The Securities and Exchange Commission's Division of Investment Management issued a no-action letter to Franklin Templeton, clearing its registered investment funds to use the blockchain-based FOBXX money market fund for cash and collateral management instead of traditional custody arrangements.
The letter allows Franklin Templeton funds to deploy FOBXX as a liquidity vehicle on-chain, a departure from the legacy settlement and custody infrastructure that has governed registered fund operations for decades. No-action letters grant regulatory forbearance; they do not grant explicit approval but the SEC staff will not recommend enforcement action if the party proceeds under stated conditions.
Franklin Templeton launched FOBXX in January 2023 as a tokenized money market fund on the Stellar blockchain, initially marketed to institutional clients seeking on-chain yield. The fund holds short-duration U.S. Treasury securities and cash equivalents. By issuing the no-action letter, the SEC's investment management staff acknowledged that registered funds, entities holding pooled assets for retail and institutional investors and bound by strict liquidity and valuation rules under the Investment Company Act, could use FOBXX to meet their own internal cash management needs without triggering additional compliance requirements or custody exemptions.
The letter addresses a structural friction in registered fund operations. Funds must hold cash to meet redemptions and pay operating expenses, but they do so under rules requiring daily net asset value calculations and segregated custody. Allowing them to hold a liquid, blockchain-native instrument that trades continuously and settles on-chain removes an operational bottleneck and reduces reliance on bank intermediaries for intra-day liquidity.
Franklin Templeton did not immediately respond to requests for comment on the scope of the letter or the funds expected to deploy FOBXX for cash management. The company has been a sustained proponent of blockchain infrastructure for institutional finance, having brought its tokenized fund onto Polygon in 2024 and integrated it with multiple blockchain networks to expand accessibility.
The no-action letter does not grant permission for retail registered funds to hold tokenized assets as portfolio holdings, only for cash management. The SEC has remained cautious about direct portfolio exposure to digital assets in registered funds, though it approved spot bitcoin and ethereum exchange-traded funds for retail investors beginning in January 2024.
Franklin Templeton's use of FOBXX for registered fund cash management sets a template for other asset managers holding registered fund licenses. The letter applies only to Franklin Templeton, but asset managers weighing their own blockchain custody strategies will likely cite it as precedent when petitioning regulators. The number of registered funds using tokenized instruments for internal cash flows remains unknown, as funds are not required to disclose cash management vehicles in SEC filings unless they constitute material holdings or create compliance risks.
