Franklin Templeton Explores SEC Relief for Tokenized Funds

Franklin Templeton Meets SEC Over Blockchain Fund Trades

Imagine trading shares of a traditional mutual fund or ETF as easily as you swap tokens on a crypto exchange. That vision is moving closer to reality, but it faces major regulatory hurdles under existing financial rules.

On October 9, asset management titan Franklin Templeton met with staff from the U.S. Securities and Exchange Commission (SEC) Crypto Task Force. The two sides discussed legal questions surrounding pricing, liquidity provider fees, and trading venues for tokenized funds.

Who Is Franklin Templeton and Why Does This Matter?

Franklin Templeton is not a small crypto startup. It is a global financial powerhouse managing approximately $1.79 trillion in preliminary assets as of September 30.

When a firm of this size talks to federal regulators about public blockchain technology, the broader financial industry pays close attention. The company has been leading efforts to bridge traditional financial assets with blockchain infrastructure, a trend often called real-world asset (RWA) tokenization.

Pairing Tokenized Money Market Funds with Tokenized Stocks

One central topic on Franklin Templeton's meeting agenda was pairing tokenized money market fund shares directly with tokenized stock shares inside blockchain liquidity venues.

Specifically, the firm explored whether investors could exchange tokenized fund shares for National Market System (NMS) stocks using automated trading pairs. NMS stocks include familiar exchange-listed company shares and exchange-traded fund (ETF) shares that follow national trade-reporting rules.

In simple terms, picture exchanging a cash-equivalent tokenized money market share directly for a tokenized share of a major public company without needing a traditional broker intermediary.

The Legal Challenge: Old Rules Meet Modern Blockchain Tech

Why does Franklin Templeton need SEC regulatory relief for this concept? The core issue comes down to federal laws written long before blockchain technology was invented.

Under Section 22(d) of the Investment Company Act of 1940, redeemable fund shares must generally be sold at the public offering price described in the fund's official prospectus.

Furthermore, Rule 22c-1 mandates that fund share orders must be executed at the next calculated Net Asset Value (NAV) after an order arrives. Net Asset Value reflects total fund assets minus liabilities, divided by total outstanding shares.

Why 24/7 Liquidity Pools Clash with Daily Net Asset Value (NAV)

Traditional funds calculate their NAV once per business day, usually after major U.S. stock exchanges close. In contrast, blockchain liquidity pools operate continuously 24 hours a day, 7 days a week.

Prices in automated market maker pools adjust instantly with every transaction. This continuous price movement creates a direct conflict with Rule 22c-1, which requires orders to wait for the next official daily NAV calculation.

The Fee Question: Paying Liquidity Providers

Decentralized trading systems rely on liquidity pools where participants deposit pairs of assets to facilitate instant trades.

Entities or individuals supplying these assets are known as liquidity providers (LPs). In return for supplying capital, liquidity providers collect transaction fees on every trade passing through the pool.

Franklin Templeton raised questions about whether liquidity providers supplying tokenized fund shares could legally charge service fees. Under strict fund pricing rules, extra fees collected during fund share transfers could violate regulations unless specific SEC exemptions are granted.

Understanding the SEC’s Innovation Exemption Framework

The meeting followed the SEC's issuance of an innovation exemption framework on September 17. This framework provides temporary relief for qualifying blockchain trading venues and liquidity providers from certain standard exchange and broker-dealer requirements.

However, this exemption comes with mandatory operational conditions to protect investor interests:

• Trading volume limits to prevent systemic market disruptions
• Strict rules requiring equivalent rights for tokenized shareholders
• Auditable and public smart contracts for complete code transparency
• Mandatory trading halts synchronized with primary stock exchanges

Franklin Templeton's discussion examined whether tokenized fund trading pairs could operate safely under these conditional exemptions.

Tokenized ETFs: Questions Around Venues and Market Structure

The discussions extended beyond money market funds to include tokenized ETFs. Franklin Templeton explored trading pairs involving tokenized ETFs alongside other tokenized stocks, permitted payment stablecoins, or tokenized money market funds.

This proposal highlights a major distinction in market structure: a tokenized securities venue built on a blockchain is legally separate and distinct from a traditional national securities exchange like the NYSE or Nasdaq.

The firm questioned whether liquidity provider fees in ETF trading pairs require the same pricing exemptions as mutual fund shares.

Are Liquidity Pools Themselves Investment Companies?

Another complex legal question addressed was whether liquidity pools themselves should be classified as investment companies under the law.

Under the Investment Company Act of 1940, any entity that pools money from multiple investors to invest in securities is classified as an investment company. That status triggers mandatory registration, board oversight, and strict compliance duties.

When liquidity providers deposit tokenized assets into a pool, they receive liquidity provider (LP) tokens representing their proportional ownership in that pool.

Franklin Templeton asked whether these LP positions and liquidity pools require regulatory relief under three core federal laws:

• The Investment Company Act of 1940: Regulates fund governance, registration, and structure.
• The Securities Act of 1933: Governs public offerings, token issuances, and required disclosures.
• The Securities Exchange Act of 1934: Oversees trading platforms, broker-dealers, and ongoing financial reporting.

Franklin Templeton’s Blockchain History: FOBXX and BENJI

Franklin Templeton's engagement with blockchain technology is built on years of hands-on experience. Back in 2021, the firm launched the Franklin Onchain U.S. Government Money Fund, identified by ticker symbol FOBXX.

FOBXX was among the first mutual funds to use a public blockchain network for recording share ownership and processing transactions.

Shares of the fund are represented digitally by BENJI tokens. Holding or transferring a BENJI token directly corresponds to owning or transferring shares of FOBXX on Franklin Templeton's proprietary recordkeeping platform, called the Benji Technology Platform.

BENJI tokens represent shares of the Franklin Onchain U.S. Government Money Fund (FOBXX). Transferring a token transfers the associated share directly on the Benji Technology Platform.

Expanding BENJI Across the Crypto Ecosystem

Since launching FOBXX, Franklin Templeton has steadily expanded the features of its Benji platform, enabling peer-to-peer share transfers and regular dividend payouts directly onchain.

Regulatory guidance has also advanced over time. On August 12, SEC staff issued a no-action position regarding custody arrangements for conventional Franklin funds holding BENJI tokens.

That position addressed safekeeping and recordkeeping requirements, allowing traditional funds to hold BENJI tokens under strict safeguards and fund board supervision.

Institutional Partnerships with MoonPay and Kraken

To broaden adoption among institutional clients, Franklin Templeton has partnered with leading crypto infrastructure providers.

On June 2, the asset manager announced an integration with crypto payment network MoonPay. This setup allows eligible institutional investors to transition smoothly between supported stablecoins and BENJI tokenized fund shares.

This integration supports corporate treasury management and portfolio rebalancing while retaining instant access back to stablecoin liquidity.

Earlier, on May 12, Franklin Templeton partnered with Payward, the parent company of crypto exchange Kraken. The collaboration focuses on tokenized investment and yield products for institutional users, including deeper BENJI integration where local regulations allow.

Summary of Key Questions Presented to the SEC

Here is a quick overview of the key regulatory questions Franklin Templeton brought to the SEC Crypto Task Force staff:

1. Can tokenized fund shares trade in liquidity pools against tokenized NMS stocks under Section 22(d) and Rule 22c-1?
2. Are liquidity providers allowed to charge service fees on tokenized fund trades without violating fund pricing regulations?
3. Do blockchain liquidity pools holding tokenized assets require exemptions from investment company classification?
4. Do liquidity provider (LP) tokens require relief under the 1933 Securities Act and 1934 Exchange Act?
5. How can tokenized ETF venues operate within regulatory frameworks alongside traditional securities exchanges?

What Lies Ahead for Onchain Finance?

The ongoing discussions between Franklin Templeton and the SEC highlight a significant shift in traditional finance. Major institutions want the efficiency, speed, and continuous operating hours of blockchain technology.

At the same time, regulators remain focused on preserving investor protection, transparent pricing, and market integrity.

As dialogues continue under initiatives like the SEC's innovation exemption, the boundary between Wall Street and decentralized finance continues to narrow. How regulators address these relief requests will play a key role in shaping the future of tokenized asset trading globally.

Investors should keep in mind that digital asset markets involve ongoing market risks and price volatility.

Past performance of digital assets or funds is not a guarantee of future results.