Franklin Templeton Explores SEC Relief for Tokenized Fund Trades

Tokenized Fund Trades Put Pricing Rules in Focus

Trading tokenized money market funds and exchange-traded funds (ETFs) through blockchain liquidity pools raises regulatory questions that Franklin Templeton (NYSE: BEN) brought to Securities and Exchange Commission (SEC) staff on Oct. 9. The global investment manager reported preliminary assets under management (AUM) of $1.79 trillion as of Sept. 30. Its proposed agenda covered its digital assets business and perspective on the agency’s innovation exemption.

For money market funds, the proposed agenda considered whether investors could exchange blockchain-based fund shares for tokenized National Market System (NMS) stocks through a trading pair on a blockchain venue. The company also asked whether providers supplying assets for those trades could charge service fees. NMS stocks include exchange-listed stocks and ETF shares covered by national trade-reporting rules.

The legal question concerns rules governing the price at which investors buy and sell redeemable fund shares. Section 22(d) of the Investment Company Act of 1940 generally requires sales at the price stated in the fund’s prospectus. Rule 22c-1 generally requires transactions at the next share value calculated after an order arrives. That value reflects the fund’s assets minus liabilities, divided by its outstanding shares. The agenda asks whether exemptions from these rules are needed for the proposed trading pairs and provider fees.

The SEC’s innovation exemption, issued Sept. 17, temporarily exempts qualifying blockchain venues and liquidity providers from certain exchange and dealer requirements, subject to conditions. It permits limited tokenized stock trading through pools accessible to approved participants. Conditions include trading-volume limits, equivalent shareholder rights, auditable public smart contracts, and trading halts aligned with the underlying stock’s primary exchange.

ETF Trading Pairs Face Venue and Liquidity Pool Questions

For tokenized ETFs, Franklin Templeton’s proposed agenda considered trading pairs involving another tokenized stock, a permitted payment stablecoin, or a tokenized money market fund. It also questioned whether the same fund-pricing provisions require exemptions when liquidity providers charge fees. A further issue concerns where ETF shares trade: the agenda describes a tokenized securities venue as distinct from a national securities exchange.

The agenda also questioned whether liquidity pools themselves need exemptions from investment-company regulation. An investment company generally pools investors’ money to invest in securities; that classification can trigger registration and fund-management requirements under the 1940 Act. These pools hold assets that facilitate trading, while liquidity-provider interests represent a depositor’s position.

The proposed discussion covered depositing specified tokenized assets and receiving those interests, including whether the interests require exemptions from treatment as securities. That could involve relief under the Securities Act of 1933, which governs offerings and disclosures, and the Securities Exchange Act of 1934, which regulates trading, intermediaries, and ongoing company reporting.

Those trading questions follow a separate development involving BENJI holdings inside conventional funds. BENJI tokens represent shares of Franklin Templeton’s government money market fund. An Aug. 12 SEC staff no-action position addressed custody arrangements for Franklin funds investing in that product. That position concerned safekeeping and recordkeeping, allowing specified arrangements subject to safeguards and board oversight.

BENJI’s Expansion Extends Beyond Recording Share Ownership

Franklin Templeton’s blockchain-based fund recordkeeping dates to the 2021 launch of the Franklin Onchain U.S. Government Money Fund, or FOBXX. FOBXX is the ticker used to identify this fund in financial listings. Each BENJI token represents one share of the same fund; transferring a token transfers the associated share. The Benji Technology Platform is Franklin Templeton’s recordkeeping system for processing these transactions and tracking who owns the shares. The fund’s five-year anniversary announcement described peer-to-peer share transfers and dividend distributions throughout the year.

The firm’s Moonpay integration, announced June 2, connected its Benji Technology Platform with institutional trading infrastructure. Moonpay provides crypto payments and trading services. Eligible institutions can move between supported stablecoins and tokenized money market fund exposure through blockchain transactions. The arrangement supports treasury management, portfolio rebalancing, and access back to stablecoin liquidity.

A partnership with Kraken parent Payward, announced May 12, outlined plans for tokenized investment and yield products. Payward is the company behind Kraken, a cryptocurrency exchange. The plans also cover BENJI integration for institutional use. The announcement described yield products for institutions, with broader access through Kraken where regulations permit.

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