Tokenized Investment Products Boom, But Moody’s Flags Potential Dangers

Moody’s Warns Tokenized Funds Face Hidden Dangers Amid Breakneck Growth
Credit agency highlights tech flaws, operational risks, and regulatory gaps as tokenization trend accelerates

The rapid rise of tokenized investment funds is raising eyebrows at Moody’s Ratings, which cautions that the booming market could be headed for trouble if key vulnerabilities remain unaddressed.

In a report issued Wednesday, Moody’s flagged concerns over the fragility of tokenized fund operations, the risks tied to blockchain infrastructure, and the fragmented regulatory environment they operate in.

The warning comes as tokenized money market funds ballooned 350% in just a year to $5.2 billion in market cap, fueled by major players like BlackRock and Franklin Templeton embracing on-chain finance, according to data from rwa.xyz.

“While tokenization brings efficiency and transparency, it also opens the door to significant risks,” said Cristiano Ventricelli, senior analyst at Moody’s Ratings. These risks range from smart contract bugs and cyber threats to governance issues and uncertain legal protections.

One concern centers on the lack of experience among fund operators, many of whom run lean teams and rely heavily on key personnel. This concentration of responsibility leaves room for disruption if critical members exit or if oversight is lacking.

Moody’s also pointed to blockchain vulnerabilities, particularly when funds rely on public networks. Smart contracts may streamline operations but can be prone to code flaws or targeted exploits. The report recommends regular audits and off-chain safeguards.

Redemption systems pose another weak spot. Moody’s urged fund managers to support both fiat and stablecoin redemptions to protect investors in case of blockchain failures or stablecoin instability.

Legal clarity is the final hurdle. With tokenized funds spanning multiple regulatory regimes, investor rights may not be enforceable across borders. Even when structured properly, enforcement can depend heavily on jurisdiction-specific laws.

Moody’s conclusion: the promise of tokenized funds is real, but so are the pitfalls. Without stronger infrastructure and clearer regulation, investors may be exposed to more risk than reward.