According to a report by Moody’s Investor Services, the adoption of tokenized funds, which use blockchain technology to digitally represent shares or units in investment funds, is growing rapidly and signals a new era of innovation and efficiency in the asset management industry.
Tokenized funds, also known as digital funds or blockchain-traded funds (BTFs), can offer various benefits to investors, such as enhanced liquidity, accessibility, transparency, and fractionalization, the report said. Tokenization can also enable new use cases, such as using tokenized funds as collateral in decentralized finance (DeFi) markets or creating new types of funds that invest in previously illiquid assets, such as real estate or intellectual property.
The report noted that the issuance of tokenized funds backed by government securities, such as bonds, increased from $100 million at the start of 2023 to over $800 million by the end of the year, driven by the rising demand for fixed-income instruments amid the recent interest rate hikes by the U.S. Federal Reserve.
Moody’s Insights on the Adoption of Tokenized Funds
Some of the prominent examples of tokenized funds in this space include Franklin Templeton’s U.S. Government Money Fund, which registered its shares on the Stellar and Polygon blockchains, UBS’s tokenized money market fund on the Ethereum blockchain, and Standard Chartered’s tokenized Singapore-dollar government bond fund on its Libeara platform.
However, the report also cautioned that tokenization introduces additional technological and regulatory challenges, such as the need for more diverse expertise, the reliance on service providers with limited track records, the exposure to stablecoin risks, and the vulnerability to cyberattacks and governance issues.
The report also said that the regulatory framework for tokenized funds is still evolving and varies across jurisdictions, requiring more clarity and standardization.
Moody’s concluded that tokenized funds represent a significant opportunity for the asset management industry to leverage the potential of blockchain technology and tap into new markets and customer segments.
However, the report also stressed that tokenized funds need to overcome the existing barriers and risks to achieve wider adoption and acceptance. Despite the challenges, the adoption of tokenized assets is on the rise, According to Moody’s report. Major entities such as Goldman Sachs, and the Monetary Authority of Hong Kong have recently been involved in the issuance of these digital assets.