SEC staff clears Franklin Templeton blockchain fund custody arrangement

SEC staff said it would not recommend enforcement action against Franklin Templeton funds over a proposed custody arrangement involving shares of the Franklin OnChain U.S. Government Money Fund.

The decision allows Franklin Templeton Investor Services, or FTIS, to act as custodian for participating funds without complying with certain requirements under Rule 17f 2 that were designed around physical or certificated securities.

The OnChain Fund is a registered government money market fund whose official shareholder records are maintained through a system combining traditional internal records with blockchain technology.

The blockchain portion records transactions including purchases, redemptions, dividend distributions, net asset values, and trade information, while FTIS maintains control over the official ownership record.

Franklin Templeton said the arrangement would allow its funds to use the OnChain Fund for cash management and securities lending collateral. The company cited benefits including hourly net asset value calculations, intraday trading, faster transaction processing, and potentially lower costs.

FTIS will create a separate wallet on the Stellar network for each participating fund and will maintain the private keys. Its security setup includes multisignature systems, multiparty computation, distributed signers, and offline recovery capabilities.

The SEC staff granted the no action position subject to several conditions, including separate wallets for each fund, daily transaction reconciliation, board oversight, authentication controls, and at least three independent accountant verifications each fiscal year.

The staff emphasized that the letter represents only its position on enforcement and does not constitute a rule, regulation, or formal approval by the SEC.