SEC Grants Franklin Templeton Custody Relief for Tokenized Money-Market Fund, Offering Potential Blueprint for Industry

The US Securities and Exchange Commission's Division of Investment Management has granted Franklin Templeton no-action relief permitting its registered funds to invest in the firm's tokenized money-market fund using a redesigned custody arrangement — a decision that industry experts say could establish a replicable model for other asset managers. The relief stands out against the backdrop of an SEC that has generally pursued enforcement actions rather than tailored accommodations for digital-asset products, making this instance of staff-level engagement with tokenized fund infrastructure particularly noteworthy.

On 12 August, SEC staff indicated they would not recommend enforcement action if Franklin Templeton's funds adopt a new custody framework to invest in the Franklin OnChain US Government Money Fund (FOBXX), provided the company complies with approximately a dozen specified conditions. FOBXX, launched in 2021 and the first US-registered mutual fund to use a public blockchain for transaction processing and record-keeping, held roughly $721 million in assets as of the end of July.

The ruling addresses a structural mismatch: existing SEC custody rules were drafted for physical securities and are poorly suited to blockchain-based instruments. Experts told Sandmark that other asset managers may look to Franklin Templeton's approach as a reference, particularly for managing cash positions and collateral. The relief, however, applies exclusively to Franklin Templeton's configuration and does not alter the broader regulatory framework. Other major asset managers have also moved into tokenization — BlackRock launched its tokenized BUIDL fund on Ethereum in March 2024 — but whether they will seek or receive similar custody accommodations remains an open question.

"Although this is a powerful precedent, it is not a blank invitation to tokenized funds," Joao Lages, co-founder of tokenization platform Lympid, told Sandmark. Lages noted that other firms could attempt to replicate the fundamental architecture but would need comparable safeguards governing transfer agents, key management, reconciliation, and oversight.

Ryan Haczynski, head of protocol partnerships at Web3 infrastructure firm GlobalStake, similarly described the setup as a "workable template" for other companies, while cautioning that it "signals regulatory openness, not a general rule."

Custody Rules Designed for a Pre-Digital Era

The core challenge stems from legacy SEC custody requirements drafted when securities were physically held. One such rule mandates that certain securities be stored in a vault — a stipulation that has little relevance for FOBXX, where ownership is recorded electronically through Franklin Templeton's proprietary system and blockchain technology.

To resolve this, Franklin Templeton petitioned SEC staff to permit an alternative custody arrangement in which each investing fund would maintain its own dedicated blockchain wallet. Under the approved framework, transactions would undergo daily verification, and independent accountants would conduct regular audits of the holdings.

Haczynski said the decision eliminates a "real, specific obstacle," enabling Franklin Templeton's funds to hold tokenized money-market shares "without conflicting with custody rules designed for physical certificates." He emphasized, however, that the ruling resolves only this particular custody question and leaves broader regulatory issues surrounding tokenized securities unaddressed.

Cash and Collateral Management as a Key Use Case

Franklin Templeton informed the SEC that its funds intend to use FOBXX for managing cash and collateral in securities lending transactions — an application that Lages suggested could emerge as one of the most significant use cases for tokenized funds.

"The new guidance will break an important institutional barrier in how funds will think about cash flows and managing collateral on an onchain security," Lages said. He added that asset custodians and fund administrators could benefit if more funds migrate onchain, while firms currently handling trade processing and settlement may face increased competitive pressure.

The limitations of the relief remain significant, however. "No-action letters carry no force of law," Haczynski said. "They are informal, revocable, and do not bind future SEC leadership or extend beyond the specific facts reviewed." He stressed that clearer SEC rulemaking would still be necessary before tokenized assets gain widespread adoption across mutual funds and exchange-traded funds (ETFs).

For now, Franklin Templeton has demonstrated one viable pathway for operating tokenized funds within the existing regulatory regime, though other asset managers have no assurance of receiving equivalent treatment. The SEC has not indicated plans for broader rulemaking on tokenized securities custody, and any future leadership change at the Commission could shift the regulatory posture.

The decision coincides with the continued expansion of tokenization across public blockchains. According to data from RWA.xyz, tokenized assets on public blockchains were valued at approximately $38 billion as of early August, with US Treasury products accounting for roughly $16 billion of that total.

Source: Sandmark