Utility Tokens Financing, Investment Incentives, and Regulation

36 Pages Posted: 19 Mar 2021 Last revised: 6 Aug 2021

See all articles by Edmond Baranes

Edmond Baranes

Université Montpellier 1

Ulrich Hege

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

Jin-Hyuk Kim

University of Colorado at Boulder

Date Written: August 1, 2021

Abstract

We analyze real economic consequences of financing with (mispriced) utility tokens that give access to consumption utility and are traded on a secondary market. Projects can be financed by equity or by selling tokens. 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 extend the model to include moral hazard about actual capital expenditure and tokens withheld for secondary market sales. If investors do not anticipate entrepreneurial moral hazard, then the issuer can sometimes sell the entire token supply and invest nothing. If they have rational expectations, then the equilibrium investment level improves, but can still be inefficient and justify regulatory policies such as a minimum requirement on the issuer's token holdings.

Keywords: utility tokens, initial coin offering, entrepreneurial financing

JEL Classification: G24, G38, L26

Suggested Citation

Baranes, Edmond and Hege, Ulrich and Kim, Jin-Hyuk, Utility Tokens Financing, Investment Incentives, and Regulation (August 1, 2021). Available at SSRN: https://ssrn.com/abstract=3784358 or http://dx.doi.org/10.2139/ssrn.3784358

Edmond Baranes

Université Montpellier 1 ( email )

Avenue de la Mer Site Richter
163 Rue Auguste Broussonnet
34006 Montpellier Cedex 1, Cedex 2 34090
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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