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The US Securities and Exchange Commission's (SEC) investment management staff has given Franklin Templeton relief to use its tokenized money-market fund (MMF) across its registered funds – a move experts say could give other asset managers a model to follow.
The SEC's Division of Investment Management said on 12 Aug that it would not recommend enforcement action if Franklin's funds use a new custody setup to invest in the Franklin OnChain US Government Money Fund (FOBXX), as long as the company follows around a dozen conditions. FOBXX, which launched in 2021, had about $721mn in assets at the end of July.
The decision helps Franklin get around custody rules that were written for physical securities and do not fit easily with blockchain-based funds. Experts told Sandmark that other asset managers could follow Franklin's example, particularly for managing cash and collateral. However, the SEC's relief only applies to Franklin's setup and does not change existing rules.
"Although this is a powerful precedent, it is not a blank invitation to tokenized funds," Joao Lages, co-founder of tokenization platform Lympid, told Sandmark. Lages said other asset managers could try to copy the basic setup but would need similar controls around transfer agents, key management, reconciliation and oversight.
Ryan Haczynski, head of protocol partnerships at Web3 infrastructure firm GlobalStake, also said Franklin's setup could provide a "workable template" for other firms, but he caveated that it "signals regulatory openness, not a general rule."
Rules written for physical securities
The issue comes down to how funds are required to hold their assets as some SEC custody rules were written when securities were still held in physical form. One rule, for example, requires certain securities to be kept in a vault.
That does not make much sense for FOBXX, where ownership is recorded electronically using Franklin Templeton's system and blockchain technology. Because of this, Franklin asked SEC staff to allow it to use a different custody setup, one where each investing fund would have its own blockchain wallet. Transactions would also be checked daily and independent accountants would regularly verify the investments.
Haczynski said the decision removes a "real, specific obstacle" for Franklin as now its funds can hold tokenized money-market shares "without conflicting with custody rules designed for physical certificates." But Haczynski said the decision only solves this particular custody problem and does not answer wider regulatory questions around tokenized securities.
Cash and collateral could be key
Franklin told the SEC that its funds want to use FOBXX to manage cash and assets used as collateral when lending securities – a use Lages said could become one of the biggest for tokenized funds.
"The new guidance will break an important institutional barrier in how funds will think about cash flows and managing collateral on a onchain security," Lages said.
He said companies that hold assets and help run funds could benefit if more funds move onchain while firms that currently help process and settle trades, could face more competition. But that's not the case with the relief granted to Franklin.
"No-action letters carry no force of law," Haczynski said. "They are informal, revocable, and do not bind future SEC leadership or extend beyond the specific facts reviewed."
He added that clearer SEC rules would still be needed before tokenized assets can be widely used by mutual funds and exchange-traded funds (ETFs). For now, Franklin has shown one way tokenized funds could work under existing rules, but other asset managers are not guaranteed the same treatment.
The decision comes as tokenization continues to grow, with tokenized assets on public blockchains worth about $38bn as of early August – US Treasury products make up around $16bn of that total, according to RWA.xyz.
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