Token Financing, Investment Incentives, and Regulation

35 Pages Posted: 19 Mar 2021 Last revised: 17 Dec 2022

See all articles by Edmond Baranes

Edmond Baranes

University of Montpellier, MRE

Ulrich Hege

Toulouse School of Economics; European Corporate Governance Institute (ECGI)

Jin-Hyuk Kim

University of Colorado at Boulder

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

Baranes, Edmond and Hege, Ulrich and Kim, Jin-Hyuk, Token Financing, Investment Incentives, and Regulation (November 17, 2022). Available at SSRN: https://ssrn.com/abstract=3784358 or http://dx.doi.org/10.2139/ssrn.3784358

Edmond Baranes

University of Montpellier, MRE ( email )

Av Raymond Dugrand
Montpellier Cedex, Cedex 2 34960
France

Ulrich Hege

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France
+33 5 61 12 86 01 (Phone)

HOME PAGE: http://https://www.tse-fr.eu/people/ulrich-hege

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Jin-Hyuk Kim (Contact Author)

University of Colorado at Boulder ( email )

Campus Box 256
Boulder, CO 80309
United States

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