The future of digital/TradFi interoperability:
A conversation with Donna Milrod

Donna Milrod: For context, we have always believed that we need to be this bridge between traditional finance and digital finance, and that has informed our Digital Asset strategy. We have three pillars to our strategy: Fund Administration and Accounting for clients who are buying digital assets like crypto, a tokenization platform, and digital custody.

We need to be able to provide tokenization services and eventually digital custody to our clients – when we no longer have to put these assets on our balance sheet to custody them. Taurus provides the central infrastructure that will allow us to offer a tokenization service. This partnership also provides the foundation for what will be our digital custody service.

After an extensive vetting process, we decided to partner with Taurus as we really liked their technology and thought they would be an excellent partner for us.

DM: Unfortunately, no. The issue is really a Securities Exchange Commission (SEC) Accounting Standard that requires us and other US Generally Accepted Accounting Principles (GAAP) reporting banks to put digital assets that we custody on our balance sheet. As everything we do consolidates onto US GAAP, it doesn’t matter where in the world we provide that custody of digital assets, it will still fall under US GAAP rules. The issue with SAB 121 is really about financial statement reporting – what winds up on your balance sheet, and what doesn’t.

DM: In addition to the tokenization and digital custody which we spoke about earlier, this partnership also allows us to interoperate with other blockchains. If you're our client and want to buy a digital asset or a token that originated from some other blockchain and have us either custody or account for it, the blockchains need to interact with one another and Taurus allows us to do that.

In addition, we provide traditional Custody, Transfer Agency and Fund Administration along with our Digital services. Even if your portfolio is comprised wholly or just partly of digital, we can provide those services across all your assets.

That's what we mean by providing the bridge for our clients, to the extent that they're active in digital assets. We need to be able to help clients manage this decentralized finance (DeFi)/TradFi fragmentation as it relates to their own book. An example of this fragmentation could be where you have digitally native bonds next to traditional bonds and we have to help them navigate all of that.

The other type of fragmentation that we manage for clients is the fragmentation between and among different blockchains, such as public permissionless and private permissioned blockchains. Our clients shouldn't have to worry about this.

Taurus helps us manage the interaction model between different blockchains, including the off-ramp/on-ramp between blockchains and traditional custody. We then continue to manage traditional asset servicing like we always have.

DM: We know from our market conversations and our research, in particular the most recent version of the annual Digital Assets Study, that the kind of interoperability that this deal enables is what the industry is looking for, in terms of how blockchain and digital assets are going to develop. We see from our data that the majority of buy-side investment institutions value the capability to transfer assets between different blockchains, or other digital distributed ledgers, and a similar number value the ability to transfer assets on- and off-chain, from their traditional forms, to a tokenized one, and back again. If we’re showing a way to make that possible at scale, and, given our size and scale in the capital markets, I guess the short answer is: Yes!

DM: That was kind of fundamental to our build-versus-buy decision. This isn't unique to State Street. When one does deals like this, the factors that are important are not just speed to market with existing services but also future investment. We firmly believe that Taurus is fully dedicated to providing the infrastructure for digital finance, and adaptability is an important part of that.

That's why we didn't build this ourselves. We felt that this is a better model, in large part, because it helps us from a future-proofing perspective since that's all the folks at Taurus look at. They look at what is happening in this digital finance revolution and are staying ahead of trends and developments. This helps us stay ahead of the curve, too.

DM: We do have some announcements planned. It is too soon to say what the timing will be, but we certainly hope they won’t be too far off!

JR: Exciting stuff. Watch this space!