As Tokenized Fund Adoption Rises, So Do The Tech Risks: Moodys Report

Updater face
Last updated Jan 16, 2024 | 10:37 AM UTC

Tokenized investment funds are increasingly popular despite the foundation of blockchain having a “limited track record”, according to a report today, 15 January, from Moody’s Investor Services.

Tokenized trends

As per a report from the credit rating agency, financial institutions and entities across the globe continue to adopt distributed ledger technology (DLT) such as blockchain to tokenize assets and entire investment funds.

Several tokenized funds issued throughout 2023, on both public and private blockchains, were largely backed by government securities, garnering significant attention from investors of all shapes and sizes. 

Leaning on data gathered by / Dune Analytics, Moody’s highlights that tokenized funds investing in government securities issued via public blockchains throughout 2023 surpassed $800million.

Tokenized US treasuries make up a significant bulk of this figure, having accumulated approximately $650m in assets, an estimated growth of 450% through 2023. As per the / Dune Analytics report, Ethereum and Stellar are the most popular networks for tokenized government securities funds.

Leading firms such as JPMorgan and Goldman Sachs are already knee-deep in the tokenization game, suggesting that whilst there may be some risks associated with blockchain, there is plenty of appetite for blockchain-based investments.

Getting tokenized

As per the report, Swiss-based real-world asset (RWA) tokenization platform, Backed Finance, began offering short-term US Treasury Bond ETF shares publicly on the Ethereum network, which it then extended to Coinbase’s layer-2 network, Base. 

Furthermore, UBS Asset Management also launched a tokenized money market fund (MMF) on Ethereum via its tokenization platform, UBS Tokenize.

This pairs the market stability of an MMF with the technology of stablecoins, and Moody’s believes this suggests “the potential for a more diverse range of uses”. 

Untapped market potential

Moody’s posits that tokenized MMFs could be an alternative to stablecoins on decentralized finance (DeFi) lending platforms.

These funds have become attractive to digital investors looking to purchase particular asset classes, such as government securities and bonds, primarily because they are capable of boosting market liquidity and efficiency, which are all-important for financial institutions. 

But according to Moody’s, tokenized funds are capable of far more than just liquidity, and could possess a myriad of applications and functions "including serving as collateral". 

Tokenization risk mitigation

Moody’s is correct to highlight that whilst tokenization may be the next phase of evolution for financial markets.

It warns that there are technological risks associated with blockchain and those that can arise from the underlying assets, fund management, and so on, writing: “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 notes that public blockchains are “particularly exposed” to a number of risks such as cyberattack and governance. Moody’s argues that highly audited smart contracts are the way forward. This is because errors in smart contract codes can result in irreversible transfers, or leave them exposed to a cyberattack.

Additionally, the report mentions that tokenized fund administrators can freeze wallets or enforce token transfers, meaning that those with whitelisted wallets can trade within the fund. With know-your-customer (KYC) and anti-money laundering (AML) checks in place, the risk of cybercrime or fraud can be vastly reduced.

Written by

Eddie is a seasoned crypto writer and Bitcoin maximalist.