The use of tokenized investment funds is growing, but credit rating agency Moody’s Investor Services issued a warning in a study on Monday, citing the technology providers’ “limited track record” as a factor in the heightened risk.
Investment funds known as tokenized funds use distributed ledger technology (DLT), the driving force behind cryptocurrencies, to digitally represent their units. Tokenization of assets or funds is popular right now as financial organisations want to increase market efficiency, transparency, and liquidity globally. The Moody’s DeFi and Digital Assets team research claims that the increasing popularity of tokenized funds, which is mostly due to the tokenization of funds that invest in government securities like bonds, indicates unrealized market potential.
The potential uses for tokenized funds go beyond just improving asset liquidity. According to the research, these monies can be used for collateral among many other purposes.
However, the authors of the paper cautioned that tokenization calls for “additional” technological know-how. Investment funds have risks associated with them that are related to fund management and the underlying assets. Tokenized money may introduce additional DLT-related concerns, the paper states.
According to the research, “the technology-related entities often have limited track records, increasing the risk that payments may be disrupted in the case of bankruptcy or technological failure.”
However, Moody’s analysts say that’s not halting adoption. Big companies from Franklin Templeton and Goldman Sachs to Hong Kong’s Monetary Authority have recently joined in the issue of tokenized assets.