SEC Issues No-Action Relief for Franklin Templeton’s Blockchain-Enabled Money Market Fund

Who may be interested: Registered Investment Companies; Directors of Registered Investment Companies; Investment Advisers

Quick Take: On August 12, 2026, the SEC’s Division of Investment Management issued no-action relief allowing certain Franklin Templeton-affiliated funds to invest in an affiliated blockchain-enabled money market fund through a custody arrangement where the transfer agent of the money market fund controls the blockchain wallets holding the investing funds’ interest in the money market fund. Although the relief is based on specific facts and circumstances presented, the letter highlights the SEC staff’s continued willingness to apply existing regulatory principles to emerging technologies while preserving core investor protection safeguards.

Background and Regulatory Considerations  

Franklin Templeton submitted a request to the SEC’s Division of Investment Management (the “Division”) seeking assurances that the Division would not recommend enforcement action under Section 17(f) of the Investment Company Act of 1940, as amended (the “1940 Act”) and Rule 17f-2 thereunder if certain Franklin Templeton-affiliated registered investment funds (each, a “Fund” and collectively, the “Funds”) invested in shares of the Franklin OnChain U.S. Government Money Fund (the “OnChain Fund”) through a novel blockchain-enabled custody arrangement that did not comply with paragraphs (b), (e), and (f) of Rule 17f-2.

The OnChain Fund uses blockchain technology as part of its shareholder recordkeeping framework. The OnChain Fund’s transfer agent, Franklin Templeton Investor Services LLC (“FTIS”), maintains the official record of share ownership through an integrated recordkeeping platform that combines traditional transfer agency records with blockchain-based transaction data (the “Integrated System”). FTIS maintains the master securityholder file, controls the blockchain permissions and administrative functions, and retains the ability to correct errors, reverse unauthorized transactions, freeze accounts, migrate records, restore ownership records when necessary, and limit the transferability of OnChain Fund shares. To facilitate investments in the OnChain Fund, FTIS would establish and maintain a separate blockchain wallet for each investing Fund and safeguard the associated private keys through a security architecture designed to mitigate theft, loss, and unauthorized access.

The request arose because FTIS is affiliated with both the investing Funds and the OnChain Fund, making the proposed arrangement a form of affiliated or “self-custody” subject to Rule 17f-2 which governs the custody of investment company assets. Franklin Templeton argued that paragraphs (b), (e), and (f) of Rule 17f-2 were designed for physical or certificated securities and are not readily applicable to blockchain-recorded fund shares. For example, Rule 17f-2 contemplates securities being physically segregated in a vault and subject to procedures for documenting physical deposits and withdrawals. Given that the ownership interests in the OnChain Fund would exist solely within FTIS’s Integrated System and not in certificated form, compliance with the physical custody requirements of Rule 17f-2 would not be operationally feasible.

In support of its request, Franklin Templeton relied on a 1992 SEC no-action letter (the “1992 NAL”) involving affiliated fund shares maintained in book-entry form by an affiliated transfer agent. Franklin Templeton argued that the OnChain Fund presents a modern technological variation of the same core arrangement, acknowledging that while blockchain technology is used to record transactions and ownership data, FTIS remains the party responsible for maintaining and controlling the official record of share ownership, much like the transfer agent in the 1992 NAL.

SEC Staff Considerations

In responding to the request, the Division highlighted Franklin Templeton’s representations that the proposed custody arrangement provided protections comparable to those required by Rule 17f-2, notwithstanding the use of blockchain technology. The Division’s response also referenced Franklin Templeton’s representation that FTIS would maintain and control the official record of share ownership, despite the use of blockchain records in the Integrated System.

The Division’s response also referenced the 1992 NAL, which Franklin Templeton cited as support for the position that the proposed blockchain-enabled custody structure was sufficiently analogous to the book-entry arrangement addressed in that letter. In its request, Franklin Templeton represented that the use of blockchain technology did not fundamentally alter the nature of the custody arrangement because FTIS would continue to serve as the entity responsible for maintaining and controlling the official record of share ownership and performing the core custodial and recordkeeping functions traditionally carried out by a transfer agent. Franklin Templeton further represented that the use of blockchain wallets and private keys in the recordkeeping process did not diminish FTIS’s ability to maintain accurate ownership records or exercise oversight over the system.

Relief Granted

Based on the facts and representations presented, the Division stated that it would not recommend enforcement action under Section 17(f) of the 1940 Act and Rule 17f-2 if FTIS acted as custodian with respect to the Funds’ investments in the OnChain Fund without complying with paragraphs (b), (e) and (f) of Rule 17f-2.

The Division conditioned its no-action relief on twelve separate conditions designed to replicate the investor protection objectives underlying Rule 17f-2, such as ensuring integrity of ownership records and safeguarding Fund assets. The conditions included requirements relating to: (i) controls over authorized instructions; (ii) transition of records and administrative controls to a successor transfer agent; (iii) maintenance of FTIS’s administrative authority over the Integrated System for so long as FTIS acts as transfer agent to the OnChain Fund; (iv) board approval and annual oversight of the arrangements with FTIS; (v) segregated accounts and dedicated blockchain wallets for each investing Fund; (vi) the distribution of transaction confirmations to each investing Fund; (vii) access to reports regarding FTIS’s internal accounting controls; (viii) limitations on the number of persons authorized to transmit instructions to FTIS; (ix) authentication and cryptographic security measures; (x) independent confirmation procedures; (xi) daily reconciliation of transactions; and (xii) periodic independent accountant verifications, including surprise examinations.

Takeaways

The Franklin Templeton letter demonstrates the SEC staff’s willingness to apply existing custody principles to blockchain-enabled fund structures where investor protection objectives are preserved. The relief was conditioned on extensive governance, recordkeeping, authentication, reconciliation and audit safeguards, reinforcing that technological innovation does not diminish the need for robust operational controls. The letter also builds on the framework established in the 1992 NAL, suggesting that the staff may continue to evaluate blockchain-based fund arrangements through the lens of existing regulatory precedent rather than creating an entirely new regulatory regime. More broadly, the letter is consistent with the SEC’s recent emphasis on providing workable regulatory pathways for emerging technologies while maintaining core investor protection principles, reflecting a willingness to adapt longstanding regulatory requirements to modern financial infrastructure where appropriate.

The Staff’s no-action letter and links to Franklin Templeton’s no-action request can be found here.