Fund tokenization is booming, but their rapid increase is accompanied by serious risks that investors should not ignore, said the Moody’s Ratings credit agency in a Wednesday report.
Several major financial institutions, including Blackrock and Franklin Templeton, have made their mark in the world of tokenization and have inspired others to follow the latest trend. For example, the money market funds in Tokenized increased by around 350% in one year for a market capitalization of $ 5.2 billion, according to Rwa.xyz data.
“During the assessment of token funds, investors must weigh not only the advantages of accessibility and transparency, but also the risks linked to underlying technology, security vulnerabilities, scalability and evolutionary regulations,” said Cristiano Ventricelli, VP-Senior analyst at Moody’s Rating.
At the forefront of these risks is the limited experience of many fund managers in the tokenization market still in development, noted Moody’s. With the small teams and the short history, the operators could cope with a risk of a key man where too much depends on a few individuals: if a crucial executive part or the governance structures are thin, the stability of the fund could be shaken, depending on the report. Moody’s urged funds to distribute responsibilities and consolidate risk management practices.
Blockchain disturbances, again resulting from the novelty of technology, poses another risk. Although intelligent contracts offer operational efficiency such as automation of fund operations, they remain sensitive to coding defects or malicious attacks, noted the report. By using the public, blockchains without authorization increase accessibility but also increase exposure to potential exploits, he added. Moody’s recommended keeping backups out of the chain and carrying out rigorous intelligent contract audits to protect against disturbances.
The buyout mechanisms, which allow investors to withdraw their assets, are another fragile link. The report has encouraged tokenized funds to allow redemptions both in stabbed and fiduciary currency. This double approach helps to cushion events such as stablecoin dots or blockchain breakdowns.
Finally, the tokenized funds operate through the courts with variable regulations, and this patchwork increases the risk that investors’ complaints can deal with legal obstacles, according to the report. While some funds use structures designed to give holders of direct complaints on underlying assets, applicability still depends on local laws and the documentation of the fund, added the report.
