Moody’s Investor Services Highlights Tech Risks in Growing Tokenized Funds
Moody’s Investor Services, a credit ratings and research provider, has drawn attention to the technological risks associated with the increasing popularity of tokenized funds. According to Moody’s DeFi and Digital Assets expert team, managing tokenized funds requires additional expertise due to the limited track record of tech providers in this field. This lack of experience increases the risk of payment disruption in the event of bankruptcy or technological failure.
“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.”
Furthermore, there is a potential for exposure of fund collateral to the volatility of other digital assets like stablecoins. Public blockchains used by some tokenized funds are also vulnerable to technological risks, cyberattacks, and governance issues.
The report suggests that conducting a robust contract audit process can help mitigate these potential tech and cyberattack issues. Additionally, expertise is required in areas such as token issuance and redemption, maintaining on-chain investors’ registers, and ensuring compliance with KYC and AML checks through whitelisting wallets.
Tokenized Funds: Carving Out a Niche in Finance
Analysts at Moody’s have observed the rapid adoption of tokenized funds, highlighting their untapped market potential. The growth is driven by funds that invest in government securities. According to the 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 seen in 2023.
“Tokenized funds’ potential applications extend beyond merely enhancing asset liquidity,” states the report. These funds can serve various functions, including collateral.
Notable examples of tokenized fund initiatives include JPMorgan and Apollo partnering with blockchain firms to explore fund tokenization for managing client portfolios. UBS, a leading Swiss asset management bank, also launched its first live pilot of a tokenized money market fund on the Ethereum blockchain in Singapore.
Hot Take: Moody’s Raises Concerns about Tech Risks in Tokenized Funds
Moody’s Investor Services has highlighted the potential risks associated with the growing popularity of tokenized funds. The limited track record of tech providers and exposure to volatile digital assets pose challenges for managing these funds. To mitigate these risks, Moody’s recommends a robust contract audit process and expertise in areas such as token issuance and compliance with KYC and AML checks. Despite these concerns, the adoption of tokenized funds continues to grow rapidly, driven by investments in government securities. This trend presents untapped market potential and opens up possibilities for various functions beyond enhancing asset liquidity.
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