Franklin Templeton, one of the largest US asset managers with roughly $1.6 trillion in client assets, is preparing to place tokenized assets inside its conventional mutual funds and ETFs, according to a Bloomberg report published on Thursday, eight days after SEC staff cleared the firm to hold its $721 million blockchain-based money market fund in those portfolios.

Franklin characterizes the relief as the first US regulatory clearance for digitally native products inside conventional funds. The SEC's Division of Investment Management, which issued the response on August 12, took care to outline its limits. "It is not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved its content," the division wrote, adding that the document "has no legal force or effect." Because that style of staff response speaks only to the requesting firm, other managers pursuing similar arrangements would need to seek their own accommodation.

The relief set aside paragraphs (b), (e), and (f) of Rule 17f-2 under the Investment Company Act of 1940, the provisions built around vault custody of share certificates, a rulebook written decades before distributed ledgers could serve as a share register.

The Franklin OnChain U.S. Government Money Fund (FOBXX) reported net assets of $720,928,224 as of July 31, along with a 3.50% seven-day net yield. The fund, which trades as BENJI, launched in April 2021 on Stellar as the first US-registered mutual fund to process transactions and record share ownership on a public blockchain; BlackRock's BUIDL, introduced in March 2024, has since become the larger of the two tokenized funds. Under the arrangement, Franklin Templeton Investor Services (FTIS), the firm's transfer agent, will open a separate wallet on the Stellar blockchain for each investment fund.

Twelve Conditions Attached

SEC staff attached twelve conditions to the relief, covering oversight, custody controls, and verification. Each fund's board of trustees must approve the arrangement and review it at least annually, a cadence that, together with the verification schedule, gives the structure recurring checkpoints rather than a one-time sign-off.

FTIS must retain the power to correct errors, freeze or migrate wallet records, and restore the official ownership record. If the company ever stops acting as transfer agent, it must hand its successor administrative control over the smart contracts.

Independent public accountants must verify each fund's holdings at least three times per fiscal year, two of those examinations without prior notice. The funds may moreover use the tokenized shares for cash balances and as securities lending collateral. CryptoPotato reported in December that BENJI served as collateral in a SemiLiquid credit pilot, staying encumbered across the loan lifecycle, an early instance of the collateral use the relief now permits inside fund portfolios.

Relief Rests on a 1992 Letter

Staff granted the position by analogy to a September 24, 1992 letter to Franklin Investors Securities Trust, which covered a master-feeder arrangement in which an affiliated transfer agent held fund shares in book-entry form. Franklin argued that a Stellar wallet raises the same question, since FTIS still maintains the official ownership record and keeps unilateral control over it. The analogy shows the staff extending book-entry recordkeeping precedent to blockchain records rather than drafting new rules.

The 1992 letter names 23 investment managers, among them Putnam, Western Asset, ClearBridge, BrandywineGLOBAL, Royce and Clarion Partners.

Separately, on August 18, the SEC proposed the Regulation Crypto Assets with $5 million and $75 million offering paths, a proposed rule carrying a 60-day comment period. That window, alongside the annual reviews required under the relief, marks the near-term process points for how the framework around tokenized funds develops.

Franklin's request was signed by Navid J. Tofigh, Senior Associate General Counsel, and the response came from Taylor Evenson, Senior Counsel.

CryptoPotato has previously covered Franklin's agreement to buy 250 Digital, the firm spun out of CoinFund, as the firm's digital asset arm passed 50 staff.

Source: CryptoPotato | CryptoNewsNet