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Utility Tokens Financing, Investment Incentives, and Regulation

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.