medium · FRM Part 2 Current Issues
An investment fund tokenizes its holdings in a private credit portfolio, offering '24/7 liquidity' to retail investors via a secondary market on a public blockchain.
If the underlying loans are quarterly-marked and illiquid, what is the most significant risk of this structure?
- Smart contract risk arising from a coding error in the token's underlying redemption and payout distribution logic.
- Liquidity illusion, where the wrapper's tradability outpaces the underlying asset's ability to be liquidated, risking a run.
- Cyber risk, where a malicious hacker steals the private cryptographic keys controlling the fund manager's cold storage wallet.
- Operational risk from blockchain network congestion, causing slow transaction times and delayed settlement during periods of market stress.
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