State Street Taps Taurus for Crypto Tokenization Move

Prominent global custody bank State Street has partnered with Taurus, the crypto custody and tokenization firm, in anticipation of friendly regulation in the United States. The move is part of the bank’s attempt to explore the US market by offering crypto custody and tokenized asset services to consumers.

State Street’s Focus on Tokenized Assets

Leading players in the financial services sector plan to enter the digital finance space by concentrating on tokenized versions of conventional assets. The first client announcement is anticipated soon and would represent a substantial change in the bank’s operations.

However, the Securities and Exchange Commission’s (SEC) scheduled Staff Accounting Bulletin 121 (SAB 121) presents an obstacle for banks operating in the United States. This order exerts a great deal of restrictions on businesses that want to store Bitcoin assets belonging to their clients; thus, it becomes very difficult for banks to offer their services to the digital asset market.

State Street is against SAB 121 because it requires banks that wish to handle cryptocurrency to keep a sizeable amount of money on hand to reduce potential risk. Accordingly, State Street’s Chief Product Officer and Head of Digital Asset Solutions, Donna Milrod, has made a strong case for regulatory reform.

Milrod claimed that the existing rule burdens institutions excessively and makes it more difficult for them to provide digital custody services. Additionally, Milrod made it clear that State Street does not list assets on its balance sheet as part of its custodial responsibilities.

Instead, the bank maintains an off-balance sheet of assets apart from the organization’s financial statements. This strategy is in line with the bank’s extensive background in custody services, where it has earned a reputation for protecting both digital and traditional assets.

Tokenization Benefits and Regulatory Challenges

Tokenization is becoming more popular in international financial markets. Lamine Brahimi emphasized its benefits, such as better collateral management and round-the-clock trading.

Brahimi is the co-founder and managing partner of Taurus, a company based in Switzerland. These advantages make a compelling case for the use of tokenized assets, especially in international markets with more accommodating regulatory environments.

However, Brahimi reiterated his worries about the limitations set by SAB 121. He was hopeful that Taurus and State Street’s alliance would provide a positive signal to the American financial markets.

According to Brahimi, the United States may surpass Europe in the adoption of digital assets with better regulation. Moreover, State Street has a strong history with blockchain technology, having worked with cryptocurrency custody company Copper in the past.

While Copper has redirected its attention from custodial services to its ClearLoop settlement system, State Street’s continued dedication to investigating novel prospects involving digital assets is still discernible.

High-Net-Worth Individuals in Tokenization

Financial institutions are not the only ones becoming increasingly interested in tokenized assets. Affluent individuals are also anticipated to lead the adoption of tokenized assets, especially as alternative investments like private lending.

According to Colin Butler, Head of Institutional Capital at Polygon, tokenization improves accessibility and liquidity for assets that were previously deemed illiquid. There are an estimated $300 trillion worth of assets in the world, with about $100 trillion held by people with net worths ranging from $1 million to $30 million.

However, Butler foresees a change where financial advisors will soon suggest higher allocations to alternative investments. Based on his predictions, tokenized assets may account for up to 20% of these portfolios, opening up a $30 trillion worldwide market.

As of now, around $9 billion has been invested in tokenized private credit. This number is anticipated to rise sharply as tokenization gains traction among top private equity funds, which include industry heavyweights like KKR and Hamilton Lane. These two businesses have already started down this path by tokenizing their assets using the Polygon platform.

Future of Tokenized Real-World Assets (RWAs)

With RWAs gaining widespread popularity, traditional financial entities are exploring significant investments in this new industry. Butler claims that large portfolio managers at private equity firms are beginning to see the possibilities in tokenized assets.

For example, a company that manages $500 billion in assets could raise an extra $50 billion by investing in tokenized RWAs. Besides stablecoins, tokenized RWAs worth about $11.6 billion are currently kept on blockchain networks.

Money market funds like Franklin OnChain US Government Money Fund (FOBXX) and BlackRock’s USD Institutional Digital Liquidity Fund (BUIDL) are some of the most prominent examples of tokenized RWAs. Currently, these funds oversee roughly $520 million and $420 million, respectively.