Franklin Templeton held a meeting with staff of the Securities and Exchange Commission’s Crypto Task Force on Oct. 9 to examine possible regulatory relief that would permit tokenized money market funds and exchange-traded funds to trade through blockchain venues. The discussion centered on how existing rules governing the pricing of redeemable fund shares and the status of liquidity pools would apply to automated trading arrangements involving blockchain-based assets.

Focus on Pricing Rules and Trading Pairs

The firm’s proposed agenda addressed whether investors could exchange blockchain-based shares of money market funds for tokenized National Market System stocks through trading pairs on a blockchain venue. It also raised the question of whether liquidity providers supplying assets for those trades could charge service fees. National Market System stocks include exchange-listed equities and ETF shares subject to national trade-reporting rules.

Section 22(d) of the Investment Company Act of 1940 generally requires that redeemable fund shares be sold at the price stated in the fund’s prospectus. Rule 22c-1 generally requires transactions at the next calculated net asset value after an order is received. That value is determined by dividing the fund’s assets minus liabilities by its outstanding shares. The agenda asked whether exemptions from these provisions would be necessary for the proposed trading pairs and associated provider fees.

For tokenized ETFs, the discussion considered trading pairs involving another tokenized stock, a permitted payment stablecoin, or a tokenized money market fund. Franklin Templeton also questioned whether the same pricing rules would require exemptions when liquidity providers charge fees and whether a tokenized securities venue, distinct from a national securities exchange, would raise additional issues.

Liquidity Pools and Investment-Company Status

A further set of questions concerned the treatment of liquidity pools themselves. An investment company generally pools investor capital to invest in securities, which can trigger registration and management requirements under the 1940 Act. The agenda examined whether pools that hold specified tokenized assets to facilitate trading, and that issue interests to liquidity providers representing a depositor’s position, would need exemptions from investment-company regulation.

Related issues included whether depositing tokenized assets and receiving those interests would require relief under the Securities Act of 1933, which governs offerings and disclosures, and the Securities Exchange Act of 1934, which regulates trading and intermediaries. The interests issued to liquidity providers could potentially be treated as securities, raising questions about registration and ongoing compliance.

Context of Franklin Templeton’s Tokenized Fund Platform

Franklin Templeton reported preliminary assets under management of $1.79 trillion as of Sept. 30. The firm has operated a blockchain-based recordkeeping system for its Franklin OnChain U.S. Government Money Fund, known by the ticker FOBXX, since its 2021 launch. Each BENJI token represents one share of the fund; transferring a token transfers the associated share ownership. The Benji Technology Platform handles transaction processing and ownership tracking, including peer-to-peer share transfers and dividend distributions.

In August, SEC staff issued a no-action position addressing custody arrangements for Franklin funds investing in the OnChain Fund. That position focused on safekeeping and recordkeeping requirements under Section 17(f) and Rule 17f-2 rather than secondary-market trading questions. Earlier in the year, Franklin Templeton connected its platform with institutional trading infrastructure to allow eligible institutions to move between supported stablecoins and tokenized money market fund exposure through blockchain transactions. The firm has also outlined plans for tokenized investment and yield products in partnership with other market participants.

The Oct. 9 discussion with SEC staff represents an effort to clarify how established fund-pricing and investment-company rules would apply to the secondary trading of tokenized fund shares in automated liquidity pools under the agency’s emerging framework for blockchain-based securities activity.