SEC staff lets registered funds hold a tokenized money fund

What happened

The staff of the Securities and Exchange Commission's Division of Investment Management issued a no-action letter to Franklin Templeton on 12 August 2026 covering the group's US registered open-end and closed-end investment companies. It says the staff 'would not recommend enforcement action to the Commission under section 17(f) and Rule 17f-2 if FTIS acts as custodian for the Funds with respect to the Funds' investments in shares of the OnChain Fund, without compliance with paragraphs (b), (e) and (f) of Rule 17f-2'. FTIS is Franklin Templeton Investor Services LLC, the group's registered transfer agent; the OnChain Fund is the Franklin OnChain U.S. Government Money Fund, a series of Franklin Templeton Trust that relies on rule 2a-7. Because FTIS is an affiliated person of the funds, holding shares with it is a self-custody arrangement, and rule 17f-2 'assumes actual physical possession of underlying securities', with paragraph (b) requiring that securities be 'placed in a vault and physically segregated at all times'. The letter describes what FTIS maintains as an 'Integrated System': an internal book-entry system holding private shareholder information, and 'one or more blockchains that record transactional and other anonymous shareholder information, such as purchases, redemptions, dividend rates, dividend distributions, net asset values, trade dates and transaction memo information'. The two 'are automatically joined by FTIS on a real-time basis by referential data linkage to establish the master securityholder file'. The stated purpose of the request is that the funds want to invest in the OnChain Fund 'for cash management purposes, including the investment of cash balances and securities lending collateral', because it offers 'hourly net asset value calculations, intraday trading, faster transaction processing and the potential for reduced costs, as well as enhanced data security'. FTIS will create a wallet for each investing fund on the Stellar blockchain network and hold the private key, using 'multi-signature and multi-party computation techniques, geographically and operationally distributed signers, and offline recovery capabilities'. The relief carries twelve conditions, among them a separate wallet and segregated records for each fund, board approval reviewed at least annually, limits on who may transmit instructions, confirmations sent to people other than those who send the instructions, daily reconciliation, and independent accountants performing 'at least three verifications of the investing Fund's investments each fiscal year, at least two of which will be performed without prior notice'. The letter is signed by Taylor Evenson, Senior Counsel, and states that it 'reflects the views of the staff of the Division of Investment Management', is 'not a rule, regulation, or statement of the Commission', and that 'the Commission has neither approved nor disapproved its content'.

Why it matters

The staff did not reason about a blockchain. It reasoned about a no-action letter of 24 September 1992 to Franklin Investors Securities Trust, which allowed the same three paragraphs to be set aside for an affiliated master-feeder arrangement whose shares were held in book-entry form by an affiliated transfer agent, and it treated this as the same case. The blockchain drops out of the analysis, and the reason it drops out is control. The letter records that FTIS 'controls the Integrated System, including the permissioning, smart-contract administrative functions and referential linkage that make blockchain-recorded information part of the master securityholder file'; that its administrative key controls 'permit FTIS to maintain, correct, freeze, migrate, or restore the official record of share ownership'; and that they apply 'regardless of whether the shareholder uses FTIS's wallet implementation, their own wallet, or a third-party wallet implementation'. From that follows the sentence the whole thing turns on, which is that 'a compromise or misuse of a wallet private key would not, by itself, establish a different official ownership record or prevent FTIS from maintaining the correct record of share ownership'. Then the staff makes those powers conditions: the relief requires FTIS to keep the ability to correct, freeze and migrate for as long as it is transfer agent, and to hand the administrative controls, 'including administrative control over any smart contracts', to a successor if it stops. So a tokenized fund becomes eligible cash and securities lending collateral for a mainstream fund complex on the footing that the chain is not the record of ownership and the transfer agent's control over the chain is. Holding the key is not holding the asset. That is the second time in three days that the economics of a tokenized instrument have turned out to rest on somebody's permission to rewrite the ledger, after the disclosure of 11 August that the largest tokenized settlement platform by published volume runs on a permissioned network. The scale is in the footnotes rather than the reports. The relief covers the funds advised by twenty-four named managers, including Western Asset Management, ClearBridge Investments, Putnam Investment Management, BrandywineGLOBAL, Benefit Street Partners, Clarion Partners and Royce and Associates, which is most of the Franklin Templeton complex. Cash management and securities lending collateral are among the largest and least discretionary flows a fund group has, and a money market fund that prices hourly and settles intraday is a different instrument from one that strikes once a day. What the letter creates is a demand-side reason to hold the tokenized version rather than a distribution story about it.

What is not settled

The letter is staff relief on the facts of one request and says so twice, that 'any different facts and circumstances might require a different conclusion' and that a staff statement 'has no legal force or effect'. It names no other issuer and settles nothing for a tokenized fund whose transfer agent is not affiliated with the funds buying it, which is the ordinary case and the harder one, since the whole analysis runs through FTIS being both the affiliate and the controller of the register. Nor does it address a fund whose shares move on a chain the issuer does not permission. Footnote 3 says the OnChain Fund 'currently uses the Stellar blockchain network as the primary public blockchain, but may use other blockchain networks for certain accounts upon request', while the operative representation puts each investing fund's wallet on Stellar; what happens to the relief if an investing fund's wallet moves to another network is not addressed. Nothing in the letter states how much the OnChain Fund holds, how much of it the affiliated funds might buy, or what the arrangement costs relative to the cash vehicle it replaces, which the request describes only as offering 'the potential for reduced costs'. The incoming letter from Franklin Templeton's counsel is published beside the response and was not read here. And the conditions are auditable rather than self-executing: three verifications a year, two unannounced, are the assurance that the transfer agent's records and the fund's books agree, which is the same assurance the 1992 arrangement carried, on a system that now updates in real time.