Rating Agency Moody’s Report Highlights Tech Risks In Growing Tokenized Funds

Moody’s Investor Services, a credit ratings and research provider, on Monday, highlighted the inherent tech risks associated with growing tokenized funds.

Moody’s DeFi and Digital Assets expert team flagged the need for additional expertise in managing tokenized funds. Tokenized investment funds tech providers often have “limited track record,” contributing to the increased 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.”

Further, there is also potential for exposure of the fund collateral to the volatility of other digital assets like stablecoins.

The team emphasized that public blockchains, used by some tokenized funds, are “exposed to technological risks, cyberattacks and governance issues.”

The report proposed that “a robust contract audit process is beneficial” to overcome potential tech and cyberattack issues.

Additionally, Moody’s research stressed the need for expertise in fields such as token issuance and redemption, maintaining on-chain investors’ registers and whitelisting wallets in compliance with KYC and AML checks.

Tokenized Funds: Carving Out a Niche in Finance

Analysts at the credit-rating agency have observed the rapidly growing adoption of tokenized funds, signaling “untapped market potential.”

The report attributed the growth fueled by funds that invest in government securities. Furthermore, per Dune Analytics Tokenization Report 2023, the total value of tokenized funds invested in government securities and issued on public blockchains, exceeded $800 million, triple the growth in 2023.

“Tokenized funds’ potential applications extend beyond merely enhancing asset liquidity,” the experts wrote. “These funds have a variety of other possible functions, including serving as collateral.”

In November 2023, JPMorgan and Apollo partnered with several blockchain firms to explore fund tokenization for managing extensive client portfolios. In October, leading Swiss asset management bank UBS debuted its first live pilot of a tokenized money market fund on the Ethereum blockchain in Singapore.