Franklin Templeton Gets SEC Staff Relief for Onchain Money Fund Use in Mutual Funds and ETFs

What the staff letter covers

The relief centers on Franklin’s blockchain-based money market fund, which reported net assets of $720,928,224 as of July 31 and a seven-day net yield of 3.50%. Under the staff position, Franklin can use that fund within its broader mutual fund and ETF lineup.

In its August 12 response, the Division of Investment Management said it would not object to setting aside parts of Rule 17f-2 under the Investment Company Act of 1940 that were designed around the physical vault custody of share certificates. Specifically, the letter set aside paragraphs (b), (e), and (f) of that rule.

At the same time, SEC staff underscored the limited reach of its view. The division wrote that the letter is not a rule, regulation, or statement of the Commission, and that the Commission has neither approved nor disapproved its contents. It also said the position has no legal force or effect.

How Franklin plans to structure custody

Franklin Templeton Investor Services, or FTIS, is expected to open a separate wallet on Stellar for each investment fund using the arrangement. Franklin argued that this setup still leaves FTIS as the keeper of the official ownership record, even though the fund shares are represented onchain.

That point was central to the company’s request. Franklin said the wallet structure raises a similar issue to prior book-entry arrangements because FTIS maintains unilateral control over the record of ownership. Under the conditions laid out by staff, FTIS must also be able to correct errors, freeze or migrate wallet records, and restore the official ownership record if needed.

If FTIS were ever to stop serving as transfer agent, it would have to pass administrative control over the relevant smart contracts to its successor. The funds would also be permitted to use the shares for cash balances and as collateral in securities lending arrangements.

Twelve conditions and an older precedent

The SEC staff attached twelve conditions to the relief. Among them, each fund’s board of trustees must approve the arrangement and review it at least once a year. Independent public accountants must verify each fund’s holdings no fewer than three times during a fiscal year, including two checks conducted without prior notice.

Staff said it was granting the position by analogy to a September 24, 1992 letter sent to Franklin Investors Securities Trust. That earlier letter dealt with a master-feeder structure in which an affiliated transfer agent held fund shares in book-entry form.

Franklin relied on that precedent to argue that a Stellar wallet should be treated in a similar way because the transfer agent still controls the ownership record. The August 12 request was signed by Navid J. Tofigh, Franklin’s senior associate general counsel, and the staff response came from Senior Counsel Taylor Evenson.

Broader backdrop and next steps

The letter names 23 investment managers, including Putnam, Western Asset, ClearBridge, BrandywineGLOBAL, Royce and Clarion Partners. The development also comes as Franklin continues to expand its digital asset operations. Earlier coverage noted the firm’s agreement to buy 250 Digital, a company spun out of CoinFund, as Franklin’s digital asset arm passed 50 staff.

The next confirmed step is internal rather than market-wide: any fund using the structure must first receive approval from its board of trustees and then undergo annual review under the conditions set by SEC staff. More broadly, the regulatory backdrop remains in flux. On August 18, the SEC proposed Regulation Crypto Assets, with $5 million and $75 million offering paths and a 60-day comment period.