Rapid growth of tokenized funds comes with warning signs: Moody's
The credit agency expressed concerns about operational instability, blockchain vulnerabilities and uneven regulation.
Christian Sandor, Helen Brown | Edited by Stephen Alpher on April 9, 2025, 3:54 PM
What you need to know:
- The tokenization of funds is growing rapidly, but the new technology brings with it a number of vulnerabilities, as indicated in a report by rating agency Moody's.
- The paper also notes that limited experience of fund managers and reliance on small teams pose risks to key participants, while blockchain glitches, redemption mechanisms and legal complexities across jurisdictions add to concerns.
Fund tokenization is booming, but its rapid growth comes with serious risks that investors should not ignore, credit agency Moody's Ratings said in a report published on Wednesday.
Several major financial institutions, including BlackRock and Franklin Templeton, have made their mark on tokenization and inspired others to follow the latest trends. For example, tokenized money market funds have grown by about 350% in a year, reaching a market cap of $5.2 billion, according to rwa.xyz.
“When evaluating tokenized funds, investors should consider not only the benefits of accessibility and transparency, but also the risks associated with the underlying technologies, security vulnerabilities, scalability limitations and changing regulations,” said Cristiano Ventricelli, vice president and senior analyst at Moody’s Ratings.
Moody’s noted that at the forefront of these risks is the limited experience of many fund managers in the still-evolving tokenization market. With small teams and short track records, operators may face key-person dependency risk, where too much is relied upon by a few people: if a key executive leaves the company or the governance structure is weak, the fund’s stability could be at risk, the report said. Moody’s urged fund teams to separate responsibilities and strengthen risk management practices.
Blockchain disruptions due to the newness of the technology pose another threat. While smart contracts provide operational efficiencies, such as automating stock market transactions, they remain vulnerable to coding errors or malicious attacks, the report noted. Using public, permissionless blockchains increases accessibility but also increases exposure to potential threats, the document added. Moody's recommended storing off-chain backups and conducting thorough audits of smart contracts to protect against potential disruptions.
Redemption mechanisms that allow investors to cash out their holdings are also a vulnerable area. The report called for tokenized funds to allow redemptions in both stablecoins and fiat currency. This dual approach helps mitigate the impact of events such as stablecoin pegs or blockchain outages.
Finally, tokenized funds operate in multiple jurisdictions with different regulations, and this diversity increases the risk that investor claims could face legal hurdles, the report notes. While some funds use structures designed to give token holders direct claims to the underlying assets, enforceability still depends on local laws and the strength of the fund’s documentation, the report adds.
