The SEC's Division of Investment Management will not recommend enforcement action against Franklin Templeton for letting its registered funds hold shares of the Franklin OnChain U.S. Government Money Fund through an affiliated blockchain-based custody system. The relief exempts the arrangement from three paragraphs of Rule 17f-2, the SEC's custody rule written for physical securities, subject to twelve operational conditions. Franklin says the fund processes transactions faster than its existing cash-management vehicle.
The U.S. Securities and Exchange Commission's Division of Investment Management said Wednesday it would not recommend enforcement action if Franklin Templeton's U.S. registered funds hold shares of its onchain money market fund through an affiliated custody and recordkeeping system. The funds can use Franklin OnChain U.S. Government Money Fund shares, ticker FOBXX, for cash management, including as collateral in securities lending.
FOBXX's blockchain-recorded shares, known as BENJI, carried a total asset value of about $726.6 million as of Aug. 12. Franklin launched FOBXX in April 2021, making it the first U.S.-registered mutual fund to use a public blockchain for transaction processing and ownership recordkeeping.
SEC exempts fund from a vault-based custody rule
The relief addresses a mismatch between FOBXX's digital shares and custody provisions built for physical or certificated securities. SEC staff agreed not to enforce paragraphs (b), (e) and (f) of Rule 17f-2 for the arrangement, provided Franklin's funds and transfer agent meet twelve conditions covering account segregation, transaction controls, reconciliation, board oversight and independent verification.
Franklin Templeton Investor Services, or FTIS, will create a separate wallet and segregated account for each investing fund, with Stellar serving as the primary network though other eligible networks can be used on request. Independent accountants must compare FTIS's transfer-agent records against the books of both the investing fund and FOBXX at least three times each fiscal year, including at least two unannounced checks.
FOBXX's reach across blockchains
Franklin's onchain fund has expanded well beyond its original network. It started on Stellar and has since expanded to Arbitrum, Solana, Base, Polygon, Avalanche and Ethereum, part of a broader tokenization push among traditional asset managers. Entry through Stellar starts at $20, while access via Ethereum requires $5 million, reflecting the higher transaction costs and institutional orientation of that network.
In April 2024, Franklin added peer-to-peer transfer functionality, letting holders move BENJI tokens directly between wallets without a traditional intermediary. FOBXX invests at least 99.5% of its assets in government securities, cash and fully collateralized repurchase agreements, under a prospectus that describes its blockchain system as permissioned and under the transfer agent's unilateral control, rather than a freely transferable crypto token.
Staff position, not a rule
The no-action letter is tied specifically to Franklin's stated facts and controls. It carries no legal force or effect, and is not an SEC rule or legal conclusion.
Sources: The Defiant, Crypto Briefing
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