Bitcoin payments in sport - the opportunities and risks for clubs and players

Gaining a basic technical understanding of Bitcoin is a vital prerequisite to proper legal analysis. Readers who are already familiar with this (or who want to focus on legal points) can skip this section. 

What is Bitcoin?

The short answer is that Bitcoin is software, a purely digital phenomenon that is essentially a protocol that coordinates a set of processes. The slightly longer answer is that it is a decentralised digital currency – comprised of thousands of computers worldwide (‘nodes’), each running the Bitcoin software, which coordinates them to store, verify and record transactions in a publicly available ledger called a blockchain.  

One key to understanding Bitcoin is to ask how thousands of computers worldwide can agree upon the single state of the ledger (i.e. who owns what bitcoin, and whether transactions are valid).  The answer lies not strictly in mathematics or computer science, but rather incentives and game theory.  Each computer running the Bitcoin software is economically incentivised to play by the rules, and bitcoins are the reward.  Computers that don’t play by the rules risk economic loss by wasting their energy.  Computers that do play by the rules are rewarded with bitcoins.  To this end, nodes are economically incentivised to arrive at consensus (agreement) on who owns what, even though they do not necessarily know or trust each other.

The value proposition of such a system was explained by Satoshi Nakamoto in his White Paper: “a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” The main idea was to eliminate centralised control of money to achieve efficiency and certainty. No individual person, company, bank, country or third-party can control Bitcoin. And as the computers running it are distributed worldwide, it is practically impossible to shut down.

The result is an open monetary system with a predetermined set of rules baked into the code that everyone can trust, including the fixed supply of 21 million bitcoins.  Any individual worldwide is free to interact with this monetary network, and to custody Bitcoin as digital property and/or transact in it as money, requiring only a smartphone and an internet connection.  This idea (this power) is what all the fuss is about.

Some technical aspects

While a detailed technical analysis of Bitcoin is not possible here, it is worth understanding the following:

• Bitcoin transactions are ‘pseudonymous’. This means that transactions are linked not to a human identity, but rather to a blockchain address, otherwise known as a public key, which is comprised of a randomly generated string of letters and numbers.
• Bitcoin owners use digital ‘wallets’ to secure and manage their bitcoins. The wallets do not actually hold bitcoins, but instead hold and manage the user’s private keys. The private keys allow the user to sign transactions, proving to the network (without revealing their keys) that they own the bitcoin associated with a particular address (public key) on the Bitcoin blockchain. To own bitcoin is therefore to control private keys.
• Transactions on the Bitcoin blockchain are irreversible.  The chain cannot be ‘rolled back’ or amended by a third party, such as a government entity or a financial services agency.  This is a significant point to note, as it is very different to the current financial system’s ability to facilitate chargebacks.
• Bitcoin transactions do not require users to have a bank account. To use or send bitcoins, users essentially only need Internet access. This means it is accessible even if the user does not have access to traditional banking systems. 
• With proper security, it is technically impossible to steal bitcoin. Conversely, if a bitcoin owner’s private keys are compromised then it can be extremely difficult to recover any stolen bitcoins. Bitcoin can be easily self-custodied without a trusted third party; however, the flip side to that is that the responsibility of security and the risk of loss is entirely on the user. Unlike cash stored in a bank, there is no one you can call to recover lost or compromised private keys.  
• At this point in time, Bitcoin’s primary use in the marketplace is as a ‘store of value’.  Bitcoin is sometimes referred to as ‘digital gold’. This is likely because it is in the process of capitalisation, so its price, while increasing, is volatile. Bitcoin can therefore be seen as an asset (ie digital property) as well as a transactional currency.
• Payments in bitcoin are increasingly common today, but still not widespread. Aside from the price volatility, there are also issues of transaction cost and efficiency. Technology such as the ‘Lightning Network’ is working to improve this. The Lightning Network is a ‘second layer technology’ that uses micropayment channels to scale Bitcoin’s transactional capacity. This will enable quicker and easier payments in the future. It is already gaining traction: Twitter enabled a tipping feature in September 2021 allowing users to send bitcoin to other users using the Lightning Network. 
• The price of bitcoin is extremely volatile. This is partially because its supply (and supply schedule) is fixed, so increased demand sees increases in price rather than supply. This price volatility is a hindrance to Bitcoin’s use as a currency at this point in time, but it is something that should, in theory, improve in time as the system reaches maturity and its market capitalisation begins to plateau. Much of the present volatility is arguably because Bitcoin is currently in the process of being capitalised.

Readers who want to learn more about the technical aspects of Bitcoin are encouraged to read Mastering Bitcoin by Andreas M. Antonopoulos.

The legality and legal/regulatory status of Bitcoin varies between jurisdictions and changes occur frequently as regulatory authorities consider their stance on the technology.  For guidance only, Wikipedia hosts a referenced page on legality by country (please note every source must be independently verified). Of note are:

• UK – Bitcoin is legal. In 2019, London’s Commercial Court recognised that stolen Bitcoin could potentially be recognised as property. Following that ruling, the UK Jurisdiction Task Force gave its support for the idea that crypto assets are property under English law. The Law Commission has been tasked by the UK Government to make recommendations to reform the law regarding digital assets (including crypto assets), and its report is expected to be published in mid-2022.
• United States – Bitcoin is legal.  In March 2014, The Internal Revenue Service (IRS) announced bitcoin would be taxed as a property. The Commodity Futures Trading Commission (CFTC), classified bitcoin as a commodity in September 2015. Certain states in the USA, such as Miami and Wyoming, are looking at becoming Bitcoin ‘hubs’. However, how Bitcoin and cryptocurrencies will be regulated and dealt with at a national level by the Joe Biden Administration remains to be seen.
• EU – There is no specific legislation around Bitcoin at this point in time, but the EU intends to regulate the digital asset industry and there are a number of ongoing initiatives including the ‘Markets in Crypto-Assets’ (MiCA) that would create an EU-level licensing framework from crypto issuers and service providers. It is notable that European Central Bank President, Christine Lagarde, has previously stated that she does not consider Bitcoin to be a real currency, and has called for greater regulation of cryptocurrencies. 
• China – China’s central bank recently announced that all transactions of cryptocurrencies are illegal, effectively banning Bitcoin in China. Earlier in 2021, China had also previously banned crypto ‘mining’ operations in the country. Regulatory clarity on the legality of Bitcoin in China has been somewhat inconsistent and subject to regular change over the years.  However, the recent announcements seem to have greater significance, as evidenced by mining operations shutting down.
• El Salvador - Not only is Bitcoin legal in El Salvador, but the country became the first in the world to adopt Bitcoin as legal tender. El Salvador plans to build the world’s first ‘Bitcoin City’, funded initially by Bitcoin back bonds, and President Nayib Bukele has stated that the city would rely on geothermal power from a volcano in the eastern region of La Union, which would simultaneously be used to mine Bitcoin.

A key point to takeaway is that while Bitcoin is legal in many jurisdictions, it is not yet legal tender in any country bar El Salvador. Rather, the trend is for it to be regulated as property (or an asset). This means, if used for payments, it will be treated differently to fiat currency (sterling/dollar etc), particularly in terms of its tax treatment and the applicable accounting practices.

As Bitcoin’s adoption continues to grow at pace, it is becoming increasingly common to see it (and other cryptocurrencies) used for payments in sport:  

• In January 2018, as noted previously a Turkish football club (Harunustaspor), claimed to be the world’s first football team to purchase a player using Bitcoin. The player, 22-year-old Omar Faruk Kiroglu, received 0.0524 in bitcoin and 2,500 Turkish Lira (£470) as part of the deal with Harunustaspor. Interestingly, given the rise in the price of Bitcoin the 0.0524 bitcoin the player received amounted to approximately £385 at the time, but is now worth approximately £2,500.
• In July 2018, Gibraltar United Football Club partially paid its players’ salaries in cryptocurrency after the club secured a sponsorship with Quantocoin.
• Fans could have bought tickets to the FIFA World Cup 2018 in bitcoin.
• Watford FC is reported to have been paid sponsorship monies in cryptocurrency and has had the Bitcoin logo on its jersey. Fans can use Bitcoin to purchase hospitality boxes and exclusive club merchandise.
• Numerous players in the NFL have publicly stated that they are receiving a portion of salaries/income in Bitcoin:
  • Russell Okung (Carolina Panthers) announced in December 2020 that he would be receiving half his $13 million salary in Bitcoin. Given the surge in the price of Bitcoin since then, Okung effectively became one of the highest paid players in the NFL.
  • Sean Culkin (formerly of the Kansas City Chiefs) tried to one up Okung by announcing that he wanted his entire 2021 base salary of $920,000 in Bitcoin. However, Culkin was ultimately cut from the Chiefs. It is notable that Culkin has a finance degree and is working on his MBA.
  • Trevor Lawrence (Jacksonville Jaguars), the number 1 pick in the 2021 NFL draft, announced in May 2021 that he placed his entire signing bonus with cryptocurrency investment app Blockfolio (now FTX), to invest in, amongst others, Bitcoin and Ethereum.
  • Whilst it did not relate to his playing salary, Saquon Barkley (New York Giants) announced in July 2021 that he would convert all of his income from marketing deals and endorsements to Bitcoin.
  • In the most high profile example to date, Aaron Rodgers (Green Bay Packers) tweeted in November 2021 that he would be receiving a portion of his salary in Bitcoin.

Finally, as noted in the introduction, Australian baseball team, Perth Heat, announced that they have moved their entire operations to a ‘Bitcoin Standard’. This means in theory that their treasury and every payment that they conduct (including salaries) is now in bitcoin instead of Australian dollars. In addition to resonating with the principles of ‘hard money’ and fixed supply in an era of unprecedented money printing, one significant practical advantage that the team quotes is their ability to pay new international players immediately upon their arrival. This allows players to focus on training without having to spend weeks worrying about setting up a bank account. To learn more about the team’s rationale and commitment to the transition, see here.

There are numerous legal issues that sports stakeholders need to consider before contemplating holding or transacting in Bitcoin. The first issue, as above, is always to clarify the legal and regulatory status of Bitcoin in the relevant jurisdictions of domicile and trade. Provided Bitcoin is legal, there are then a number of important points, particular in terms of tax treatment and accounting practices, that need to be considered. This will also vary between jurisdictions (and indeed sports), so this article will focus on high level considerations under UK law and for football.         

Athletes

For athletes wishing to have a portion of their salary paid in bitcoin, the first issue is that it will still be subject to income tax. In the UK, there is HMRC guidance on this issue which makes it clear that if an individual receives cryptocurrency as income, it would be subject to income tax and national insurance contributions. Moreover, if tax on this is not paid by the player’s club, then the player could be liable for that tax.

Further, capital gains tax (CGT) could be payable upon the sale of that bitcoin in the future (the cost base for CGT purposes would be determined by the value of the bitcoin at the time of receipt). Given that athletes receiving salaries in bitcoin are effectively being paid with an asset, the athletes could therefore be liable for both income tax (when they receive bitcoin) and CGT (when they sell the bitcoin). Cryptocurrency is an area that HMRC will be focusing on over the next 12 months. Athletes wishing to receive salaries in bitcoin (or any other cryptocurrency) would be well advised to seek tax advice before doing so.  

Secondly, as mentioned previously, the method of custody is a crucial issue for owners of Bitcoin to understand - it is not as simple as leaving cash in a bank. If a Bitcoin owner loses the keys to their digital wallet it is all but impossible to recover the bitcoins. It is crucial that athletes who earn, and own, significant amounts of bitcoin give serious consideration as to how this will be retained going forward.

Clubs

Clubs paying players in bitcoin also need to consider the tax issues mentioned above. In the UK, the HMRC guidance cited above states that any employers paying employees in bitcoin must estimate the value of the bitcoin and pay income tax and national insurance contributions based on that estimate.

Numerous football clubs have sponsorship deals with cryptocurrency related companies. Those sponsorship deals often allow for clubs to be paid in bitcoin (or another cryptocurrency), by the sponsor directly or, for example, by fans purchasing corporate box tickets. However, the author understands that in practice these clubs would likely have that bitcoin converted into fiat currency by a third party, so that it ultimately only receives GBP (for example) even if that initial payment was made in bitcoin. This would be similar to when clubs receive payment in foreign currencies. In short, despite it appearing that clubs may be getting paid in bitcoin, those clubs may not actually hold any Bitcoin on their balance sheets.

This is perhaps unsurprising, given the potential accounting issues that the bitcoin price volatility could cause. For example, in the USA, Generally Accepted Accounting Principles (GAAP) considers that cryptocurrencies are an intangible asset that is recorded at cost, and the impairment of the asset cost must be recorded. That means that the value can be reduced on a balance sheet over time. However, the opposite does not apply because increases in the price cannot be taken into account as the asset is not measured at fair value at the end of each reporting period.

In short, this means that if the price of bitcoin held by a company temporarily drops to a price (£X), but then rises to a significantly higher price (£Y) by the end of the reporting period, the value of the bitcoin must still be recorded at the lower price (£X). As MicroStrategy has publicly stated, this means that companies “with significant digital asset holdings … are therefore required to report digital asset carrying values on their balance sheets that diverge significantly from their fair market value.” As at 30 June 2021, this resulted in a disconnect of USD 1.6 billion between the carrying value of the bitcoin held by MicroStrategy, and the value reported on its balance sheet. This acts as a significant deterrent for companies wanting to hold any material amounts of Bitcoin (or other cryptocurrencies) on their books.

MicroStrategy and others have been urging the Financial Accounting Standards Board (FASB) to update the accounting model to allow companies in the USA to reflect fair values of cryptocurrencies. If they do so, the International Accounting Standards Board (IASB) may do the same with International Financial Reporting Standards (IFRS – applicable in the EU, Asia and South America). If this occurs, it is possible that many more companies around the world may look to hold Bitcoin on their balance sheets.

Cryptocurrencies are a very new concept, so the applicable accounting standards (and indeed the law) in this area are developing all the time and can vary significantly from country to country. Accordingly, clubs considering whether to hold bitcoin should consider the potential impact a sharp drop in price would have on its financial statements if it is unable to reflect any subsequent upward changes in fair value under the applicable accounting rules. This is particularly important in light of any financial regulations it would need to abide by – eg UEFA’s Financial Fair Play rules. Needless to say, clubs should obtain accounting advice before proceeding to hold any bitcoin on its balance sheet.

Sports governing bodies

Athletes receiving salaries in bitcoin and clubs having bitcoin on their balance sheets also poses interesting questions for sports federations / governing bodies.

The author notes that in light of COVID-19, spending limits / financial regulations in sport are as important an issue as it has ever been. In football, UEFA are in the process of establishing a revised set of Financial Fair Play (FFP) rules, and it is reported that a salary cap with a luxury tax is being considered. In England, it is being reported that the Premier League is considering bringing in new rules to combat related party sponsorships and payments, as there is a concern that it could be used by clubs to circumvent financial regulations in football domestically and in Europe.

Given the importance of these financial regulations, the alleged circumvention of them is obviously a pressing concern for both UEFA and domestic leagues. Given that Bitcoin transactions are pseudonymous, it is not possible to identify the individuals behind them so there is a potential for Bitcoin transactions to be used by clubs in an attempt to circumvent financial regulations.

Similarly, illicit/undeclared payments are an unfortunate reality in the sports industry, be it in the context of payments to agents/players’ families to secure a transfer, or to individuals for the purposes of match fixing/betting/corruption etc. The potential use of Bitcoin (and/or other cryptocurrencies) for these payments would only make it even more difficult for governing bodies to monitor or regulate them. It is worth noting that making payments across borders is significantly more frictionless using Bitcoin than through traditional banks. As such, the potential future use of Bitcoin for payments to individuals in football transfers is something both domestic football associations, and FIFA (who will be regulating all agency activity in football from 2022) should be mindful of.

This is of particular interest if, as currently expected, FIFA’s new agents regulations in 2022 contain a commission cap. Leaving aside the legality of such a commission cap (an issue which is being hotly debated), one of the concerns about the imposition of a cap is that it may simply result in driving commission payments underground. The reality is that illicit payments in the football transfer system already occur, however a pseudonymous worldwide payment system may only make this easier.

Similarly, governing bodies responsible for safeguarding the integrity of their sport should invest time in understanding how payments in Bitcoin (and other cryptocurrencies) are made and what could be done to monitor/regulate them.

Moreover, it is interesting to consider how various sports regulations may potentially need to be amended in order to reflect any use of Bitcoin by stakeholders. For example:

• In the context of football, if an employment contract denominated (even partially) in Bitcoin is breached without just cause, would damages awarded be denominated in both fiat and Bitcoin, or would parties be required to convert the relevant amounts to an equivalent EUR/CHF amount? If the former, this may require FIFA (as the first instance decision maker in numerous football disputes) and arbitrators at the Court of Arbitration for Sport (CAS) to become at least somewhat familiar with Bitcoin and cryptocurrency.
• If accounting standards are not amended worldwide to allow for fair value accounting, would governing bodies consider allowing it in financial statements submitted under their own financial regulations? This might be an issue raised by clubs in the future given the increasing amounts of sponsorship deals in the sports industry from cryptocurrency-related sources, resulting in an increased likelihood that clubs may wish to hold Bitcoin on their books.
• In the future, all payments in international football transfers will be processed by the FIFA Clearing House (once it is established). The author understands that it is not presently envisaged that the Clearing House would accept payments in Bitcoin (or other cryptocurrencies). But would this change in the future if transfer payments in Bitcoin become more commonplace?

Agents

In addition to any of the issues raised above which could also potentially apply to agents, agents would need to consider how commission would be calculated and paid on employment contracts or sponsorship contracts denominated in Bitcoin (or indeed other cryptocurrencies). It would, the author assumes, require agents to become at least somewhat familiar with Bitcoin and cryptocurrency.