Moody's Highlights Risks in Tokenized Funds Amid Growth

According to PANews, Moody's has issued a report highlighting significant risks associated with the burgeoning tokenization of funds. Cristiano Ventricelli, Moody's Vice President and Senior Analyst, emphasized the importance of investors weighing the benefits of tokenized funds against risks related to underlying technology, security, scalability, and regulatory changes. Moody's noted that many fund managers lack experience in the early stages of the tokenization market, often operating with small teams and short track records. This creates a key person risk, where over-reliance on a few individuals could destabilize funds if key executives leave or governance structures are weak. The agency urged fund teams to diversify responsibilities and enhance risk management. Blockchain disruptions pose another risk due to the novelty of the technology. While smart contracts can improve operational efficiency, they are vulnerable to coding defects or malicious attacks. Using public, permissionless blockchains increases accessibility but also heightens potential attack risks. Moody's recommends maintaining off-chain backups and conducting thorough audits of smart contracts. Redemption mechanisms are identified as a weak point. Moody's encourages tokenized funds to allow redemptions in both stablecoins and fiat currency to mitigate impacts from stablecoin de-pegging or blockchain disruptions. Additionally, operating across different jurisdictions presents varied regulatory challenges, increasing legal obstacles for investor claims. Some funds offer structures granting token holders direct claims to underlying assets, but enforceability depends on local laws and the completeness of fund documentation.