Tokenization of funds is thriving, but their rapid increase comes with serious risks that investors should not overlook, the Credit Agency Moody’s Ratings said in a Wednesday report.
Several large financial institutions, including Blackrock and Franklin Templeton, have marked themselves in the world of tokenization and inspired others to follow the latest trend. For example, tokenized money market funds grew approx. 350% in one year to a market value of $ 5.2 billion per year. Rwa.xyz -Data.
“When evaluating tokenized funds, investors must not only weigh the benefits of accessibility and transparency, but also the risks associated with the underlying technology, safety vulnerability, scalability limits and developing rules,” said Cristiano Ventricelli, VP-senior analyzes on Moody’s ratings.
At the forefront of these risks is the limited experience of many fund managers on the still -developing tokenization market, noticed Moody. With small teams and short track records, operators could face key man’s risk, where too much depends on a few individuals: If a crucial executive leaves or government structures are thin, the fund’s stability can be shaken, the report says. Moody’s invited fund teams to distribute responsibilities and create risk management practices.
Blockchain disorders, which in turn are the result of the technology’s news, pose a different risk. While smart contracts offer operating efficiency such as automation of fund operations, they remain sensitive to coding deficiencies or malicious attacks, the report noted. Using public, permitted -free blockchains is increasing accessibility, but also increases exposure to potential exploits, added it. Moody’s recommended to keep backups out of the chain and complete strict smart contract revisions to protect themselves from disturbances.
Redemption mechanisms that let investors pay their inventory are another fragile link. The report encouraged tokenized funds to allow redemptions in both stableecoins and Fiat currency. This double approach helps pillow against events such as StableCoin Depegs or Blockchain power breaks.
Eventually, tokenized funds operate across jurisdictions with different rules, and this patchwork increases the risk of the investor claiming may face legal obstacles, the report said. While some funds use structures designed to give token holders directly claims to the underlying assets, enforcement still depends on local laws and the strength of fund documentation, the report added.
