Moody’s Flags Mounting Risks as Tokenized Funds Accelerate in Growth

The explosion in tokenized investment vehicles has captured institutional attention, but Moody’s Ratings warns the surge may be outpacing essential safeguards.

In a report released Wednesday, the credit rating agency voiced concern over the rapid growth of tokenized funds, highlighting vulnerabilities in operational design, smart contract infrastructure, and regulatory clarity. According to data from rwa.xyz, tokenized money market funds have grown approximately 350% year-over-year to reach $5.2 billion in total value.

“Tokenization offers substantial benefits in terms of transparency, liquidity, and efficiency,” said Cristiano Ventricelli, VP-senior analyst at Moody’s. “However, those advantages are accompanied by technological, governance, and legal challenges that must be addressed as the sector scales.”

Moody’s identified key risks including limited track records among tokenized fund managers, heavy dependence on small teams, and insufficient redundancy in oversight. The potential for key-person risk remains high, particularly in funds operated by lean teams with highly centralized decision-making.

Additionally, the report emphasizes that blockchain-based systems, particularly when built on public and permissionless platforms, may be vulnerable to security flaws and malicious exploits. Smart contracts—while enabling automation—can introduce systemic risks if inadequately audited or poorly coded. Moody’s advises robust audit protocols and off-chain contingency mechanisms.

Redemption mechanisms were also noted as structurally fragile. The agency recommends dual-mode redemption support (stablecoin and fiat) to mitigate liquidity constraints in the event of blockchain outages or stablecoin de-pegging events.

Regulatory uncertainty further complicates the landscape. Operating across multiple legal jurisdictions introduces enforceability concerns for investor claims, even when tokenized fund structures offer direct claims on underlying assets.

While major financial players such as BlackRock and Franklin Templeton have made strides in the space, Moody’s cautioned that growth alone does not equate to resilience. The report concludes that a maturing tokenization market will require stronger operational frameworks and clearer regulatory harmonization to ensure long-term investor protection.