Aug 20 (Reuters) - State Street is partnering

with Swiss crypto company Taurus to offer new digital asset

services, including turning real-world assets into tradeable

tokens, to tap growing institutional demand for such

investments, the U.S. financial services provider told Reuters.

As cryptocurrencies have spread in the financial system

through regulated products including futures and exchange-traded

funds, they are drawing more interest from institutions seeking

ways to hedge inflation and diversify portfolios.

Through the partnership, State Street, which provides

crypto fund administration and accounting services, will hold

clients' crypto assets and help them create tokenized assets,

such as funds and other securities.

Reuters is the first to report on the partnership.

Tokenizing involves converting ownership rights to

traditional assets into digital tokens on a blockchain, a

decentralized database controlled by all its users. Proponents

say the consensus mechanism, which enhances transparency and

security, makes the assets easier to trade.

BlackRock ( BLK ), for example, has a tokenized fund on the

ethereum blockchain that allows investors to earn U.S. dollar

yields.

Donna Milrod, chief product officer at State Street and

head of digital asset solutions, said the new service is geared

toward asset management clients looking for partners to help

tokenize their funds.

"We need to provide our clients the ability to deal with

both traditional finance as well as (digital assets) side by

side," she said.

The service will be launched in the near future, Milord

said, without elaborating.

State Street is also meeting institutions' need for trusted

partners like banks to serve as custodians for their crypto

assets, rather than a crypto exchange or a wallet provider that

might have less stringent security controls.

Institutional demand swelled as several spot bitcoin and

ether exchange-traded funds were launched this year. Goldman

Sachs ( GS ) and Morgan Stanley ( MS ) purchased more than $600

million in spot bitcoin ETFs in the second quarter, joining

hedge funds, pension funds and financial advisers that are

venturing into such products.

In June, State Street Global Advisors, a unit of the bank,

filed with the Securities and Exchange Commission to register a

crypto fund managed by Galaxy Asset Management, which would

offer exposure to crypto companies and crypto-based ETFs. SSGA

would provide administration services.

Plans to offer crypto custody - which would enable the bank

to safeguard crypto assets on behalf of clients - are subject to

the SEC revising 2022 accounting guidance that makes it

extremely expensive for publicly listed banks to store crypto

for their customers, Milrod said.

Taurus, a Swiss company backed by Credit Suisse - now owned

by UBS - entered into a similar partnership for crypto custody

and tokenization with Deutsche Bank last year. The Bank of New

York Mellon ( BK ) also launched a crypto custody platform in 2022.