State Street Sees ‘Significant Opportunity’ in Tokenization

While State Street’s digital arm is working on the ability to custody cryptoassets by the end of the year, tokenization remains a top focus for the business going forward as institutions continue to show interest in the segment.

Using distributed ledger technology to tokenize funds and private assets, for example, to improve efficiency and accessibility is something the company is working on for 2023, according to Nicole Olson, a vice president of digital product development and innovation at the bank.

“[Tokenization] is exciting for me because there’s a significant opportunity there for State Street to play and for State Street clients,” she said. “It’s broadly adding digital tech to those more traditional assets and bringing them into the future.” 

State Street’s assets under custody and administration were $42.6 trillion as of June 30. Its asset management arm had $3.9 trillion in assets at that time.

Olson joined the company’s digital product development and innovation team in 2018. State Street formally revealed the launch of its digital finance division, renamed State Street Digital, in June 2021. Nadine Chakar leads the unit.

“That coincided with a doubling down or even tripling down of focus on digital at the bank,” Olson said. “We transitioned from being more experimental when I first joined, really encapsulated in innovation, to now it’s very much the future of the bank.”

Product roadmap

State Street partnered with cryptoasset data and software provider Lukka in July 2021 to help it provide digital and cryptocurrency asset fund administration capabilities for its private funds clients. 

More recently, State Street Digital revealed in March that it entered into a licensing agreement with Copper.co to launch a digital custody offering for institutions. Copper.co provides custody, trading and settlement solutions across 450 cryptoassets and more than 40 exchanges. 

Olson said State Street Digital intends to offer the ability to custody some of the “blue-chip” cryptoassets, such as bitcoin and ether, by the end of the year before introducing others. 

But tokenization is perhaps Olson’s biggest focus as the company seeks to add blockchain-based rails to funds and private assets. 

Tokenization can allow shares of a fund to be freely traded on a digital ledger, making the process more efficient for both the fund issuer and end investors, the executive said. 

Tokenizing private assets can solve problems around accessibility in the secondary market and liquidity in those assets, Olson added. 

Finally, State Street is working on adding smart contracts and distributed ledger tech to automate the process of trade collateralization, which she said can help increase the frequency in which the trades are valued and decrease risk.

The recent crypto downturn has shown “elasticity in demand” among a growing number of institutions that realize blockchain technology is here to stay.   

“Even if bitcoin and ethereum are fluctuating, firms have already made these large decisions to invest and to incorporate this technology,” Olson said.

M&A

Olson said a key to success in the crypto space for financial services incumbents is to partner with specialized companies in the sector. BlackRock, the world’s largest asset manager, teamed up with Coinbase earlier this month to allow institutional clients of its Aladdin platform to get bitcoin exposure.

“State Street has the breadth of client relationships, the reputation, the global presence,” she said. “And then you get a newer entrant that can move quickly that has a very specific technology or skill set that they’ve honed through the entire existence of their organization.”

The custody bank participated in the $30 million Series B round for blockchain-based financial and regulatory technology firm Securrency in April 2021. Another investor in the round was WisdomTree Investments, whose CEO has said that virtually all financial assets will eventually come to the blockchain through tokenization.

In addition to State Street’s ongoing collaborations with Lukka and Copper.co, Olson said tokenization would be an area in which the bank would potentially seek to add capabilities.   

“There’s the age old question of build versus buy, and do we partner, do we invest or do we acquire?” she added. “All of those are on the table.”

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