For the first time, SEC staff have cleared a fund custody arrangement built on blockchain infrastructure. The Division of Investment Management issued a no-action letter on Aug. 12 allowing Franklin Templeton’s traditional registered funds to hold shares of its tokenized government money fund for cash management purposes.
The letter, signed by Senior Counsel Taylor Evenson in the Office of Chief Counsel, responds to a request from the Franklin Templeton family of funds. The funds sought assurance that staff would not recommend enforcement under Section 17(f) of the Investment Company Act of 1940 when an affiliated transfer agent, running a blockchain-integrated recordkeeping system, custodies shares of the Franklin OnChain U.S. Government Money Fund.
What that means in practice: dozens of legacy open-end and closed-end funds inside the Franklin complex can now park cash, including securities-lending collateral, in a tokenized money-market vehicle that trades on a public blockchain. The OnChain fund is widely known by its ticker FOBXX and its token brand BENJI. The SEC letter refers to it only by its formal name.
The legal problem the letter resolves is narrow. Franklin Templeton Investor Services LLC, the transfer agent, and the funds’ investment advisers are all indirect subsidiaries of Franklin Resources. Having the transfer agent hold fund shares therefore counts as self-custody under Rule 17f-2. Paragraphs (b), (e), and (f) of that rule set custodial conditions the funds asked to bypass. Staff agreed, conditionally.
What is new is the plumbing. The transfer agent maintains its master securityholder file through what Franklin calls an Integrated System: an internal book-entry ledger for private shareholder data paired with one or more blockchains that record transactions, NAVs, distributions, and trade history. The two layers connect in real time through referential linkage. The OnChain fund currently runs on the Stellar network, though the letter notes it may use other chains for certain accounts on request.
None of this changes the underlying custody arrangement, Franklin argued. The transfer agent controls the system end to end. It permissiones users, administers the smart contracts, and can correct errors or unauthorized transactions on any chain it uses. A compromised wallet private key, Franklin wrote, would not by itself create a different official ownership record or prevent the transfer agent from maintaining the correct one. Staff found the setup “similar” to a no-action letter it issued to Franklin in 1992 for an affiliated master-feeder arrangement, where the master fund’s transfer agent kept feeder-fund shares in book-entry form.
The relief comes with strings. Twelve conditions are attached to the letter. Each investing fund’s board must approve the arrangement and review it at least annually. The transfer agent must maintain a separate blockchain wallet and a segregated record for each fund. Transaction confirmations go to the fund. Daily reconciliation against the fund’s own authorizations is required, and the duties of authorizing transactions and confirming them fall to different people.
The accounting demands go beyond ordinary custody. Each fund’s independent public accountants must run at least three record verifications per fiscal year, at least two of them unannounced, reconciling the transfer agent’s books against both the investing fund’s and the OnChain fund’s records. Should the transfer agent step down from that role, it must hand over the official record and the administrative controls needed to maintain it, including smart-contract access, to its successor.
Franklin told the SEC the OnChain fund offers features its current cash-management vehicles do not, hourly NAV calculations and intraday trading among them, and could lower costs and improve data security. Staff did not assess those claims. The letter restated the standard caveat: it “has no legal force or effect,” is not a Commission rule or statement, and does not alter applicable law. A no-action letter binds only the requesting party and only on the facts presented.
No Franklin fund has disclosed that it has begun investing through the arrangement. The letter is permissive. The OnChain fund’s assets under management and the size of potential inflows from the affiliated funds are not stated in either the letter or the reporting on it.
