Franklin Templeton is set to incorporate tokenized assets into its conventional investment funds after obtaining what it describes as the first US regulatory clearance for digitally native products to be used in traditional funds. This development follows an August 12 no-action letter from the SEC's Division of Investment Management, which stated 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 (FOBXX), provided certain conditions are met.
The firm intends to leverage its tokenized money-market fund, BENJI, within ETFs and mutual funds. This will allow the tokenized fund to serve as a holding or collateral, meaning investors in otherwise conventional funds could find tokenized assets in their portfolios without actively seeking them. The OnChain Fund, launched in 2021 and using the Stellar public blockchain, had approximately $721 million in assets by the end of July. The broader BENJI suite, which uses tokens to represent shares, managed about $1.98 billion in assets as of April 29.
Franklin Templeton anticipates that this structure will enhance liquidity management through features like hourly net asset value calculations, intraday trading, faster transaction processing, and potentially reduced costs. Sandy Kaul, Franklin Templeton’s head of digital assets and innovation, noted that the firm aims for its funds to manage cash more precisely, capture higher yield, and decrease the liquidity they need to maintain. The firm could begin integrating the tokenized fund into conventional portfolios as early as the fourth quarter, pending approval from individual fund boards. Franklin also plans to develop additional tokenized products for cash or collateral across its fund lineup.
While this SEC staff relief is a significant step, it is important to note that it reflects a staff position on enforcement and does not constitute formal Commission approval or a legal conclusion. Experts suggest this move could provide a template for other asset managers, especially for cash and collateral management, as it addresses a specific obstacle related to custody rules designed for physical securities. However, this is not a blanket invitation, and other firms would need to establish similar controls to meet regulatory requirements.
