On Monday, Moody’s Investor Services, a renowned credit ratings and research provider, drew attention to the inherent technological risks associated with the growth of tokenized funds.
Moody’s expert team specializing in Decentralized Finance (DeFi) and Digital Assets raised concerns about the necessity for enhanced expertise in managing tokenized funds. They noted that providers of technology for tokenized investment funds often lack a substantial track record, which amplifies the risk.
“The entities involved on the technology side often have limited track records, increasing the risk that in the case of bankruptcy or technological failure, payments may be disrupted.”
Moreover, there is a potential for the fund’s collateral to be exposed to the volatility of other digital assets, such as stablecoins. This adds another layer of complexity and risk to the management of these tokenized funds.
The expert team at Moody’s underscored the vulnerabilities of public blockchains, which are utilized by certain tokenized funds, to various technological risks, cyberattacks, and governance concerns.
In their report, they put forth the idea that implementing a rigorous contract audit process could prove instrumental in mitigating potential technological and cyberattack-related challenges.
Furthermore, Moody’s research emphasized the significance of expertise in several areas, including token issuance and redemption processes, maintaining on-chain investor registries, and implementing whitelisting protocols for wallets that comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) checks. These measures are crucial for ensuring the integrity and security of tokenized funds operating on public blockchains.
Tokenized Funds: Carving Out a Niche in Finance
Moody’s analysts have taken note of the rapid and burgeoning adoption of tokenized funds, identifying a significant “untapped market potential.”
The report attributes this growth primarily to funds that invest in government securities. According to the Dune Analytics Tokenization Report for 2023, the total value of tokenized funds invested in government securities and issued on public blockchains exceeded $800 million, marking a threefold increase from the previous year.
The experts emphasized that the potential applications of tokenized funds go beyond simply enhancing asset liquidity. These funds have diverse functions, including the potential to serve as collateral.
In November 2023, JPMorgan and Apollo collaborated with several blockchain firms to explore fund tokenization for managing extensive client portfolios. Additionally, in October, UBS, a leading Swiss asset management bank, launched its first live pilot of a tokenized money market fund on the Ethereum blockchain in Singapore, further demonstrating the expanding adoption of tokenized funds in the financial sector.
