The adoption of tokenized investment funds is gaining traction, with financial institutions leveraging distributed ledger technology (DLT) to improve market liquidity, efficiency, and transparency. While this trend signals untapped market potential, it also comes with increased risk due to the limited track record of technology providers, according to a recent report by credit-rating agency Moody’s Investor Services.
Tokenized funds, which digitally represent investment fund units using DLT, are particularly popular for funds investing in government securities like bonds. However, the potential applications of tokenized funds extend beyond liquidity enhancement, including the use of these funds as collateral.
Despite the promising outlook, the report emphasizes the need for additional technological expertise to mitigate the risks associated with tokenization. The underlying assets, fund management, and DLT present unique challenges that require careful consideration.
The report cautioned that technology providers with limited track records may increase the risk of potential disruptions in the event of bankruptcy or technological failure. However, this hasn’t deterred major players such as Franklin Templeton, Goldman Sachs, and Hong Kong’s Monetary Authority from participating in the issuance of tokenized assets, indicating continued adoption despite the associated risks.
