Franklin Templeton Plays a Pioneering Role in the On-Chain Money Market Fund

The $1.4 trillion investment giant Franklin Templeton has been deeply involved in blockchain technology and continues to see operational efficiencies through a blockchain-integrated system. 

Franklin Templeton first started exploring the tech back in 2019 and recently said that it will offer digital asset strategies to wealth managers. It is also one of the companies waiting for regulatory approval in the US for a Spot Bitcoin exchange-traded fund (ETF).

Despite an uncertain regulatory environment in the US, the asset manager has been embracing public blockchains for its tokenization efforts. 

In a recent interview, Jenny Johnson, CEO of Franklin Templeton, noted that securitization is undergoing a dramatic transformation and compared tokenization to “securitization done on steroids.” 

According to her, available capital and technology disruption have attracted more companies and CEOs to invest in “things for the future,” like blockchain technology, which allows for a:

• Payment mechanism
• Smart contracts to be programmed into the token
• The general ledger acting as a source of truth.

Tokenization is all about issuing digital tokens to represent diverse assets such as securities, treasuries, and real estate. Using blockchain technology, different asset classes can be digitized, offering a more fluid and transparent trading environment.

Tokenization's potential to revolutionize asset management has several leading firms investigating blockchain's ability to digitize varied assets. Investment giant Franklin Templeton is one of the most prominent names in the traditional finance (TradFi) space to adopt tokenization. 

“Investors are waking up to the opportunity that there's probably, on a forward basis, going to be an array of on- and off-ramps for you to be able to utilize in and out of digital assets,” 

– Roger Bayston, head of digital assets at the asset manager giant

According to him, blockchain is set to be “transformational” for other capital markets going forward.

Franklin Templeton has actually been a pioneer in the tokenization space. The asset manager's Franklin OnChain US Government Money Fund (FOBXX) has grown to $309.97 million in assets as of the end of September. The fund invests in US government securities, cash, and repurchase agreements and doesn't hold any cryptocurrencies.

The fund has been seeing a lot of traction this year in tandem with the popularity of the tokenization trend. At the beginning of 2023, the fund had less than $100 million in assets, which surged to $276 million at the end of April. 

This growth was driven by the shuttering of several industry-friendly banks in March, with Franklin Templeton stating that its money-market fund has been recording inflows from crypto-related entities in the aftermath of the banks' shutdown. 

In addition to the banking crisis, high inflation, the downturn in the crypto market, and the lack of return on stablecoins have investors looking for ways to hedge their investment risks. Money market funds are mutual funds that invest in short-term and highly liquid investments to offer investors low-risk options.

Looking Under the Hood  

While the focus on tokenization has been recent, Franklin Templeton has long been curious about the crypto space. What really started the development at one of the world's largest asset managers in earnest was “trying to find ways for the broader company to benefit from blockchain technology,” said Mike Reed, Franklin Templeton's Head of Digital Assets Strategic Partnerships, at the inaugural TokenizeThis conference by Security Token Market (STM).

With the traditional finance industry rife with ledgers, he explained that it has been all about using blockchain to increase the efficacy of ledgers, whether that be cost efficiency, trust efficiency, or general efficiency of ledgers. 

The idea for one of the first on-chain money market funds meanwhile started out as a thought exercise, said Reed. 

“We're not anarchists, we're not trying to blow up the banking system or anything remotely close to that, we're also not trying to blow up the stablecoin marketplace because we understand what a valuable tool that is in this ecosystem,” he said.

The Franklin OnChain U.S. Government Money Fund (FOBXX) was launched on April 6, 2021, and became publicly available last year. 

“When we launched originally, rates for all intents and purposes were zero, and nobody cared, so it wasn't this big awesome asset-gathering opportunity for us,” noted Reed.

After that, with the failure of the banks, “a lot of Web3 natives” who had their cash in those banks invested treasury with Franklin Templeton. 

“I'd be remiss if I didn't say we also have some non-Web3 native groups as well who invest just because they think it's a cool idea and the investment properties work for them,” he added.

Web3 natives like the idea of just knowing where their money is and having complete transparency into that. Meanwhile, in addition to that, traditional investors also “like the idea of potentially strong yield from this because of the savings that are achieved by running different functionalities on-chain.”

The fund is a 40-act mutual fund, a very boring traditional structure that's registered with the SEC. But the twist is, to own that fund in tokenized form, you have to purchase the Benji token.

Each of these Benji tokens represents one share in Franklin Templeton's fund. Access to the tokenized fund is via its BENJI investments app, which generates a private key for each investor to control their tokens and is managed by the organization's transfer agent subsidiary. 

Having a token means the return on the asset doesn't have to be paid in a lump sum on a quarterly basis; rather, with automation, the asset manager can choose to make payments as often as it wants. Franklin Templeton makes payouts every weekday in BENJI tokens.

Benji is not a stablecoin but a digital asset security. However, its regulatory construct, which seeks to keep its net asset value stable, allows it to act like one while also generating income. 

Talking about the future integration of the token into JPM, Goldman, or Broadridge, Reed said, “the thought that you could own an asset and legally earn a yield on chain is appealing to a lot of different market constituents,” not just within TradFi but also Web3 space, so, they are having ongoing discussions about doing that in a regulatory compliant way.

When it comes to the fund's working, the transfer agent is the one using the blockchain, and transactions are recorded on the public blockchain without personal information. However, there is a conventional database to track investor names and other information. From the regulatory standpoint, the asset manager does know-your-customer (KYC) and anti-money laundering (AML) checks while onboarding users.

Gradual Blockchain Diversification 

Interestingly, the asset manager has chosen to go with public blockchains despite the regulatory uncertainty in the US. This is unlike other TradFi giants like JPMorgan and Citi, who have created their own private blockchains for their projects.  

This, Sandy Kaul, SVP, Head of Digital Asset and Industry Advisory Services at Franklin Templeton, noted, is because of the evolution of the public blockchains, specifically Ethereum and its shift to proof-of-stake (PoS), which, she said, provides free benefits to those running a node. She also said:

“It's going to be very difficult for these private blockchains to keep pace with that rate of innovation and with the cost efficiency of having the big public blockchains operating almost like the utilities of the future,”

The fund initially used the Stellar blockchain network to process transactions and record ownership. After successfully launching on the Stellar blockchain, it extended to Ethereum via the layer 2 blockchain Polygon Network in April this year. Then, in August, the asset manager said it may also issue tokens on the Avalanche and Aptos blockchains as well as Ethereum layer 2 Arbitrum. Franklin Templeton is also invested in Aptos Labs — a startup founded by part of the team from Meta's abandoned Diem stablecoin project — alongside fellow asset manager Apollo.

The motivation behind this blockchain diversification of the tokenized fund has been to “create as wide of an interoperable space and cast a wide net as possible,” said Reed. He noted how all blockchains are different, as each has:

• Distinct ecosystems.
• Strengths
• Weaknesses

Then, there are projects embedded with different tokenomics that are being built on these chains.

He pointed out that the systems in the space are still “fragmented,” which means one particular chain won't win the day. “We believe in a multi-chain world,” Reed said. “The chains are almost like different digital nation states,” and they all have different constituents and ecosystem partners, so “if you want to proliferate your idea, you want to have access to as many potential customers as possible,” he added.

So, when it comes to tokenomics, feedback loops, value capture, and more, “this idea where there's value discrepancy between different assets is something that really resonated with us, and we thought, okay, so we're working on this on-chain development, idea, what if we built an investment strategies unit that could really take advantage of the discrepancy in valuation between different assets,” leading to the development of firm's digital asset investment strategies business unit.

And all of this is because “this is a space that we really believe in as a firm,” said Reed, “I think there's this idea that we're still so early that being able to rise the tide for everybody is something that we're cognizant of.“

Join the waitlist for TokenizeThis April 11-13, 2024, via summit.stm.co