The tokenization of the funds is booming, but its rapid increase involves serious risks that investors not overlook, according to the Moody’s ratings credit agency in a Wednesday report.
Several important financial institutions, including Blackrock and Franklin Templeton, have left their mark on the world of token and inspired others to follow the last trend. For example, tokenized monetary market funds grew approximately 350% in a year to a market capitalization of $ 5.2 billion, according to data RWA.XYZ.
“When evaluating tokenized funds, investors must weigh not only the benefits of accessibility and transparency, but also the risks linked to underlying technology, security vulnerabilities, scalability limitations and evolution regulations,” said Cristiano Ventricelli, an VP-Senior analyst in Moody’s qualifications.
At the forefront of these risks is the limited experience of many fund managers in the tokenization market still in development, Moody’s said. With small teams and short stories, operators could face a risk of a key man, where too much depends on some people: if a crucial executive leaves or governance structures are thin, the stability of the background could be shaken, according to the report. Moody’s urged funds to distribute responsibilities and underpin risk management practices.
Blockchain interruptions, again as a result of the novelty of technology, poses another risk. While smart contracts offer operational efficiencies such as the automation of fund operations, they are still susceptible to coding malicious failures or attacks, the report said. The use of public block chains without permission increases accessibility, but also increases exposure to possible feats, he added. Moody’s recommended maintaining backup copies outside the chain and conducting rigorous intelligent contracts to protect against interruptions.
The redemption mechanisms, which allow investors to withdraw their holdings, are another fragile link. The report encouraged the tokenized funds to allow reimbursements in both Stablecoins and in fiduciary currency. This dual approach helps cushion events such as Stablecoin’s dependents or blockchain interruptions.
Finally, tokenized funds operate between jurisdictions with variable regulations, and this mosaic increases the risk that investors claims may face legal obstacles, according to the report. While some funds use structures designed to give tokens headlines direct claims on underlying assets, the application of execution still depends on local laws and the strength of the fund documentation, the report added.
