SEC Staff Clears Franklin Funds to Use Onchain Money Fund for Cash and Collateral

The U.S. Securities and Exchange Commission’s Division of Investment Management said Wednesday that it would not recommend enforcement action if Franklin Templeton’s U.S. registered funds hold shares of its onchain money market fund through an affiliated blockchain-integrated custody and recordkeeping system. The funds can use Franklin OnChain U.S. Government Money Fund shares for cash management, including securities-lending collateral.

The change addresses a mismatch between the digital shares and Rule 17f-2 custody provisions designed for physical or certificated securities. SEC staff agreed not to enforce paragraphs (b), (e) and (f) of the rule for the arrangement if Franklin’s funds and transfer agent meet 12 conditions covering account segregation, transaction controls, reconciliation, board oversight and independent verification.

For Franklin’s registered funds, the practical effect is access to FOBXX as an internal cash vehicle without forcing its digital ownership record into vault-era procedures. Franklin told the SEC that the fund offers hourly net asset value calculations, intraday trading and faster transaction processing than its funds’ current cash-management vehicle.

FOBXX, whose blockchain-recorded shares are known as BENJI, had a total asset value of about $726.6 million as of Aug. 12, according to RWA.xyz. BENJI represents one share of the government money market fund.

Relief Replaces Physical Procedures With Digital Controls

Franklin Templeton Investor Services, or FTIS, maintains FOBXX’s official ownership record through an internal book-entry system linked in real time to one or more blockchains. The internal system holds private shareholder information, while blockchain records include transactions, net asset values and dividend information.

The arrangement counts as self-custody because FTIS is affiliated with the investing funds, the SEC letter said. Rule 17f-2(b) addresses physical-vault custody, paragraph (e) requires notation of deposits and withdrawals, and paragraph (f) requires three independent verifications during each fiscal year.

Under the relief, FTIS will create a separate wallet and segregated account for each investing fund. The letter says Stellar is the primary network, although other eligible networks may be used on request. FTIS will secure the private keys while retaining administrative controls that allow it to correct unauthorized transactions, freeze or migrate wallet records, and restore the official ownership record.

The conditions also require each fund’s board to approve the arrangement and review it annually. Authorized personnel must use authentication and cryptographic tools to transmit instructions, transaction confirmations must go to different authorized personnel, and confirmations must be reconciled daily against the fund’s authorizations.

Independent accountants must compare FTIS’s transfer-agent records with the books of both the investing fund and FOBXX at least three times each fiscal year, including at least two unannounced checks. FTIS must also be able to transfer the shares, records, smart-contract controls and other administrative functions to a successor if it stops serving as transfer agent.

FOBXX invests at least 99.5% of its assets in government securities, cash and fully collateralized repurchase agreements, according to its SEC-filed prospectus. The prospectus describes its blockchain system as permissioned and under the transfer agent’s unilateral control, rather than a freely transferable crypto token.

The no-action letter is a staff enforcement position tied to Franklin’s stated facts and controls. It is not an SEC rule or legal conclusion, and the letter says it has no legal force or effect.