SEC staff gives Franklin limited relief for blockchain-recorded fund custody

The Securities and Exchange Commission’s Division of Investment Management said on August 12, 2026, that it would not recommend enforcement action if Franklin Templeton’s registered funds used an affiliated transfer agent to custody shares of the Franklin OnChain U.S. Government Money Fund under a specified set of controls.

The decision addressed a narrow but important institutional problem: how rules written around physical securities should apply when official fund-ownership records incorporate a public blockchain. It did not exempt the underlying fund from securities regulation, approve cryptocurrency investments or establish a general custody rule for tokenized assets.

What the decision covered

The OnChain Fund is a registered government money-market fund operating under Rule 2a-7 of the Investment Company Act framework. Franklin’s August 12 request stated that the fund invests at least 99.5% of its assets in government securities, cash and fully collateralized repurchase agreements. It does not invest in cryptocurrencies or other digital assets.

Its distinguishing feature is the ownership-record system maintained by Franklin Templeton Investor Services, or FTIS, a registered transfer agent. The system joins private shareholder information held in an internal book-entry database with anonymous transaction and operational information recorded on one or more blockchains. The SEC record identified Stellar as the primary public network then in use.

Because FTIS and the relevant funds are affiliated, the proposed arrangement implicated Section 17(f) and Rule 17f-2. Parts of that rule assume securities can be physically segregated in a vault, that deposits and withdrawals can be notated, and that accountants can physically inspect the assets. Those procedures do not map neatly onto uncertificated fund shares represented through controlled electronic records.

The SEC staff therefore agreed not to recommend enforcement over noncompliance with paragraphs (b), (e) and (f) of Rule 17f-2, provided the funds followed 12 enumerated conditions. The position applied only to the facts and representations in Franklin’s request.

Control, not bearer ownership

The record makes an important distinction between using a blockchain and surrendering control to an autonomous network. FTIS retained authority over the official master securityholder file, permissioning, administrative smart-contract functions and the linkage between its internal records and blockchain entries.

Franklin represented that FTIS could correct unauthorized transactions, freeze or migrate wallet records, create replacement wallets and restore the official ownership record. Possession or misuse of a wallet private key would not, by itself, determine legal ownership of the fund shares.

That centralized administrative authority was fundamental to the staff position. Required safeguards included segregated accounts and wallets for each investing fund, controls over who could issue instructions, transaction confirmations sent to personnel other than the instruction sender, and daily reconciliation against authorized transactions.

Each fund’s board also had to approve the arrangement and review it at least annually. Independent public accountants were required to perform at least three verifications during each fiscal year, including at least two without advance notice, by comparing FTIS records with the books of both the investing fund and the OnChain Fund.

Why it mattered

The practical significance was that other Franklin registered funds could use the OnChain Fund for activities such as cash-balance management or securities-lending collateral without forcing blockchain-integrated shares into procedures designed for paper certificates. Franklin attributed potential operational benefits to hourly net-asset-value calculations, intraday trading, faster processing and possibly lower costs. Those were Franklin’s stated expectations, not findings independently established by the SEC.

Institutionally, the letter showed one way legacy custody safeguards could be translated into controls for tokenized fund records: administrative recoverability, segregation, authorization checks, board oversight and independent reconciliation. It did not conclude that blockchain records alone satisfy custody obligations.

The limits of the relief

The SEC staff expressly said its response was an enforcement position rather than a legal conclusion. It was not a Commission rule, carried no independent legal force and could produce a different result if the facts changed.

The August 12 record also did not establish how many Franklin funds would adopt the arrangement, when investments would begin, or how much capital would move through it. The verified development was permission to proceed under defined conditions—not evidence of completed adoption or a broad regulatory settlement for onchain finance.