Tokenized Funds Surge: Balancing Adoption and Tech Risks

• Increasing Adoption of Tokenized Investment Funds Despite Associated Risks
• What are Tokenized Funds?
• Potential Applications
• Associated Risks
• Continued Adoption Despite Risks

Increasing Adoption of Tokenized Investment Funds Despite Associated Risks

The rising trend of tokenized investment fund adoption by financial institutions worldwide is evident. However, the technology providers' relatively short operational history presents an increased risk, as per a recent report by Moody's Investor Services.

What are Tokenized Funds?

Tokenized funds are a type of investment fund where the units are digitally represented using distributed ledger technology (DLT), a key component that enables cryptocurrencies. The increasing interest by financial institutions in these funds is primarily due to the potential improved market liquidity, efficiency, and transparency they offer. The majority of this growth is attributed to the tokenization of funds that invest in government securities such as bonds, indicating a market with untapped potential, as stated in the report by Moody's DeFi and Digital Assets team.

Potential Applications

According to the same report, the possible applications of tokenized funds reach beyond just enhancing asset liquidity. These funds can serve various other functions, including functioning as collateral.

Associated Risks

Nonetheless, the report pointed out that the tokenization process demands an advanced level of technological proficiency. Apart from the regular risks associated with investment funds, such as those stemming from the underlying assets and fund management, tokenized funds could introduce additional risks related to DLT. The report added, "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."

Continued Adoption Despite Risks

Despite these potential risks, the adoption trend of tokenized funds is showing no signs of slowing down, as stated by Moody's analysts. Key players, including Franklin$0.0015 -3.24% Templeton, Goldman Sachs, and Hong Kong's Monetary Authority, have recently participated in the issuance of tokenized assets.

Edited by Jonathan Stoker