The U.S. Securities and Exchange Commission’s Division of Investment Management said it would not recommend enforcement action if Franklin Templeton’s U.S. registered funds hold shares of the firm’s onchain money market fund through an affiliated blockchain-based custody and recordkeeping setup.
That position would allow the funds to use shares of the Franklin OnChain U.S. Government Money Fund, known as FOBXX, for cash management purposes, including as collateral in securities lending. The staff relief is limited to the specific facts and controls Franklin described, and it does not amount to an SEC rule or formal legal determination.
Relief aimed at a custody rule mismatch
The request centered on Rule 17f-2, a custody framework written for physical or certificated securities. Franklin argued that applying those provisions to blockchain-recorded fund shares created a mismatch because the ownership record is maintained digitally rather than through the kinds of vault-era procedures contemplated by the rule.
SEC staff said it would not recommend enforcement action under paragraphs (b), (e) and (f) of Rule 17f-2 if Franklin’s funds and transfer agent follow 12 conditions. Those conditions cover segregation of accounts, transaction controls, reconciliation processes, board oversight and independent verification.
How the onchain recordkeeping system works
Franklin Templeton Investor Services, or FTIS, maintains the official ownership record for FOBXX through an internal book-entry system linked in real time to one or more blockchains. Private shareholder information remains in the internal system, while blockchain records include transaction data, net asset values and dividend information.
Because FTIS is affiliated with the investing funds, the setup is treated as self-custody. Under the arrangement described to the SEC, FTIS would establish a separate wallet and segregated account for each investing fund. The no-action letter identifies Stellar as the primary network, while allowing other eligible networks if requested.
FTIS would hold the private keys and keep administrative powers to address unauthorized transactions, freeze or migrate wallet records, and restore the official ownership record. Franklin also told the SEC that FOBXX offers hourly net asset value calculations, intraday trading and faster transaction processing than the cash-management vehicle its funds currently use.
Controls required under the staff position
The conditions attached to the relief require each participating fund’s board to approve the arrangement and review it every year. Operational controls must include authentication and cryptographic tools for transmitting instructions, with trade confirmations sent to separate authorized personnel.
Those confirmations must then be reconciled each day against the fund’s authorized instructions. In addition, independent accountants must compare FTIS transfer-agent records with the books of both the investing fund and FOBXX at least three times during each fiscal year, including at least two surprise checks.
The letter also requires FTIS to be able to hand off the shares, records, smart-contract controls and other administrative functions to a successor if it stops acting as transfer agent.
Fund profile and what comes next
FOBXX invests at least 99.5% of its assets in government securities, cash and fully collateralized repurchase agreements. Its blockchain-recorded shares are known as BENJI, with each BENJI representing one share of the government money market fund. According to RWA.xyz, FOBXX had about $726.6 million in total asset value as of Aug. 12.
The prospectus describes the blockchain system as permissioned and under the transfer agent’s unilateral control, rather than as a freely transferable crypto token. The immediate next step is implementation only within the boundaries of the no-action letter: the SEC staff position applies to Franklin’s stated facts and controls, and the letter itself says it has no legal force or effect.
Source: thedefiant.io