The year is still young, and 2025 has already produced a handful of developments that have the potential to generate progress in the world of digital assets – many of them following the change of administration in the United States.
While not much detailed policy has emerged from the new administration, the Strengthening American Leadership in Digital Financial Technology Executive Order (EA) in January, establishing the new federal government level Working Group on Digital Assets, has been generally well received by the digital finance technology, crypto and traditional financial services industries.
The main evidence of positivity in this space has been the rising price of Bitcoin. However, the asset management industry has always seen the tokenisation of capital market assets and the creation of on-chain infrastructure for their trading and custody as a key part of the bigger picture for digital finance.
And, on that score, one concrete change in regulation has taken place to justify optimism. The US Securities and Exchange Commission’s (SEC) repeal of its SAB 121 regulation is an important step towards improving the position of banks regarding crypto and digital assets custody.
This rule required an entity that custodies crypto assets for customers to recognise those assets as both a liability and an asset on its balance sheet, triggering prudential rules requiring capital be held against balance sheet items (whereas most custodied capital market assets are considered off balance sheet for these regulatory purposes).
For this reason, SAB 121 was a prohibitive cost to custodians that wanted digital assets on behalf of their clients, while having a regulated and independent custodian is an important feature of institutional asset management.
Banks will still need permission, on an entity-by-entity basis, from the SEC and other relevant US regulators to custody digital assets, but a significant impediment has been removed.
The recent evidence suggests that the buy side has understood and been sold on the benefits of digital assets for a long time now. But, in the absence of a wider, interoperable digital trading and especially custody infrastructure, have been muted in their expectations of it happening in the near future.
For example, last year’s State Street Digital Assets Study indicated the majority of respondents see the on-chain trading of tokenised versions of existing forms of security as being at least five years off becoming mainstream.
Along with a sense that their peers are not sufficiently aware of the benefits and cyber security concerns, lack of suitable legal and regulatory frameworks was the main reason for this. So, it will be interesting to see if the end of SAB 122, the EA and working group, and the generally boosterish tone coming from the US on digital assets and crypto are enough to move these numbers when we conduct this year’s survey.
Looking forward to what else to expect in this space in 2025, it will be worth keeping an eye on developments in digital cash. Here, the US remains behind the international curve and the EA mentioned above actually prohibits the establishment of a US dollar-based Central Bank Digital Currency (CBDC), or the use or circulation of other CBDCs within the US.
Nonetheless, the central banks of almost all other developed nations, as well as all the BRICS (Brazil, Russia, India, China and South Africa) now have dedicated CBDC departments and are publishing increasingly detailed regulatory frameworks in place for them, should they be created.
Similarly, regulators in the European Union, UK, Singapore and Japan have detailed regulatory frameworks in place for stablecoins, digital money backed by fiat currency. Once again, the US does not have clear rules in place here.
Digital money is a core use case for capital market asset tokenisation as it would be an essential component of providing liquidity and collateral in the on-chain trading process, to enable the atomic settlement of digital securities. This combined with its potential utility as cash for non-investment-related transactions in the wider economy means we should expect continued concentration on this space by policymakers.
Also, the creation of liquid tokens representing a share of an illiquid asset (fractionalisation) remains high on the industry’s agenda. Private equity, private debt and real assets, such as real estate or infrastructure, were the asset classes our survey respondents felt were most likely to benefit from tokenisation.
Of course, a space several times longer than this one would still be insufficient to treat every trend in this industry with the detail it deserves, but I offer the above as some initial food for thought and recommend anyone interested in more analysis read the State Street quarterly Digital Digest Publication (as well as the rest of Capital Pioneer, of course!).
- James Redgrave is vice president, global thought leadership and editorial, State Street
