Token Financing, Investment Incentives, and Regulation
35 Pages Posted: 19 Mar 2021 Last revised: 17 Dec 2022
Date Written: November 17, 2022
Abstract
We analyze the economic consequences of financing projects with utility tokens that give access to consumption utility and are traded on a secondary market. In a baseline analysis, efficient projects prefer equity while inefficient projects prefer token financing; however, when there are frictions that block the financing of efficient projects, token financing can improve efficiency. We then extend the model to include capital expenditure and token retention. If investors do not anticipate entrepreneurial moral hazard, then the issuer may sell the entire token supply and invest nothing. If investors have rational expectations, then the equilibrium investment level improves, but regulatory policies such as a minimum requirement on the issuer's token holdings can further enhance efficiency.
Keywords: utility token, initial coin offering, entrepreneurial financing
JEL Classification: G24, G38, L26
Suggested Citation: Suggested Citation