the bodies whose job it was to police the use of the term, nothing could be done. Even if their behaviour, in the words of the FCA, “strongly indicates that they could be operating a scam”.

With crypto, there’s no trading standards, no industry ombudsman, no FCA regulation, no fit and proper persons test and, in the event of a suspected crime, no great likelihood of police action.

This Alice in Wonderland feeling is common if you spend much time dealing with crypto companies, where blatantly unethical activities, which would be regarded as unconscionable in other industries, are common practice. Much of what goes on can be best described as ‘not illegal yet.’

Shortly after, the decidedly non-random guys at Scallop dropped the ‘DeFi bank’ from the company’s Twitter handle, but over a year later continued to pitch Scallop as a “regulated, low-fee banking blockchain” and the “future of banking”.

It illustrates a major tension within crypto: the industry wants to behave like an unregulated start-up while also being allowed to encroach on the territory of heavily regulated financial services providers. Here, the ‘fake-it-till-you-make-it’ approach of many tech companies – which prefer to act first rather than seek permission, tweaking their business as they grow – collides with a culture where even the slightest update to a website requires the approval of the regulatory team and senior staff bear, at least in theory, personal liability for corporate malfeasance.

It would be unthinkable, for example, for a properly licensed UK bank to have a privacy policy on its website which was actually a plagiarised set of instructions from another website on ‘how to create a privacy policy’. Scallop did. (Anyone who works in a regulated industry will be muttering about GDPR at this point.)

Likewise, it would be unthinkable for a building society, say, to have an FAQ on insurance which was plagiarised wholesale from other websites. Scallop did this with its intro to crypto.

The company also announced it would be offering an investment product which allowed up to x125 leverage on crypto trading. In other words, putting down £100 ($126) would enable you to make a return of up to £12,500 ($15,800). Or a loss of up to £12,500.

The potential of loss

Quite obviously, highly leveraged products like this have the potential to lose people enormous amounts of money, which is why in 2019 the FCA placed a limit of x30 on leveraged non-crypto CFD products – limiting your losses or gains to thirty times your initial stake. Scallop also announced that people would be able to trade on “NFT futures” and so gamble on the price of NFTs they didn’t own. It’s very hard to know what other reason there would be for a would-be bank, a custodian of other people’s money, to be offering products like this other than to attract speculative investors to their platform. Certainly, it appears at odds with the established division in banking between retail and investment banking, where the basic functions of a high street bank – bank accounts, credit cards, mortgages – are separate from the higher risk trading operations, to prevent the latter destroying the former in the event of big losses in the investment arm.

Don’t worry, though. As soon as these risky products had been mooted, they seemed to vanish. Likewise the launch of the app that would allow you to access all these services. When the partnership with Norwich was signed in January 2022, the app was apparently due in May. It changed to ‘soon’ once that deadline came and went. Over a year later, the app was still in Beta and the website still invited you to ‘join waitlist.’

Throughout this entire period, the Scallop crypto was available for people to invest in on the continuous promise that the company was about to create a set of services that would transform banking and, by implication, make its crypto much more valuable than a standard cryptocurrency that wasn’t connected to any value generating economic activity.

While I doubt Scallop’s competence, I’ve no reason to think the company was consciously conning anyone. But if you launch a business making huge claims, claims seemingly not backed by reality, and if you announce a stream of new products which never arrive, then the quality of someone’s intentions aren’t especially relevant. From an investor perspective, honest failure and deliberate fraud look largely the same when they hit the bottom line – which is why we regulate financial services products as heavily as we do.

  • Martin Calladine will be a guest on the GRIP podcast next week. His book, No Questions Asked, is available online.