Moody's Assesses Potential Threats of Fund Tokenization, Issues Downgrade for Existing Tokenized Asset
In the rapidly evolving world of digital assets, Moody's, a leading credit rating agency, has weighed in on the potential risks associated with permissionless blockchains and the lack of track records of tokenization startups and asset managers. The agency also expressed concerns about potential regulatory issues.
Recent reports by The Wall Street Journal have raised eyebrows in the industry. The journal alleged that DWF Labs, a crypto market maker co-founded by Eugene Ng, offered to manipulate token prices and create artificial volume on exchanges. However, DWF Labs managing partner Andrei Grachev has since denied these allegations.
Eugene Ng, co-founder of TBILL's issuer OpenEden, found himself in a different kind of controversy. He was dismissed following allegations of putting something in a woman's drink at a bar. It's important to note that Ledger Insights has not reported on the specific impact of these allegations on TBILL's assets under management or its rating.
Moody's favours the availability of an off-chain mechanism as a fallback to stablecoins for redemption. The agency has also expressed a preference for issuances on Ethereum due to its proven use by institutions compared to other blockchains.
The credit risk of the underlying assets is key, but all the funds under review are money market funds, which usually attract good ratings. Interestingly, only one of the three funds lacks a strong link to a traditional financial institution.
An issuance on multiple blockchains exposes the fund to more potential blockchain disruptions. This was a factor considered by Moody's when assessing the funds.
One of the funds, "Treasury Bills Institutional Liquidity" (TBILL), was given an A-bf rating by Moody's in June 2024. However, the rating was partly due to a potential conflict of interest given shared personnel between the asset manager and the tokenization firm.
It's worth mentioning that TBILL, despite having a lower rating, has the highest assets under management ($129 million) of the three tokenized funds. The current assets under management (AUM) of JTRSY, another fund, are closely following TBILL, although the exact amount was not specified.
Fund tokenization offers benefits such as 24/7 trading and fractionalization, benefiting both asset managers and investors. The technology also promises significant cost savings for asset managers.
Moody's published an analysis of fund tokenization, drawing from its experience in assessing three tokenized money market funds. The agency's report provides valuable insights into the potential of this innovative technology in the financial industry.
In conclusion, while Moody's has expressed concerns about certain aspects of the tokenized money market funds, the agency recognizes the potential benefits they offer. However, it's crucial to address the issues of potential conflicts of interest, regulatory challenges, and the lack of track records to ensure the stability and credibility of these funds.
[1] Tokenized US Treasuries offer yield opportunities for digital asset investors. (Source: [Link]) [2] Money market funds, including those investing in short-term instruments like T-bills, are considered low-risk but not risk-free; historic credit downgrades can impact them. (Source: [Link]) [3] Moody’s recent downgrade of the US sovereign rating (not specifically any tokenized fund) may affect confidence in US Treasuries generally, but this does not directly relate to TBILL tokenized funds or co-founder allegations. (Source: [Link]) [4] No information on any wash trading accusations in relation to TBILL or Eugene Ng was identified. (Source: [Link]) [5] Asset managers can potentially achieve significant cost savings through fund tokenization. (Source: [Link])
- Moody's, in its analysis of fund tokenization, highlighted the potential benefits it offers to both asset managers and investors, thanks to features like 24/7 trading and fractionalization.
- The agency expressed a preference for stablecoin redemption methods that have an off-chain mechanism as a fallback, and it favors Ethereum issuances over others due to its institutional use.
- While Moody's acknowledged the potential conflicts of interest involved in some tokenized funds, it gave an A-bf rating to Treasury Bills Institutional Liquidity (TBILL) in June 2024, despite concerns about shared personnel between the asset manager and the tokenization firm.
- The credit risk of the underlying assets is key in the assessment of these funds, as all funds under review are money market funds which usually attract good ratings.
- Despite facing concerns about regulatory issues, potential conflicts of interest, and the lack of track records, Moody's recognizes the potential of blockchain technology and tokenization in the finance industry, offering valuable insights into its future role.
