SEC Lets Franklin Templeton Invest Cash in Its Own Tokenized Money Fund

The SEC has allowed Franklin Templeton to invest client fund cash in its own tokenized money market fund without following standard physical custody rules. The decision came as a no-action letter and applies to a company that already ranks among the top five largest tokenized asset managers.

What exactly did the SEC allow?

On Wednesday, the SEC issued a no-action letter in response to a request Franklin Templeton filed that same day. The letter means the regulator will not pursue enforcement if Franklin Templeton fund managers start investing client cash in the Franklin OnChain U.S. Government Money Fund. That is a tokenized money market fund that invests in US government securities and aims to hold a stable $1 share price.

Before this decision, such transfers would have had to go through traditional custodians handling physical asset custody. Now the firm's affiliated transfer agent, Franklin Templeton Investor Services (FTIS), can act as custodian itself and hold the tokens' private keys. That removes a middleman that used to be required under older securities custody rules.

A no-action letter is not a law or a formal rule. The regulator is simply telling one specific company it will not bring an enforcement case over the described activity, even if it technically breaks an older rule. The SEC reaches for this tool when rules were written long before a given technology existed and applying them literally would create pointless obstacles. That was exactly the case here. Physical custody rules for securities never anticipated a fund issuer holding its own tokenized assets.

How does the tokenized fund work?

The Franklin OnChain U.S. Government Money Fund works like an ordinary money market fund, except ownership of shares is recorded on a blockchain instead of a traditional register. Each share is worth $1, and returns come from interest on the US government bonds the fund holds. The SEC's permission comes with specific conditions that limit how the company can use its new freedom. Franklin first launched the fund back in 2021 on the Stellar blockchain, becoming the first US fund to record share ownership on a blockchain rather than solely through a traditional transfer agent register. The product has since expanded to several other networks, including Polygon.

• The point: The SEC let Franklin Templeton invest client fund cash in its own tokenized money market fund without standard physical custody requirements.
• The firm's affiliated transfer agent, FTIS, can act as custodian and hold the tokens' private keys instead of a traditional depositary.
• The company must maintain systems that prevent unauthorized instructions to move tokens.
• FTIS must keep administrative controls in place to correct, freeze, migrate or restore ownership records.

Why does this matter for the market?

Franklin Templeton oversees about $2.5 billion in tokenized assets and ranks fifth among the largest tokenized fund managers, according to RWA.xyz. In June, the firm launched a dedicated crypto division and acquired crypto asset manager 250 Digital, preparing for exactly this kind of scenario. In this niche, BlackRock's BUIDL fund remains the main rival, holding the largest amount of assets among tokenized government bond funds. The SEC's permission gives Franklin Templeton a more flexible tool for closing that gap.

The SEC letter is not an isolated signal. The regulator is also preparing a broader proposal called Regulation Crypto and has already scheduled an open meeting to consider it. Together, these moves show the regulator's stance on asset tokenization is shifting faster than market participants expected even a year ago.

Tokenized money market funds have already become their own corner of the industry, with large banks and asset managers rolling out similar products to give clients government bond yields in a form that settles on a blockchain. The SEC's permission removes one of the main technical obstacles for that segment, so readers should expect more letters like this one from other large players in the coming months.

What changes for investors?

For Franklin Templeton clients, the change looks invisible. The money still sits in a money market fund, and returns are still tied to the same government bonds. But the internal process speeds up, since share transfers and recordkeeping happen on a blockchain instead of through a paper register and an extra custodial link.

For the rest of the industry, the precedent matters more than the dollar figure. If the SEC lets a major traditional manager bypass physical custody rules for tokenized products, other fund issuers now have a template for filing their own requests. That could speed up similar tokenized products built on other assets, including USDC and other dollar stablecoins already competing for the same cash settlement niche.

What comes next?

The SEC will soon hold an open meeting on Regulation Crypto that will determine whether this approach becomes standard practice across the industry rather than a one-off exception. For now, the permission applies only to Franklin Templeton and this specific fund, so other asset managers will need to file their own requests if they want the same treatment.