Fear toxin is a substance made from a rare blue flower found on the slopes of a tibetan mountain. To prove his worth to the League of Shadows, Bruce Wayne had to take one of the flowers up the mountain to the League's headquarters. When there, Henri Ducard ground the flower into a powder and made Bruce inhale the fumes - Bruce then had visions of bats flying out a chest, but Ducard told him to face his fears.
After Bruce had left the League and returned to Gotham City, they started importing the toxin within drug shipments by Carmine Falcone. Dr Jonathan Crane separated out the fear toxin from the drugs and used it in experiments on the inmates of Arkham Asylum. The League also had him pour large quantities of the toxin into Gotham's water supply, which he did for several weeks.
The effects on Rachel Dawes
When Falcone was arrested, Crane sprayed him with fear toxin which drove him insane. Later, when Batman was investigating the drug shipments, Crane used the toxin on him which again gave him visions of bats crawling out of Crane's mask. Lucius Fox saw Bruce's condition and synthesised an antidote, which Bruce asked him to create more of. When Rachel Dawes visited Arkham, Crane sprayed her with the toxin and she had visions of maggots crawling out of Crane's mask. Batman rescused Rachel and sprayed Crane with his own toxin, which caused him to see Batman as an evil black skull-like monster. The toxin drove him crazy, and when the police investigated the water supply they found it was full of the toxin, but that the toxin only had effects in aerosol form.
The effects on Jonathan Crane
The League of Shadows used a stolen Microwave emitter to vapourise Gotham's water supply and infect the population with the fear toxin. Many residents went insane, having visions of men with bright eyes and fire-breathing horses. As the microwave emitter was headed for Wayne Tower, the hub of the water system, Batman managed to stop it to avoid the fear toxin being dispersed city-wide.
After being released from Arkham, Crane started to sell the toxin to a drug dealer named the Chechen. However, the drug caused the buyer to become paranoid, so the Chechen angrily confronted Crane in a parking lot. Their meeting was interrupted by Batman who apprehended the people there.