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Franklin Templeton is preparing to use tokenized assets inside conventional investment funds after receiving SEC staff relief allowing its funds to invest in shares of its blockchain based money market fund.
The SEC Division of Investment Management said in an August 12 no action letter that it would not recommend enforcement action against Franklin funds using Franklin Templeton Investor Services as custodian for investments in the Franklin OnChain U.S. Government Money Fund, subject to a series of conditions.
The SEC stressed that the letter reflects a staff position on enforcement and does not constitute Commission approval or a legal conclusion.
The decision gives Franklin funds flexibility to use the OnChain Fund for cash management, including cash balances and securities lending collateral. Franklin said the structure could eventually allow its tokenized money market fund to be used inside ETFs and mutual funds, bringing tokenized assets directly into conventional portfolios.
The OnChain Fund uses an integrated recordkeeping system in which blockchain networks record transaction and anonymous shareholder information while Franklin Templeton Investor Services maintains the official record of ownership. The fund currently uses Stellar as its primary public blockchain.
Franklin said the structure could improve liquidity management by offering hourly net asset value calculations, intraday trading, faster transaction processing and potentially lower costs. The SEC letter said Franklin funds believe these capabilities could provide operational benefits compared with their existing cash management vehicle.
Sandy Kaul, Franklin Templeton’s head of digital assets and innovation, told Bloomberg that the firm wants its funds to manage cash more precisely, capture more yield and reduce the amount of liquidity they need to hold.
The firm could begin using the tokenized fund inside conventional portfolios as early as the fourth quarter, though individual fund boards must approve the arrangements. Franklin also plans to develop additional tokenized products that could eventually serve as cash or collateral across its fund lineup.
Franklin launched the OnChain U.S. Government Money Fund in 2021. The fund uses the BENJI token to represent shares and was the first U.S. registered money market fund to use a public blockchain as its official system of record. Franklin said its broader BENJI suite had $1.98 billion in assets under management as of April 29.
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