The U.S. Securities and Exchange Commission (SEC) staff has issued specific relief to Franklin Templeton, permitting its tokenized money market fund to be held within conventional mutual funds and exchange-traded funds (ETFs). This action, detailed in an August 12 staff letter, is explicitly not a rule or regulation and is contingent upon twelve stringent conditions. This nuanced approach highlights the cautious regulatory stance on integrating digital assets into traditional investment vehicles.
The relief allows Franklin Templeton to incorporate its Franklin OnChain U.S. Government Money Fund, which reported net assets of $720,928,224 as of July 31, into its conventional fund and ETF portfolios. This involves setting aside specific provisions of Rule 17f-2 under the Investment Company Act of 1940, which traditionally govern the custody of share certificates. Franklin Templeton has characterized this relief as the first U.S. regulatory clearance for digitally native products within conventional funds.
Crucially, the SEC staff letter emphasizes that it does not constitute a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved its content. The staff further noted that the letter possesses no legal force or effect. This distinction is vital, underscoring that the action represents a specific staff position rather than a broad regulatory endorsement.
Key Conditions and Requirements
Twelve conditions are attached to the relief, focusing on robust oversight and verification. These include mandates for the fund’s board of trustees to approve the arrangement and conduct annual reviews. Independent public accountants must verify each fund’s holdings at least three times per fiscal year, with two of these verifications conducted without prior notice. Franklin Templeton Investor Services will retain unilateral control over the official ownership record and smart contracts, with provisions for correcting errors, freezing or migrating wallet records, and transferring administrative control to a successor if necessary.
Regulatory Precedent and Context
The SEC staff granted this position by analogy to a September 24, 1992, letter concerning a master-feeder arrangement where an affiliated transfer agent held fund shares in book-entry form. Franklin argued that a Stellar wallet, used for its onchain fund, presents a similar situation as FTIS maintains the official ownership record and unilateral control.
The Franklin OnChain U.S. Government Money Fund (FOBXX) reported a seven-day net yield of 3.50%. Franklin Templeton plans to establish a separate wallet on the Stellar blockchain for each investment fund. The firm is also in the process of acquiring 250 Digital, a firm spun out of CoinFund, as its digital asset arm.
This development precedes the SEC’s August 18 proposal of Regulation Crypto Assets, which includes proposed offering paths and a 60-day comment period. The relief granted to Franklin Templeton, signed by Navid J. Tofigh, Senior Associate General Counsel, and answered by Taylor Evenson, Senior Counsel, provides a specific pathway for a tokenized fund within existing regulatory frameworks, albeit under strict conditions.
While this relief may signal a potential pathway for other digital asset integrations, uncertainties persist regarding the long-term legal standing of such staff letters and the broader implications of the imposed conditions for future onchain fund structures. The SEC staff’s action is a conditional allowance, not a general approval, reflecting the ongoing, careful evolution of regulatory approaches to digital assets in traditional finance.
Why This Matters
The materials describe a narrow update: The SEC staff provided relief to Franklin Templeton, allowing its $721 million onchain money market fund to be held within conventional mutual funds and ETFs. The long-term legal force and effect of SEC staff relief letters.
Broader Context
Source materials place the factual news in this context: Franklin Templeton Wins SEC Staff Relief for Its $721M Onchain Fund.
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