Key Takeaways:

• Tokenized funds have grown rapidly, but the technology comes with notable risks, according to Moody's Ratings.

• Limited experience among fund managers and reliance on small teams introduce key-man risks.

• Potential blockchain disruptions could impact operations and security.

• Redemption mechanisms may be complex or unreliable.

• Legal and regulatory challenges vary across jurisdictions, adding further uncertainty.

The tokenization of funds is rapidly expanding, but this swift rise carries major risks that investors shouldn’t ignore, Moody’s Ratings stated in a report released Wednesday.

Several leading financial firms, such as BlackRock and Franklin Templeton, have embraced tokenization, encouraging others to join the growing trend. According to data from rwa.xyz, tokenized money market funds surged by approximately 350% over the past year, reaching a market cap of $5.2 billion.

Cristiano Ventricelli, VP-senior analyst at Moody’s Ratings, stated, “When evaluating tokenized funds, investors must consider not only the advantages of improved accessibility and transparency, but also the risks associated with the technology itself, including security weaknesses, scalability issues, and shifting regulatory landscapes.”

Moody’s highlighted that a major concern in the tokenization space is the limited experience of many fund managers. With small teams and minimal track records, these operators face key-man risks—where too much depends on a few individuals. If a key executive departs or if governance is weak, fund stability could be compromised. Moody’s urged firms to spread responsibilities more evenly and strengthen risk management frameworks.

The report also flagged blockchain-related disruptions as another significant risk, driven by the emerging nature of the technology. While smart contracts can streamline operations, they are still prone to coding errors and potential cyberattacks. Using public, permissionless blockchains may enhance accessibility but also increases vulnerability. Moody’s recommended maintaining off-chain backups and conducting thorough smart contract audits to minimize these risks.

Redemption processes represent another fragile point. The report suggested that tokenized funds should support redemptions in both stablecoins and traditional fiat currencies, offering greater flexibility and protection against issues like stablecoin depegs or blockchain failures.

Finally, Moody’s warned that regulatory inconsistencies across jurisdictions could complicate legal claims for investors. While some tokenized fund structures aim to grant direct claims on assets, actual enforceability will depend on local legal frameworks and the robustness of fund documentation.