Tokenized Fund Adoption Grows but Brings Technology Risks

A recent report from analysts at a credit-rating agency highlights that technology providers offering tokenization services have a limited history, which could contribute to an elevated level of risk. Moody's Investor Services cautioned that while the adoption of tokenized investment funds is increasing, the providers of this technology lack an extensive track record.

Tokenized funds are investment vehicles where the units are digitally represented using distributed ledger technology (DLT), commonly associated with cryptocurrencies. The financial industry is embracing asset or fund tokenization to enhance market liquidity, efficiency, and transparency. Moody's DeFi and Digital Assets team emphasized in their Monday report that the growing use of tokenized funds, particularly those investing in government securities like bonds, indicates an untapped market potential.

The report suggested that tokenized funds offer more than just improved asset liquidity, citing various potential applications such as serving as collateral. However, the authors of the report cautioned that implementing tokenization requires additional technological expertise. While traditional investment funds already come with inherent risks related to underlying assets and fund management, tokenized funds could introduce additional risks associated with distributed ledger technology (DLT).

The report specifically pointed out that the entities providing tokenization technology often lack an extensive track record, thereby increasing the risk of payment disruptions in case of bankruptcy or technological failures.