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Tokenized Fund Adoption Grows but Brings Technology Risks: Moody’s

Tokenized Fund Adoption Grows but Brings Technology Risks: Moody’s

The adoption of tokenized investment funds is on the rise – but the technology providers have a “limited track record,” contributing to increased risk, a Monday report by credit-rating agency Moody’s Investor Services warned.

Tokenized funds are investment funds whose units are digitally represented with the use of distributed ledger technology (DLT), which powers crypto. Asset or fund tokenization is having a moment as financial institutions worldwide attempt to improve market liquidity, efficiency and transparency. The growing adoption of tokenized funds – mostly fueled by the tokenization of funds that invest in government securities like bonds – signals untapped market potential, according to the report by Moody’s DeFi and Digital Assets team.

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

However, tokenization requires “additional” technological expertise, the report’s authors warned. Investment funds come with their risks stemming from things like the underlying assets and fund management. Tokenized funds could bring additional risks connected to DLT, according to the report.

“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,” the report said.

That’s not stopping adoption, though, according to Moody’s analysts. Big players from Franklin Templeton and Goldman Sachs to Hong Kong’s Monetary Authority have recently participated in the issuance of tokenized assets.