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

Entities providing tokenization tech have a limited track record and may contribute to increased risk, a new report by analysts at the credit-rating agency says.

AccessTimeIconJan 15, 2024 at 9:00 a.m. UTC

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.

Edited by Parikshit Mishra.


Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

Sandali Handagama

Sandali Handagama is CoinDesk's deputy managing editor for policy and regulations, EMEA. She does not own any crypto.