Large financial institutions are increasingly focusing on tokenized versions of familiar cash and fund products rather than launching new crypto-native instruments. State Street is the latest major bank to adopt this strategy, expanding its digital-asset initiatives by developing tokenized money-market funds, exchange-traded funds, and cash instruments such as tokenized deposits, according to a report by Bloomberg. This approach reflects a broader trend within the banking sector, which favors integrating blockchain settlement and ownership records into existing financial products rather than creating parallel crypto structures. In this model, tokenization serves as an infrastructure upgrade rather than a fundamental reimagining of how funds or deposits operate. State Street's current work builds upon its established presence in crypto markets, where it already provides administration and accounting services for crypto ETFs. The bank has also indicated plans to extend its digital-asset custody services by 2026, underscoring its commitment to serving institutional clients who seek blockchain efficiency within regulated frameworks.
State Street's Tokenization Strategy
Instead of issuing crypto-native funds or tokens, State Street is positioning tokenization as an enhancement to traditional investment vehicles. The bank intends to collaborate closely with institutional money managers and clients through its asset-management division, which recently entered into a partnership with Galaxy Digital for a tokenized private liquidity fund. The emphasis is on maintaining continuity in services. Fund strategies, risk profiles, and regulatory classifications will remain unchanged, while settlement, ownership tracking, and interoperability will transition to the blockchain. This approach facilitates easier adoption for institutions that already rely on State Street for custody, accounting, and fund administration services. Custodial banks are also actively working to digitize cash itself. Tokenized deposits enable banks to represent customer balances on blockchain systems, with these balances remaining direct liabilities of the issuing bank. Unlike stablecoins, these deposits operate within the banking system and do not depend on reserve structures held by third parties.
Tokenized Deposits vs. Stablecoins
Earlier this month, BNY Mellon launched a tokenized deposit service intended for payments, collateral, and margin applications. This product generates blockchain-based representations of bank deposits that remain fully integrated within the regulated banking system. For banks, tokenized deposits offer advantages similar to stablecoins, including near-instant settlement, programmability, and interoperability, without introducing a separate monetary instrument. As direct bank liabilities, they align more seamlessly with existing supervisory and capital frameworks. This distinction is significant as regulators continue to evaluate the role of stablecoins within the financial ecosystem. Although stablecoins have experienced rapid growth, banks appear more inclined to extend blockchain functionality to deposits and fund shares that they already issue and manage.
Asset Managers Adapt Traditional Funds
Other prominent asset managers are adopting a comparable strategy. Franklin Templeton recently updated two institutional money-market funds to support blockchain-based settlement and ownership records. This modification enables the funds to interface with tokenized and regulated stablecoin frameworks without altering their management or regulatory oversight. This model treats blockchain as an operational layer rather than a distinct asset class. Investors continue to hold the same fund structures, while issuers benefit from faster settlement, enhanced transparency, and improved integration with digital-asset workflows. Across the industry, the focus is on making existing products compatible with onchain systems rather than requiring clients to adopt entirely new instruments.
Drivers of Institutional Demand for Tokenization
State Street has highlighted increasing client interest as a primary driver. In a research report from October 2025, the bank indicated that nearly 60% of institutional investors planned to increase their digital-asset exposure, with many anticipating that significant portions of their portfolios will become tokenized over time. For institutions, tokenization offers operational efficiencies rather than speculative gains. Faster settlement reduces counterparty risk, onchain records simplify reconciliation processes, and programmable assets pave the way for more automated collateral and liquidity management. These benefits help explain the banking sector's focus on tokenizing cash, deposits, and fund shares—assets that are central to global finance—instead of directly competing with crypto-native stablecoins or introducing new digital currencies.
The Future of Onchain Finance
State Street's expansion signifies a clear direction for institutional finance: blockchain adoption is progressing through enhancements to existing products, rather than through complete overhauls. Tokenized funds and deposits allow banks to migrate core financial infrastructure onto new technological rails while preserving the legal and regulatory frameworks that clients rely upon. As more custodial banks and asset managers embrace this approach, the distinction between traditional finance and onchain infrastructure will continue to diminish. The immediate outcome is unlikely to be a proliferation of new crypto products, but rather a subtle transformation in the behind-the-scenes movement of cash and securities.