Franklin Templeton Fund gets SEC approval to include BENJI in ETF

Franklin Templeton received SEC approval, tokenized money market funds may enter traditional mutual funds and ETFs

Franklin Templeton has received approval from U.S. regulators to include its $726 million tokenized money market funds in its portfolio of traditional mutual funds and ETFs as early as the fourth quarter.

Core Points

·Franklin's funds can use BENJI tokens as portfolio positions, cash positions or collateral.
·The SEC's exemptions relate to custody rules under the Investment Company Act of 1940.
·The fund board of directors must first approve the arrangement before specific products can be adopted.
·Franklin expects to be implemented as early as the fourth quarter, with the possibility of starting earlier.

The SEC approves Franklin Fund to hold BENJI

The U.S. Securities and Exchange Commission's Investment Management Department stated in an August 12 letter that if Franklin Templeton's registered funds hold shares of the Franklin OnChain U.S. Government Money Fund under the proposed custody arrangement, the department will not recommend enforcement action.

The money market fund code is FOBXX, and it records eligible share transactions on the public blockchain, with each BENJI token representing a fund share. Its investment portfolio mainly includes U.S. government securities, cash and repurchase agreements backed by government securities or cash.

This exemption involves sections 17(f) and 17f-2 of the Investment Company Act of 1940, which require registered investment companies to properly preserve assets. Some of these provisions are specific to physical securities, including requirements related to vouchers, treasury and physical inspections.

Franklin Mutual Funds and ETFs are allowed to invest in BENJI

Under Franklin's proposed structure, their registered mutual funds and ETFs can hold FOBXX without having to comply with certain requirements designed for paper certificate type assets. Depending on the investment strategy and approval status of each product, these funds can use BENJI as an investment tool, cash management tool or collateral.

Sandy Kaul, director of innovation and digital assets at Franklin Templeton, told the media that once the fund completes the relevant access process, it can hold these tokens. However, not all products can automatically adopt this arrangement. Kaul pointed out that each fund's board of directors must first approve the use of BENJI, so even if SEC staff have granted the requested exemption, the specific implementation time still depends on reviews at each product level.

Franklin Templeton retains traditional control over tokenized shares

Franklin's model does not use the blockchain ledger as the only ownership record, but instead combines on-chain transaction data with its existing transfer agent system. Franklin Templeton Investor Services will create wallets for its participating funds and retain control of the associated private keys.

Associated transfer agents will continue to maintain the official register of shareholders and perform management responsibilities. According to the SEC's letter, Franklin's system also allows transfer agents to correct blockchain errors and restore records if necessary.

SEC staff compared this arrangement to a book-based custody model previously considered under the Investment Company Act. The letter also mentions the regulatory treatment granted to Franklin by the SEC in 1992, when the agency dealt with the issue of recording securities electronically rather than paper certificates.

The SEC has concluded that it will not take action on Franklin's proposed treatment of FOBXX shares. This decision is a no-action stance based on the facts and explanations stated in Franklin's application and does not cover new rules for all tokenized fund structures.

For U.S. investors, this arrangement means that a regular Franklin ETF or mutual fund can gain exposure by investing in blockchain-recorded securities without requiring its shareholders to open a crypto wallet or directly purchase BENJI. Investors will continue to hold shares of the traditional fund, while its portfolio can include FOBXX.

This architecture also retains tokenized assets in the U.S. registered fund system. FOBXX remains a money market fund regulated by the Investment Company Act, and the transfer agent retains its established role, despite the use of public blockchain records.

BENJI optimizes cash and collateral management

According to Kaul, Franklin plans to use BENJI within his funds to more accurately manage cash balances and reduce uninvested funds held to meet liquidity needs. Because FOBXX invests in interest-bearing government instruments, the cash allocated to the fund can be readily used for the operating needs of the portfolio while continuing to earn income.

Kaul said: "We want our funds to experience the efficiency of having better money market fund options: managing cash more accurately, getting more returns, and managing the cash liquidity that must be held better and more strictly."

The actual use of the fund will depend on its investment authorization. One product may treat FOBXX as a cash position, while another product may use its share as collateral if permitted by the relevant platform and legal structure.

Franklin has tested both features outside the scope of his traditional funds. In June this year, the asset management company connected BENJI to the MoonPay platform, allowing qualified institutional customers to exchange stable currencies such as USDC and USDT into fund shares through MoonPay Trade.

Franklin said the arrangement with MoonPay could support portfolio rebalancing, capital operations, collateral and liquidity management. According to both parties, MoonPay's institutional transaction system can access more than 200 blockchain networks through an application programming interface (API).

In May, Franklin reached another agreement with Kraken parent company Payward to position BENJI as a collateral and cash management infrastructure. The two sides said they will also cooperate to develop tokenized stocks, income products and proactively managed on-chain investment products.

In February this year, Franklin and Binance launched another model for eligible institutions. Participating customers can pledge tokenized money market fund shares as over-the-counter collateral, while the underlying assets remain in the custody of a regulated custodian.

Tokenized funds continue to expand in U.S. asset management

Franklin launched FOBXX on the Stellar network in 2021, making it the first U.S. registered mutual fund to use a public blockchain to process transactions and record share ownership. Since then, its blockchain access has expanded to networks such as Ethereum, Solana, Polygon, Avalanche, Arbitrum, Base and Aptos.

data shows that the fund's assets are approximately US$726 million. The tracker also separately measures Franklin's complete Benji tokenization platform, which contains products other than FOBXX and therefore has higher total assets.

According to relevant data, the market size of tokenized assets has reached approximately US$38 billion. Traditional financial institutions are advancing blockchain-based versions of funds and securities while testing faster settlements, extended trading times, and new uses for using investment assets as collateral.

BlackRock is also expanding in this space through its U.S. Dollar Institutional Digital Liquidity Fund (BUIDL). In May this year, the asset management company submitted an application for a second fund after its BUIDL assets grew to approximately $2.3 billion and selected Securitize as its tokenization service provider.

Meanwhile, Franklin completed the acquisition of crypto investment management company 250 Digital in June this year and merged its business with existing digital asset operations into Franklin Crypto. At the time of the transaction, the company had approximately $1.78 trillion in assets under management globally.