- Distributed ledger technology is used to represent tokenized fund units
- Adoption of is growing because of tokenization of funds that invest in bonds
- The platforms responsible for tech aspects tend to have limited track records
As tokenized investment funds go mainstream, the risks associated with them are increasing correspondingly because the tech providers don’t have enough experience according to a Monday report by credit rating agency Moody’s, CoinDesk reported.
Tokenized funds are investment assets, where distributed ledger technology (DLT) is used to represent the units digitally.
Untapped market potential
Fund or asset tokenization is taking center stage as banks all over the world try to improve efficiency, market liquidity, and transparency. Adoption of tokenized funds is growing largely due to the tokenization of funds that invest in bonds and other government securities. This process indicates untapped market potential, according to Moody's report.
The potential applications of tokenized funds go beyond improving asset liquidity. They can serve as collateral among other possible uses.
However, the report warned that tokenization requires more advanced technological capacities. Among the risks associated with investment funds is the underlying asset management. Tokenized funds could increase the risks connected to ledger technology.
Risk of disrupted payments
The institutions and platforms responsible for the technological aspects tend to have limited track records, leading to a higher risk of disrupting payments in the case of technological issues or bankruptcy.
No shortage of providers
Despite the risks, leading corporations like Goldman Sachs and JPMorgan are issuing digital funds. Goldman Sachs’ Digital Asset Platform issued digital bonds worth around $109 million and achieved 15 basis points in savings in November 2023. This led to added returns of over $155 million passed onto Union Investment as the only buyer.
Last year, CoinDesk reported that JPMorgan’s Onyx Digital Assets expected savings of $20 million on tokenized repossession of $1 trillion by the end of 2023. Finally, Broadridge saved Societe Generale and other clients $1 million per 100,000 repo transactions.
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