Tax challenges in debt financing involving digital tokens

Abstract

The application of blockchain technology1 in the corporate finance sphere has created many new innovations2 such as asset-backed tokens,3 debt and equity security tokens4 and decentralized finance (DeFi).5 These innovations have the potential to greatly facilitate the raising of capital by businesses. They can make the process more efficient by automating certain parts of the process with smart contracts,6 matching available capital to businesses more quickly and boosting liquidity.7 Crucially, they can also facilitate access to new capital markets by lowering the barriers to entry, both on the part of businesses seeking to raise capital and investors seeking returns on their capital. Much of the DeFi movement focuses on enabling smaller players to seek and offer financing,8 where it might have previously been uneconomical for them to do so through traditional capital markets.9 As such, the use of digital tokens in corporate finance can both boost the efficiency of the process of raising capital and open up access to new capital markets.