Blockchain-based Tokenized Funds Improve Efficiency and Market Potential
Moody’s, a global financial services company known for its credit ratings, stated that the increasing adoption of blockchain-based tokenized funds is enhancing the efficiency of investing in assets like government bonds. This trend also signifies untapped market potential. However, Moody’s analysts cautioned that tokenized funds may introduce tech-related risks, which require fund managers to possess diverse technological expertise.
Growth of Fixed-Income Tokenized Funds Fueled by Government Securities
According to Moody’s, the growth of fixed-income tokenized funds is primarily driven by investments in government securities. The recent series of interest rate hikes from the U.S. Federal Reserve has made yields more attractive. Analysts revealed that the issuance of tokenized funds backed by government securities on public blockchains reached over $800 million by the end of 2023, compared to $100 million at the beginning of the year.
Examples of Tokenized Funds Backed by Government Securities
Franklin Templeton conducted the largest issuance to date, registering share ownership of its U.S. Government Money Fund on the Stellar blockchain in 2021 and later extending it to the Polygon blockchain in 2023. Other examples include Backed Finance, which expanded its Ethereum-based tokenized short-term U.S. Treasury bond ETF offering, and UBS, which issued a tokenized money market fund on the Ethereum public blockchain through its UBS Tokenize platform.
Efficiency and Transparency Enhanced by Tokenization
Tokenized funds operate similarly to traditional bond funds but with digital tokens representing shares on a distributed ledger instead of centralized shareholder registers. This digital nature improves market liquidity and accessibility while reducing costs and enabling fractionalization for both traditional and crypto investors. In a high-yield environment, tokenized funds offer significant benefits to crypto investors seeking more stable returns compared to the volatility of DeFi.
Risks and the Need for Tech Expertise
While tokenized funds face risks associated with underlying assets and fund management like regular bond funds, tokenization introduces additional complexities. These complexities require a broader range of expertise due to the involvement of service providers with limited track records. The use of public blockchains in tokenized funds also exposes them to technological risks, cyberattacks, and governance issues. Moody’s emphasizes that despite the current interest in tokenized funds, further development and standardization are necessary for their long-term success.
Hot Take: Tokenized Funds Driving Efficiency and Innovation in Asset Investing
Moody’s report highlights the growing adoption of blockchain-based tokenized funds as a means of enhancing investment efficiency in assets like government bonds. This trend not only presents untapped market potential but also introduces new challenges and risks related to technology. However, the benefits of tokenization, including increased liquidity and accessibility, make it an attractive option for both traditional and crypto investors. As the market continues to evolve, further development and standardization will be crucial for ensuring the long-term success of tokenized funds.
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