Today Moody’s published a short report on tokenized funds, noting the popularity of funds backed by government bonds from traditional asset managers such as Franklin Templeton and WisdomTree.
Some touted benefits of fund tokenization include broader access through fractionalization, lower costs, and enhanced liquidity. However, so far the biggest takeup has been from the crypto sector for government bond-backed funds which don’t have these features. Moody’s acknowledges that a key reason for this is these funds are held on public blockchains and provide an attractive yield.
In contrast, stablecoins returns via DeFi lending protocols have been relatively low and volatile. For example, today users can earn more than 8% by depositing the USDC stablecoin on Aave. But yesterday the figure was below 4%, less than the return on a government bond fund. Moody’s concluded that crypto investors could get lured away during another crypto bull run. In that case, the target client must shift to traditional investors.
Fund tokenization risks
As a ratings agency one of Moody’s key tasks is to assess risks. And it sees a few additional ones from tokenization. Part of that is a lack of track record with tokenization duties.
“Fund managers and administrators often find themselves handling operations such as token issuance and redemption, maintenance of an on-chain investors’ register, and whitelisting wallets in compliance with KYC and AML checks. These are areas where they might not have extensive experience. They also have to navigate diverse regulatory regimes,” Moody’s writes.
Additionally, there are the cybersecurity and governance risks associated with public blockchains.
It concludes that the efficiencies of the technology mean tokenized funds are carving out a new niche. However, the frameworks supporting this are still maturing in the development phase.
Meanwhile, new projects are popping up regularly. Last week saw the unveiling of the fund tokenization protocol Libre, backed by Nomura’s Laser Digital. It will launch by tokenizing alternative asset funds from Hamilton Lane and Brevan Howard. This will offer several of the promised benefits of improved access, fractionalization and lower cost.
