Legacy monetary establishments proceed to pay attention to the rising variety of conventional belongings being introduced on-chain. In a brand new report, Moody’s, the funding danger evaluation agency, highlighted the rising groundswell of mainstream asset tokenization.
In a Jan. 15 report, Moody’s mentioned the worth of tokenized funds grew from $100M at the beginning of 2023 to round $800M right this moment, propelled by the rising tokenization of U.S. treasuries.
Moody’s mentioned belongings are being introduced onto each private and non-private blockchains. Examples embrace Franklin Templeton’s U.S. Authorities Cash Fund extending from Stellar onto Polygon, Backed Finance launching a tokenized short-term U.S. treasury bond ETF, and UBS Asset Administration deploying a tokenized cash market fund (MMF) on Ethereum.
“By tokenizing MMFs, issuers can mix the steadiness of MMFs with the technological benefits of stablecoins,” Moody’s mentioned. “Moreover, functions of tokenized MMFs lengthen past mere buying and holding till maturity, suggesting the potential for a extra numerous vary of makes use of.”
The report additionally highlights the numerous effectivity advantages related to tokenized belongings, suggesting such might drive up adoption amongst conventional buyers as effectively.
“For conventional buyers, tokenized funds can improve market liquidity and accessibility, lower prices, and allow fractionalization,” Moody’s mentioned. “Tokenization also can cut back prices and dependence on intermediaries, shorten settlement occasions, automate processes with the assistance of sensible contracts, and improve transparency.”
DeFi buyers flip to legacy belongings for yield
Moody’s mentioned the elevated curiosity in tokenized treasury payments and bonds echoes elevated curiosity from crypto buyers searching for publicity to secure yields on-chain.
The corporate famous that web3 lending markets provided better returns than conventional short-term securities in comparison with treasury payments or different conventional sources of fiat-denominated curiosity all through 2021. Nonetheless, the pattern has since reversed.
“Now, in a higher-yield surroundings, as buying and selling volumes and lending charges on DeFi protocols have declined, investments in belongings similar to U.S, T-bills have develop into extra interesting,” Moody’s mentioned. “This has motivated crypto buyers to shift their funds from crypto belongings like stablecoins to conventional investments that supply comparable or larger yields with decrease dangers.”
Moody’s added that tokenized MMFs might comprise an alternative choice to stablecoins as a supply of collateral for DeFi lending protocols. Nonetheless, Moody’s conceded that models in tokenized funds would doubtless be far much less liquid than stablecoins.
Tokenization dangers
Regardless of the report’s bullishness concerning the tokenization of conventional belongings, Moody’s highlighted a number of distinctive dangers related to the burgeoning sector. The report mentioned tokenization service suppliers might undergo from technological malfunctions and should traverse numerous and evolving regulatory landscapes.
“The administration of a tokenized fund requires a variety of experience,” the report mentioned. “Fund managers and directors typically discover themselves dealing with operations similar to token issuance and redemption, upkeep of an on-chain buyers’ register, and whitelisting wallets in compliance with KYC and AML checks. These are areas the place they won’t have intensive expertise. Additionally they must navigate numerous regulatory regimes, contemplating each the placement of the fund’s issuance and the domiciles of potential buyers.”
The report additionally emphasised the technological dangers related to belongings tokenized on public blockchains, together with cybersecurity assaults and governance points. Moody’s recommends the adoption of off-chain investor registers to guard towards the dangers related to issuing belongings on public blockchains.
Moody’s suggests that each one related stakeholders — “the know-how supplier, fund supervisor, fund administrator, and custodian” — also needs to be unbiased and replaceable to guard towards the impression of chapter or different unexpected circumstances.
The report additionally mentioned tokens needs to be programmed in order that fund directors can limit asset transfers between whitelisted wallets managed by accredited buyers which have accomplished know-your-customer and anti-money laundering checks.
“This could cut back the chance of cyberattacks or different fraudulent actions by exterior events,” Moody’s mentioned. “Nonetheless, it additionally imposes a further duty on the fund administrator to handle the know-how successfully.”
