SEC Staff Clears Franklin Templeton to Custody Blockchain Fund Shares Through Its Own Transfer Agent

The SEC's Division of Investment Management said Wednesday it will not recommend enforcement action against Franklin Templeton over a blockchain custody arrangement for its OnChain U.S. Government Money Fund, according to Crypto Briefing and cryptotimes.io.

The arrangement lets Franklin Templeton Investor Services, the firm's own affiliated transfer agent known as FTIS, hold official ownership records for shares of the fund using a mix of traditional book-entry systems and blockchain records on the Stellar network.

Rule 17f-2 under the Investment Company Act sets custody rules built for physical, certificated securities. Digital shares recorded on a blockchain don't fit that mold. Because FTIS is affiliated with the funds it would serve, the whole setup counts as a form of self-custody under the rule, which normally triggers extra scrutiny.

Franklin Templeton argued the physical-segregation requirements in the old rule don't make sense for shares that only exist as blockchain-linked ledger entries. SEC staff accepted that argument, but only for the narrow facts Franklin Templeton laid out in its request.

What FTIS Actually Does

FTIS keeps a master shareholder file for the OnChain Fund. That file links an internal private database, containing shareholder identity information, to blockchain records tracking purchases, redemptions, dividend distributions, and net asset value calculations. The two record sets sync in real time, and FTIS retains ultimate control over which one counts as the official record.

For every participating fund, FTIS will spin up a separate wallet on Stellar and hold the private keys itself. Franklin Templeton says its security stack includes multisignature authorization, multiparty computation, distributed signers, and offline backup recovery, according to Crypto Briefing.

The company's pitch for why this matters: hourly net asset value updates instead of once-daily pricing, intraday trading, faster settlement, and lower costs. Franklin Templeton wants to use OnChain Fund shares for cash management and as collateral in securities lending across its other funds.

The Strings Attached

SEC staff didn't hand this over with no conditions. Franklin Templeton has to keep separate wallets for each fund, reconcile transactions daily, maintain authentication controls to block unauthorized instructions, and get at least three independent accountant verifications every fiscal year. Fund boards have to provide oversight too.

Both the SEC's own language and reporting from cryptotimes.io are blunt about what this is not. It's not a formal SEC rule. It's not a legal determination. The Commission itself didn't vote to approve or disapprove anything. It's staff saying they won't recommend punishing Franklin Templeton if it does exactly what it described, under exactly these conditions.

A no-action letter is narrower than approval. It applies to Franklin Templeton's specific facts and representations. If the arrangement changes, or if some other asset manager tries something similar with different safeguards, they're starting from scratch with their own request.

Self-Custody and Conflict of Interest

Skeptics of fast-tracked crypto integration into regulated funds have a legitimate concern. Self-custody by an affiliated party is exactly the kind of conflict-of-interest structure securities rules have historically tried to limit, because the custodian and the fund manager end up checked by nobody but themselves and their own board. Rule 17f-2's physical-segregation requirements exist because letting an affiliate hold the keys to its own client's assets, literally in this case, creates room for error or self-dealing that arm's-length custody was designed to prevent.

SEC staff's answer to that concern is the layered condition list: separate wallets per fund, daily reconciliation, board oversight, and three independent accountant checks a year, rather than removing the affiliate-custody structure altogether. Whether those conditions substitute adequately for the independent-custodian model the original rule assumed is an open question that hasn't been tested by any enforcement action, because there's been no violation yet to enforce against.

No investigation, no charges, no formal rulemaking process has been triggered by any of this. It's a green light of a specific kind: proceed under these rules, and staff won't come after you.

The bigger unresolved piece is what this means for the rest of the asset management industry. If tokenized fund shares recorded on Stellar or another blockchain can be custodied this way, other firms building similar money market products will likely file their own no-action requests. Whether the SEC eventually converts this into an actual rule, rather than a growing pile of case-by-case staff letters, remains unanswered.