Initial Coin Offerings and Seigniorage

Abstract:

Entrepreneurs start a finitely-lived trading platform, which can operate in fiat currency and get financed with debt or equity. Alternatively, entrepreneurs can issue platform native tokens (cryptocurrency) and require their usage on the platform as a means of payment. I characterize properties of optimal tokens: transaction fees (subsidies) and dividends, that maximize the net present value of the platform’s cash flows. I show that optimal tokens improve the platform’s borrowing capacity relative to a platform operating in fiat currency.