State Street said it will focus on tokenization rather than cryptocurrency custody, citing ongoing U.S. regulatory challenges.
The global custody bank, managing $44.3 trillion in assets, has teamed up with Taurus, a Swiss company specializing in cryptocurrency custody and tokenization, to offer digital asset services. This move comes as State Street expects a more favorable regulatory environment in the United States.
State Street’s decision comes in response to the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 121 (SAB 121), which places strict restrictions on banks looking to hold customers’ crypto assets.
The bulletin mandates that banks hold substantial capital reserves to offset the risks of managing digital assets. Donna Milrod, State Street’s chief product officer and head of Digital Asset Solutions, voiced strong opposition to SAB 121, stating that it could prevent banks from effectively handling crypto assets.
“While we’re starting with tokenization, that’s not where we’re ending,” Milrod said in an interview. “As soon as U.S. regulations help us out, we will be providing digital custody services as well. We know how to be a custodian. We don’t do that on our balance sheet. We do that off-balance sheet. They’re not our assets.”
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State Street, the 12th-largest bank in the U.S., has a history of involvement in the cryptocurrency sector. In July, it partnered with Galaxy Asset Management to launch exchange-traded funds (ETFs) that provide exposure to crypto firms. In 2021, the firm established a new unit dedicated to digital assets, tokenization, and cryptocurrency.
That said, State Street plans to go live with tokenized versions of traditional assets, with the first client expected to be named shortly thereafter. Tokenization, which offers benefits such as 24/7 trading and optimized collateral management, is seen as a promising alternative while regulatory hurdles persist.
Lamine Brahimi, co-founder and managing partner of Taurus, said that the partnership could help U.S. financial markets catch up to Europe, which has been ahead largely because of fewer regulatory roadblocks like SAB 121.
State Street has a long-standing involvement in blockchain technology, previously collaborating with crypto custody firm Copper before the latter shifted its focus to its ClearLoop settlement system. The bank’s eventual goal is to expand its services to include digital asset custody once the regulatory environment in the U.S. becomes more conducive.
