By Hannah Lang

(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, 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 and Morgan Stanley 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 also launched a crypto custody platform in 2022.

(Reporting by Hannah Lang in New York; Editing by Michelle Price and Richard Chang)