Tokenized funds have risen by almost 400% during the past year, according to Moody’s.
Tokenization typically refers to digital securities. The tokenization of an asset brings improved efficiencies and characteristics to the asset.
The report states that the market capitalization of tokenized funds stands at $3.6 billion. While small, the growth is impressive, and much of the world expects digital securities to become the norm going forward.
The benefits of tokenization include 24/7 trading or transfers, rationalization, transparency, and perhaps self-custody. Over time, increased liquidity for novel assets may also occur.
While improvements are the goal, Moody’s also believes there are risks to the emerging ecosystem.
The report notes that investors are “exposed to potential vulnerabilities” within the technology utilized.
“Malfunctions and exploits could pose risks to blockchain technology and smart contracts,” states the report.
The fragmented regulatory environment is a challenge as well as rules are not uniform and investor protection concerns remain.
According to Moody’s, another issue could be the team’s limited experience and size.
Cristiano Ventricelli, VP-Senior Analyst at Moody’s Ratings, states:
“When assessing tokenized funds, investors have to weigh not only the benefits of accessibility and transparency, but also the risks tied to the underlying technology, security vulnerabilities, scalability limitations and evolving regulations.”