FTX Crash Has Sports Leagues, Teams, And Athletes Running Scared
Written by: Leonard Armato for Forbes.com
The entire sports world has been turned on its head following the arrest of FTX CEO Sam Bankman-Fried Monday. Before the scandal, FTX had sponsorship deals with sports leagues, teams, arenas, celebrities and even made its way onto the chest of Major League Baseball umpires.
FTX was a major sponsor of several high-profile sports teams and events including the Miami Heat, the Dallas Mavericks, and the Ultimate Fighting Championship (UFC). It is unclear how these organizations will be affected by the loss of FTX’s sponsorship, but it is likely that they will need to find new sponsors to make up for the lost funding.
In addition to sponsoring sports teams, FTX trotted out a host of athletes and celebrities such as Tom Brady and his ex-wife Giselle Bundchen, Steph Curry and Trevor Lawrence, among others, to promote the crypto exchange in a highly public fashion. All these athletes and celebrities are being sued in a class action lawsuit for promoting FTX through advertising.
FTX even ran a Super Bowl ad starring Larry David, and it was reported that the company used customer deposits to fund that ad. This has implications not only for FTX, but the agencies and media companies associated with that deal. Namely the money FTX spent with its agency, Dentsu, and Super Bowl broadcaster NBC, which was likely misappropriated customer funds. Wow!
But we may be only scratching the surface of what is yet to come. Crypto firms have spent $2.4 billion in sports sponsorships in 2022. One example is Crypto.com ,which has leveraged sports for brand recognition, agreeing to pay $700 million (over 20 years) to put its name on the arena formerly called the Staples Center. Around the water cooler, people are asking how much of the $700 million Crypto.com committed to the arena is “at risk?” And beyond Crypto.com, how much of future sponsorship commitments secured from Crypto firms, which total in the billions of dollars, are at risk for sports leagues and teams? The short answer is “all of it.”
This latest controversy has grave implications regarding the role of cryptocurrency in the sports sponsorship industry for leagues, teams and athletes, so what does the future look like? Normally, these types of deals are led by sponsor sales agents looking to maximize company revenue and have but one mantra: show me the money. Generally speaking, money is the determining factor in sizing up the available opportunity. It leaves the potential for oversight on the risk versus benefit analysis and due diligence that should follow any initial pitch, including whether or not the business in question will be able to follow through on promised future payments.
With the FTX collapse and spate of lawsuits involving athletes and celebrities that endorsed the company, a whole new level of scrutiny will emerge. The risk factors that will be examined include such things as company history, their regulation and governance practices, as well as the financial stability of company and the track record of the management team. Akin to the process that a private equity firm puts in place for the potential acquisition of any given company.
Overall, the highly public and far reaching implications of FTX’s implosion has magnified the risks, and challenges associated with the cryptocurrency market. But expect that same trepidation to carry over into all sponsorship deals in the future that will necessarily trigger greater diligence and less tolerance for risk. Sports organizations will adopt a highly cautious approach when considering partnerships with cryptocurrency-based companies, because of the highly volatile and virtually unregulated nature of the industry, but a higher level of scrutiny will also be applied to company partners bringing anything less than a long standing and proven track record of excellence and trust.
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Published on December 16, 2022
Written by Leonard Armato