SEC lets Franklin Templeton put tokenized funds inside ETFs

The no-action letter improves capital efficiency, liquidity and collateral management for ETFs, Kaul said. A fund that holds BENJI shares can settle trades faster and manage cash positions more precisely because the tokenized shares trade 24/7 on blockchain rails. Investors in an ETF that holds BENJI indirectly gain access to that blockchain layer without holding the tokens themselves.

Kaul said the distribution channel – not just the $2.6 billion size of the tokenized fund – is the main story. Franklin's large mutual fund and ETF base means the no-action letter could let thousands of existing funds plug into tokenized cash management. Other asset managers are likely to seek similar relief, though the SEC has not signaled a broader policy shift.

The move comes as tokenized money-market funds have grown to roughly $2.6 billion across issuers, with Franklin's BENJI among the largest. The broader crypto ETF market has seen volatile flows: Bitcoin ETFs recorded net inflows of over $500 million in Q3, following outflows of about $4 billion in June and withdrawals of over $380 million last week. Jane Street added roughly $630 million in Bitcoin ETFs in Q2, bringing its reported position to about $1.06 billion.

Franklin Templeton is now the test case for how far the SEC is willing to let tokenized assets penetrate traditional fund structures. Kaul said the no-action letter is the first instance where the regulator has specifically granted this type of comfort, leaving the door open for similar applications.