Why Are Banks Tokenizing Existing Cash and Funds?
Large financial institutions are doubling down on tokenized versions of familiar cash and fund products rather than launching new crypto-native instruments. State Street is the latest major bank to take this route, expanding its digital-asset strategy by building tokenized money-market funds, exchange-traded funds, and cash instruments such as tokenized deposits, Bloomberg reported.
The approach reflects a broader preference across the banking sector: bring blockchain settlement and ownership records into existing financial products instead of creating parallel crypto structures. Tokenization, in this model, acts as an infrastructure upgrade rather than a reinvention of how funds or deposits work.
State Street’s work builds on its established role in crypto markets, where it already provides administration and accounting for crypto ETFs. The bank has also said it plans to expand into digital-asset custody by 2026, reinforcing its focus on serving institutional clients that want blockchain efficiency without stepping outside regulated frameworks.
Investor Takeaway
How Is State Street Positioning Its Tokenization Strategy?
Rather than issuing crypto-native funds or tokens, State Street is framing tokenization as an enhancement to traditional investment vehicles. The bank plans to work closely with institutional money managers and clients through its asset-management arm, which recently partnered with Galaxy Digital on a tokenized private liquidity fund.
The emphasis is on continuity. Fund strategies, risk profiles, and regulatory treatment remain unchanged, while settlement, ownership tracking, and interoperability move onchain. This makes tokenized funds easier to adopt for institutions that already rely on State Street for custody, accounting, and fund services.
Custodial banks are also racing to digitize cash itself. Tokenized deposits allow banks to represent customer balances on blockchain systems while keeping them as direct liabilities of the issuing bank. Unlike stablecoins, these deposits do not sit outside the banking system or rely on reserve structures held elsewhere.
Why Are Tokenized Deposits Gaining Ground Over Stablecoins?
Earlier this month, BNY Mellon activated a tokenized deposit service designed for payments, collateral, and margin use. The product creates blockchain-based representations of bank deposits that remain fully inside the regulated banking system.
For banks, tokenized deposits offer many of the benefits associated with stablecoins—near-instant settlement, programmability, and interoperability—without introducing a separate monetary instrument. Because they are direct bank liabilities, they fit more cleanly into existing supervisory and capital frameworks.
This distinction matters as regulators continue to debate the role of stablecoins in the financial system. While stablecoins have grown rapidly, banks appear more comfortable extending blockchain functionality to deposits and fund shares they already issue and control.
Investor Takeaway
How Are Asset Managers Adapting Traditional Funds?
Other large asset managers are following a similar path. Franklin Templeton recently updated two institutional money-market funds to support blockchain-based settlement and ownership records. The change allows the funds to interact with tokenized and regulated stablecoin frameworks without altering how they are managed or regulated.
This model treats blockchain as an operational layer rather than a new asset class. Investors continue to hold the same fund structures, while issuers gain faster settlement, improved transparency, and easier integration with digital-asset workflows.
Across the industry, the focus is on making existing products compatible with onchain systems rather than asking clients to adopt entirely new instruments.
What Is Driving Institutional Demand for Tokenization?
State Street has pointed to growing client interest as a key driver. In an October 2025 research report, the bank said nearly 60% of institutional investors planned to increase digital-asset exposure, with many expecting meaningful portions of their portfolios to become tokenized over time.
For institutions, tokenization promises operational gains rather than speculative upside. Faster settlement reduces counterparty risk, onchain records simplify reconciliation, and programmable assets open the door to more automated collateral and liquidity management.
These benefits help explain why banks are focusing on tokenizing cash, deposits, and fund shares—assets that already sit at the center of global finance—rather than competing directly with crypto-native stablecoins or launching new digital currencies.
What Comes Next for Onchain Finance?
State Street’s expansion highlights a clear direction for institutional finance: blockchain adoption is advancing through upgrades to existing products, not wholesale replacement. Tokenized funds and deposits allow banks to move core financial plumbing onto new rails while preserving the legal and regulatory structures clients depend on.
As more custodial banks and asset managers follow this path, the line between traditional finance and onchain infrastructure will continue to blur. The near-term result is unlikely to be a wave of new crypto products, but a quieter shift in how cash and securities move behind the scenes.
