The tokenization of the funds is emerging, but their rapid increase is at a serious risk that investors should not notice, Moody agency ratings said in a Wednesday’s report.
Many major financial institutions, including Blackrock and Franklin Templeton, have made their mark on the world of tokenization and inspiration to others to follow the latest trend. For example, the tokenized funds in the currency market grew nearly 350% a year in a market capitalization of $ 5.2 billion, per Rwa.xyz data.
“When assessing tokenized funds, investors need to weigh not only the benefits of access and transparency, but also the risks tied to the underlying technology, security weaknesses, scalability limits and emerging regulations,” said Cristiano Ventricelli, VP-senior analyst in Moody’s ratings.
At the forefront of these risks is the limited experience of many fund managers in the tokenization market developed, Moody noted. In small teams and short track records, operators may deal with the risk of key-man which is highly dependent on some individuals: if an important executive leaf or management structures are skinny, the stability of the fund may be degraded, the report said. Moody’s fund teams urged to distribute responsibilities and coast the risk management skills.
Blockchain interruptions, resulting from technology freshness, pose another risk. While smart contracts offer operational efficiency such as automating fund operations, they remain susceptible to coding flaws or malicious attacks, the report mentioned. Public use, unauthorized blockchains increase access but also increases exposure to potential exploitation, it added. Moody recommends retaining off-chain backups and performing strict audits of smart contracts to guard against disruptions.
The redemption mechanisms, which allow investors in their holdings, are another fragile link. The report urged tokenized funds to allow redemption in both stablecoins and fiat currency. This dual approach helps the pillow against events such as Stablecoin degs or blockchain outages.
Finally, tokenized funds operate on constituents with various regulations, and this patchwork increases the risk that investors’ claims may face legal barriers, the report said. While some funds use structures designed to give token holders of direct claims to underlying properties, the implementation still depends on local laws and the power of the fund documentation, the report added.
