Applicant Information
Name: Franklin Templeton Digital Assets
Address (Headquarters): 1 Franklin Parkway
City, State, Postal Code: San Mateo, CA 94403
Country: United States
Website: Alternatives By FT or Franklin OnChain U.S. Government Money Fund - FOBXX (franklintempleton.com)
Primary Contact Name: Ric Golubov
Title: VP, Digital Asset Partnership Development
Country: United States
Email, Telegram, Forum, & other methods of contact: Please contact FTDigitalAssets@franklintempleton.com for any inquiries.
Key Information
Expected Yield: 7-day current yield of the Franklin OnChain U.S. Government Money Fund (FOBXX, i.e., the “Fund”) as of March 31, 2024 is 5.13%, and 5.16% as of April 30, 2024. For more information, including daily updates for 7-day current yield, please visit Franklin OnChain U.S. Government Money Fund - FOBXX (franklintempleton.com).
Expected Maturity: The weighted average maturity of FOBXX as of March 31, 2024 is 22 days, and 24 days as of April 30, 2024. For more information, including daily updates for weighted average maturity, please visit Franklin OnChain U.S. Government Money Fund - FOBXX (franklintempleton.com).
Underlying asset: U.S. Treasury Bills, Federal Home Loan Bank, Federal Farm Credit Bank
Minimum/Maximum transaction size: The minimum initial investment is $20.
Current AUM for product: The AUM for the Franklin OnChain U.S. Government Money Fund is $358.19 million as of March 31, 2024, and $368.04 million as of April 30, 2024.
Current AUM for issuer: The AUM of Franklin Templeton is $1.6 Trillion as of March 31, 2024.
Volume of transactions LTM: Over the last 12 months, the Franklin OnChain U.S. Government Money Fund has done over 900 transactions. This does not include daily dividend reinvestments.
Source of first-loss capital: N/A
Basics and Background
1. How will this investment improve Arbitrum’s RWA ecosystem?
We have created a digital asset security that represents a share of a regulated money market mutual fund. The Franklin OnChain U.S. Government Money Fund, also known as the BENJI token, provides an opportunity for Arbitrum to practice sound treasury management while also generating attractive income. The BENJI token is a competitive solution for Treasury fund diversification, while also acting as an additional source of income generation through competitive yield. Any income generated by investing in the BENJI token can provide additional capital to aid in the development of new products, technology, or other initiatives deemed important to Arbitrum’s DAO.
This on-chain money market mutual fund, the BENJI token, is designed to provide transparency by using blockchain technology to process transactions and record share ownership. The fund’s transfer agent maintains the official record of share ownership via a proprietary blockchain-integrated system that utilizes a public blockchain for recording transactional activity, known as the Benji platform. Ensuring the safety and stability of a DAO’s Treasury is of the utmost importance and, as a result, many invest in stablecoins to try to preserve capital. Stablecoin providers invest the underlying assets across many different investment types to generate return but rarely pass that return onto holders of the stablecoin. In BENJI’s case, we believe that the Arbitrum DAO Treasury can not only receive the benefit of capital preservation but can also earn any income generated from the fund’s holdings. Although the Treasury may be able to accommodate a larger investment than $150mm (a potential of up to $500mm), we would advise allowing the Fund’s size to grow before increasing the allocation.
As mentioned later in the plan design section, the Franklin OnChain U.S. Government Money Fund invests 99.5% of its total assets in Government securities, cash and repurchase agreements collateralized fully by Government securities or cash.
We would like to advocate for the Arbitrum DAO Treasury to liquidate a portion of its reserves and invest in the BENJI token. Please see Appendix 1 – Say Hello to Benji for more information on the Fund and the process for investing.
The BENJI token represents shares of a government money market mutual fund that’s registered under the Investment Company Act of 1940 but performs the transfer agent transaction record-keeping function via public blockchains. It’s important to note that there is no personal identifiable information publicly available on the blockchain, just transaction-level data. Unlike many similar offerings, the Benji platform records transaction records and fund ownership via a public blockchain, which means that the DAO would have increased transparency and assurance that their assets are in good stead. The DAO Treasury can interact with their account at any time using our Benji Institutional interface and provide a look through to their holdings using the Stellar Explorer or the Polygon PoS Chain Explorer.
Please see below for a preview of our institutional interface supporting the BENJI token.
Please see the previews below of the Stellar Explorer tool that provides increased transparency, where historical transaction data and fund ownership is always readily available.
Please see the previews below of the Polygonscan tool that provides increased transparency, where historical transaction data and fund ownership is always readily available.
Franklin OnChain U.S. Government Money Fund has maintained a NAV of $1.00 since inception, having provided price stability, and is also required by law to provide quarterly public disclosure of all holdings. While minor, many of the largest stablecoins have faced price volatility in the peg of their stablecoin.
Additionally, the Fund generated a 7-day current yield of 5.13% as of March 31, 2024, and 5.16% as of April 30, 2024. This yield is distributed directly to investors, providing a yield-generating investment with a stable NAV. To see current 7-day yield figures for the Fund, updated on a daily basis, please visit: Franklin OnChain U.S. Government Money Fund - FOBXX (franklintempleton.com).
2. Identify key management personnel and individual experience. Also include third parties utilized for managing assets and their qualifications.
The two portfolio managers on this Fund are Shawn Lyons and Johnson Ng, with 27 and 26 years of service, respectively. The portfolio managers seek to build a diversified portfolio of Government securities. Government securities include those issued by government agencies or instrumentalities, such as the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Home Loan Banks and Federal Farm Credit Banks, whose securities are neither issued nor guaranteed by the U.S. Government.
The portfolio managers make the final security selection decisions, consistent with desired overall risk positioning, and based on relative pricing and trading liquidity. Throughout the portfolio construction process, dedicated risk analysts collaborate with the portfolio managers to identify the level and sources of risk and help determine optimal position sizing.
We do not utilize third parties for managing assets as investment management functions are managed in-house. However, the Fund utilizes the following third parties for its sub-administrator, custodian and independent registered public accounting firm:
- Sub-administrator: JPMorgan Chase Bank, N.A. (JPMorgan) has an agreement with FT Services to provide certain sub-administrative services for the Fund. The administrative services provided by JPMorgan include, but are not limited to, certain fund accounting, financial reporting, tax, corporate governance and compliance and legal administration services.
- Custodian: JPMorgan Chase Bank, at its principal office at 270 Park Avenue, New York, NY 10017-2070, and at the offices of its branches and agencies throughout the world, acts as custodian of the Fund’s assets.
- Independent Registered Public Accounting Firm: PricewaterhouseCoopers LLP, 405 Howard Street, Suite 600, San Francisco, CA 94105, is the Fund’s independent registered public accounting firm. The independent registered public accounting firm audits the financial statements included in the Fund’s Annual Report to shareholders.
3. Describe any previous work by the entity or its officers/key contributors similar to that requested. References are encouraged.
Franklin Templeton Digital Assets has been engaged in intensive research and technical development within the digital asset ecosystem for the last several years, developing technology platforms and strategy differentiation to help clients achieve their investment goals in this new asset class, all while supporting and investing in digital asset networks. We believe that, in this space, everything is interconnected and thus take a holistic approach to the ecosystem. We have developed blockchain-native expertise and are committed to distinct pillars across the digital asset economy:
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Digital Assets Technology: Franklin Templeton Digital Assets believes that blockchain technology has the ability to create efficiencies across a variety of business processes, which is why we are building our own blockchain-based technology solutions to support these assets in the investment management space. Our team built a full service blockchain-based technology stack to support a blockchain-enabled money fund, which includes a digital transfer agent platform, digital asset management system, and digital wallet infrastructure.
In April 2021, we launched the Franklin OnChain U.S. Government Money Fund, the first U.S.-registered mutual fund to use blockchain to process transactions and record share ownership. In early 2022, we expanded the availability of the Fund through our Benji Investments app and designated the Stellar network’s blockchain as the Fund’s official record of share ownership. In 2023, we further expanded the availability of the Fund to the Polygon blockchain network. Token holders can gain exposure to the Fund in digital wallets through the Benji Investments app or our institutional website, and we believe that eventually these tokens may be interchangeable with the rest of the digital asset ecosystem. The Franklin OnChain U.S. Government Money Fund had over US$360 million under management as of March 31, 2024. -
Digital Assets Investment Strategies: Franklin Templeton Digital Assets believes that digital assets are frontier risk alternatives™ and have the potential to generate capital appreciation in the long-term. We also believe that, as with many investment types, much of the alpha generation in this space can occur in the early stages. We are engaged in the early stages of the digital assets market and build portfolios of tokens that are listed on exchanges.
Our team has developed capabilities to invest in early-stage, private blockchain-focused companies. This investment process includes new techniques developed by the team to help expand our opportunity set using proprietary quantamental research methods. Franklin Templeton Digital Assets also invests in listed tokens and has developed new ways of evaluating these digital assets from both a quantitative and fundamental (tokenomics) perspective. -
Node Operations: Franklin Templeton believes that it should be a part of the blockchain networks in which we operate. Running validators and providing staking services can have an impact on client portfolios and help drive potential returns, so we have been developing strategies around this exciting capability. We have operated nodes on both the Provenance and Stellar blockchains since 2019. In 2021, we began operating node validators and staking on four additional Proof-of-Stake blockchain networks: Ethereum, Cardano, Solana and Polkadot. In 2023, we began supporting Polygon, Aptos, Avalanche and Arbitrum.
4. Has your entity or its officers/key contributors been subject to an enforcement action, criminal action, or defaulted on legal or financial obligations? Please describe the circumstances if so.
No, with respect to investment-related regulatory matters, during the quarter ended March 31, 2024, neither Franklin Advisers, Inc. (FAV) nor, to the best of its knowledge, its individual advisory affiliates or the Fund* was named as a respondent in any investment-related regulatory or criminal proceedings brought by any U.S. federal or state regulatory agency, foreign financial regulatory authority, or self-regulatory organization. Additionally, to the best of FAV’s knowledge, it has not defaulted on any legal or financial obligations. For a summary of investment-related proceedings, findings or orders brought or issued by any such regulatory entity against FAV and/or certain of its advisory affiliates in the past 10 years ended March 31, 2024, as well as certain other regulatory matters, please see Appendix 2 – Franklin Advisers, Inc. Regulatory Summary. In addition, from time to time, FAV and its advisory affiliates receive subpoenas and inquiries, including requests for documents or information, from governmental authorities or regulatory bodies, and also are the subject of governmental or regulatory examinations or investigations. Investment-related proceedings, findings or orders resulting from such subpoenas, inquiries, examinations, or investigations, if any, will be reported, to the extent required and permitted by law, on FAV’s Form ADV filed with the U.S. Securities and Exchange Commission. (Italicized terms are as defined on Form ADV.)
*The “Fund” refers to the Franklin OnChain U.S. Government Money Fund.
5. Describe any conflicts of interest for your entity and key personnel.
Franklin Templeton’s policy is to take all reasonable steps to maintain and operate effective organizational and administrative controls to identify and manage relevant conflicts that may occur between Franklin Templeton and its clients or between multiple clients.
The following list provides a summary of the main conflicts we have identified and the controls in place to manage such conflicts within the Franklin Templeton group.
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Franklin Templeton Seed Money versus Shareholders’ Investment. As part of normal business practice, Franklin Templeton will invest money, initially, at the launch of a fund in order to diversify and attract clients. The policy is that an investment by Franklin Templeton is treated in a manner that is believed to not conflict with the interests of any client.
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Fairness of Trading Allocation and Order Priority among Clients. Franklin Templeton has trading aggregation, allocation, and best execution policies and procedures that are designed to ensure that all trades are treated in an equitable and fiduciary manner relative to investment objectives. Where there is insufficient liquidity, the allocation policy automatically attributes liquidity proportionately across all client orders. The aggregation and allocation procedures are subject to a regular review.
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Interfund Trading and Franklin Templeton Funds Purchasing Franklin Templeton Funds. At times, Franklin Templeton may match internal orders of sales and purchases of portfolio securities. This is known as crosses or Interfunds. Some Franklin Templeton funds can also trade units in other Franklin Templeton funds. This process is dealt with in the existing trading system and procedures. The trade is executed at market price with no commissions or spread taken by Franklin Templeton. This activity is regularly reviewed with the goal of ensuring that clients are treated fairly.
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Research Material and Client Commissions. Franklin Templeton (FT) proprietary research material is not offered to the general public for sale. FT may enter into Client Commission Arrangements (CCAs), whereby FT directs trades to a broker-dealer with the instruction that the executing broker segregate commission in excess of execution costs in a pool which may be used to compensate brokers and other third parties that provide research services or products to FT. FT has established policies and standards that include ongoing monitoring, oversight, and audit controls.
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The Use of Sensitive Data and Non-Public Information. Franklin Templeton has a number of policies and procedures in place that place restrictions on staff use of confidential or non-public information. There are formal reporting and approval procedures to release such information to satisfy Franklin Templeton’s fiduciary obligations to clients and shareholders. These policies and procedures are regularly reviewed.
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Information Barrier among Investment Advisors and Broker-Dealer Relationships. With the goal of ensuring that sensitive decision information cannot be used to the disadvantage of another fund and that confidential information is not shared inappropriately, Franklin Templeton has Information Barrier Compliance Policy and Procedures in place that separate the physical and logistical investment information between different advisor groups.
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Code of Ethics. All Franklin Templeton personnel are bound by a Code of Ethics and Business Conduct which requires staff to conduct themselves with ethics and integrity and to avoid a conflict, particularly where their personal interests (including family members) could interfere with the interests of the firm and/or the client. In addition, Franklin Templeton has a Personal Investments and Insider Trading Policy that requires pre-clearance of personal transactions, including those of the immediate family of staff members who have access to non-public information regarding securities transactions, securities recommendations, or portfolio holding of FT funds or client accounts. Personal transactions of such staff members are regularly monitored, and prescribed sanctions are issued in the event of a breach.
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Equitable and Fair Treatment among Clients. At the heart of Franklin Templeton procedures is the requirement to treat clients fairly and equitably in line with the firm’s fiduciary obligations and investment objectives. This includes, but is not limited to, activity such as the allocation of fees and expenses, redemption in kind, and the lending of securities of a fund. Franklin Templeton procedures are regularly reviewed.
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Investment in Client Securities. At times, Franklin Templeton funds or investors will invest in the securities of a company for which Franklin Templeton serves as investment manager. Such investment decisions made by Franklin Templeton to invest in client securities are always guided by what is in the best interest of the relevant fund, account, or its investors. Investment decisions are regularly reviewed.
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Gifts and Entertainment. Franklin Templeton has adopted strict guidelines regarding what gifts and business entertainment are acceptable. The policy is part of our Code of Ethics, any violation of which may result in disciplinary action up to and including termination.
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Side-by-Side Management. Franklin Templeton has implemented “Policies and Procedures for Side-By-Side Management of Registered Investment Companies and Investment Accounts” designed to address potential conflicts of interest that may arise when a portfolio manager or different portfolio managers within a single investment adviser or within a single investment group manage both U.S.-registered funds and other investment accounts or pooled vehicles for other advisory clients.
6. Insurance coverages, guarantees, and backstops Name of insurer or guarantor Per incident coverage Aggregate coverage
Franklin Resources, Inc. maintains the following comprehensive, worldwide insurance programs:
Financial Institution Bond/Computer Crime
This insurance responds to claims that allege theft of money or securities. It has a US$100 million single loss limit and an aggregate limit of US$200 million. The coverage is provided by a syndicate of commercial insurance companies and is led by Berkshire Hathaway.
Directors and Officers and Professional Liability
This program provides Directors & Officers Liability and Errors & Omissions coverage to Franklin Resources, Inc., its worldwide subsidiaries, funds, and accounts. Coverage is provided for settlements, judgments, and defense expenses. The program has an aggregate limit in excess of US$100 million. The coverage is provided by a syndicate of commercial insurance companies and is led by Chubb Insurance Companies.
ERISA Bonds
This bond provides the Fiduciary Fidelity Bonds required by ERISA law. Coverage is written on a co-surety basis, and Federal Insurance Company (Chubb) is the lead co-surety. The plan limit is 10% of each Insured’s Plan Property with a maximum limit of US$500,000 per plan (US$1,000,000 for plans that hold employer securities) and a minimum limit of at least US$1,000 and no deductible.
Coverage Term
The policy period for these insurance coverages is June 30, 2023 – June 30, 2024.
Other Insurance Coverage
The firm maintains Privacy and Network Security insurance coverage (also known as “Cyber Insurance”) with an annual aggregate limit in excess of US$50 million. Coverage includes Security and Privacy Liability and Event Management insurance which covers losses and expenses attributable to cybersecurity incidents. The coverage is provided by a syndicate of commercial insurance companies and is led by AXA XL.
The firm also maintains a total of US$51 million in Public and General Liability limits. Additional coverage for Fire, Hazard, and Documents in Transit has various limits.
7. Historical tracking error in your proposed product, or similar to that being proposed Product 2024 YTD 2023 2022 2021
As mentioned above, Franklin OnChain U.S. Government Money Fund has maintained a NAV of $1.00 since inception, having provided price stability, and is also required by law to provide quarterly public disclosure of all holdings. While minor, many of the largest stablecoins have faced price volatility in the peg of their stablecoin.
8. Brief reason for above tracking error
Not applicable.
9. Please describe any experience your firm has in working with decentralized organizational structures
Our team has relationships with some of the largest DAOs in the digital asset ecosystem. Currently in our Digital Asset Investment portfolios, we own several governance tokens including many of the top governance tokens by market cap.
10. What is your entity’s current assets under management, assets held in trust, total value locked, or equivalent metric for your legal structuring?
As of March 31, 2024, Franklin Templeton managed total assets of US$1.4 trillion. The Franklin OnChain U.S. Government Money Fund had over US$360 million under management as of March 31, 2024.
11. How many of these assets held are present on Arbitrum One, if any?
As of the time of posting, the Franklin OnChain U.S. Government Money Fund is not currently live on Arbitrum for general availability.
Plan Design
1. Please describe your proposed product, including a description of the underlying assets and, if more than one asset, the proposed allocation among assets and general investment guidelines. Where appropriate, include targeted maturity mix and credit quality. Attach supplementary documents as appropriate.
As mentioned above, under this proposal, a portion of Arbitrum DAO’s Treasury reserve funds would be invested in the world’s first registered money market mutual fund offered in token form, BENJI. One BENJI token is equivalent to one share of the Franklin OnChain U.S. Government Money Fund (FOBXX).
The Franklin OnChain U.S. Government Money Fund seeks to provide capital and liquidity preservation characteristics presents a unique opportunity for the Arbitrum DAO. Similar to the objective of stablecoins, the Fund tries to maintain a stable $1.00 share price (NAV), which it’s maintained since inception. The BENJI token can help diversify Arbitrum DAO’s Treasury into a steady, income-generating asset that can provide both capital and liquidity preservation.
FOBXX invests at least 99.5% of its assets in Government securities, cash and repurchase agreements collateralized fully by Government securities or cash.
The Fund invests in:
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U.S. government securities, which may include fixed, floating and variable rate securities.
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Repurchase agreements which are agreements by the Fund to buy Government securities and then to sell the securities back on an agreed upon date (generally, less than seven days) at a higher price, which reflects prevailing short-term interest rates.
Please refer to Franklin OnChain U.S. Government Money Fund Prospectus and Franklin OnChain U.S. Government Money Fund SAI for more detailed information.
2. Do investors have any shareholder, investor, creditor or similar rights?
Because BENJI token is a share of the Franklin OnChain U.S. Government Money Fund (“Fund”) recorded on a public blockchain, investors are shareholders of the Fund.
3. Describe the legal and contractual structuring for your product including regulatory bodies overseeing your business and the product and identifying all legal jurisdictions interacting with your product. Attach supplementary documents as appropriate.
Franklin Templeton Trust (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of one fund, Franklin OnChain U.S. Government Money Fund (Fund). The Franklin OnChain U.S. Government Money Fund intends to be a “Government money market fund,” as such term is defined in or interpreted under Rule 2a-7 under the Investment Company Act of 1940 (1940 Act) and is registered with the U.S. Securities and Exchange Commission (SEC). For more information, please contact our team or visit the Fund’s Prospectus: Franklin OnChain U.S. Government Money Fund - FOBXX (franklintempleton.com).
4. Would Arbitrum’s assets be bankruptcy remote from your own entity and its officers/key contributors? If so, please explain the legal and contractual basis. On a confidential, non-reliance basis, provide any third party legal opinions to support the conclusions.
The Franklin OnChain U.S. Government Money Fund is a 1940 Act fund. The Fund assets are separate from any Franklin Templeton company, manager or adviser assets, and are maintained with a qualified custodian. For information on the Fund’s custodian, please see the response to question 5 below in the “plan design” section.
5. How are Arbitrum’s assets protected vis-a-vis the bankruptcy of the brokerage or applicable financial institution (e.g., bank deposit insurance, securities insurance, etc.)?
An investment in the Fund is not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time. Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed by, any bank. However, it is important to note that the Fund intends to be a “government money market fund” as such term is defined in or interpreted under Rule 2a-7 under the Investment Company Act of 1940 (1940 Act). The Fund invests at least 99.5% of its total assets in Government securities, cash and repurchase agreements collateralized fully by Government securities or cash.
6. Does the Issuer issue more than one asset? If so, what is the priority relationship between different asset classes?
Yes. The Fund’s investment manager is Franklin Advisers, Inc. The investment manager is a wholly owned subsidiary of Resources, a publicly owned company engaged in the financial services industry through its subsidiaries. Franklin Resources, Inc. is the holding company for various subsidiaries that form the global investment management organization known as Franklin Templeton. With more than 75 years of active management experience, Franklin Templeton offers investment solutions to help clients achieve better outcomes. Our independent specialist investment managers (SIMs) provide clients with deep expertise and boutique specialization across asset classes, investment styles, and geographies. Furthermore, our SIMs are backed by a global infrastructure with at-scale capabilities in research, data analytics, and servicing—this combination of independent, entrepreneurial SIMs and global strength makes Franklin Templeton uniquely agile and allows us to offer 200+ investment strategies across a full range of vehicles.
The Franklin OnChain U.S. Government Money Fund is managed by Franklin Templeton’s Fixed Income portfolio management team.
7. Provide a detailed cash flow diagram that shows the flow of funds from ARB/Fiat conversion, investment in underlying asset, payment of expenses, sale of underlying asset, and repayment (Fiat/ARB conversion), including the counterparties and legal jurisdictions involved.
Institutional investors may open a new account by using our Institutional Web Portal. Please see the graphic below for the flow of funds from fiat, namely USD, via Fed Wire for purchases; for redemptions, please see the same graphic:
In the subscription and liquidation of shares of the Fund, Franklin Templeton utilizes JP.Morgan Chase Bank as a third party counterparty for the Fed Wire process.
8. Describe anticipated tax consequences (if any) in transacting on the underlying and/or receipt of yield.
Fund distributions, which will be automatically reinvested in additional shares, are generally taxable to you as ordinary income, capital gains or some combination of both. Investment company dividends paid to you from interest earned on certain U.S. government securities may be exempt from state and local taxation, subject in some states to minimum investment or reporting requirements that must be met by the Fund.
Dividend income: Income dividends are generally subject to tax at ordinary rates. Because the Fund invests primarily in debt securities, it is expected that none of the Fund’s income dividends will be qualified dividends subject to reduced rates of taxation to individuals. A return-of-capital distribution is generally not taxable but will reduce the cost basis of your shares, and will result in a higher capital gain or a lower capital loss when you later sell your shares.
Capital gains: Fund distributions of short-term capital gains are also subject to tax at ordinary rates. Because the Fund is a money market fund, it does not expect to realize and distribute any long-term capital gains on its investments.
Sales of Fund shares: Because the Fund seeks to maintain a $1.00 per share NAV, sales of its shares will not generally result in a taxable capital gain or loss for federal or state income tax purposes.
Medicare tax: An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains from redemptions or other taxable dispositions of Fund shares) of U.S. individuals, estates and trusts to the extent that such person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds a threshold amount. Any liability for this additional Medicare tax is reported on, and paid with, your federal income tax return.
Backup withholding: A shareholder may be subject to backup withholding on any distributions of income and capital gains if the shareholder has provided either an incorrect tax identification number or no number at all, is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends, has failed to certify that the shareholder is not subject to backup withholding, or has not certified that the shareholder is a U.S. person (including a U.S. resident alien). The backup withholding rate is currently 24%. State backup withholding may also apply.
State and local taxes: Distributions of ordinary income and capital gains, if any are generally subject to state and local taxes. However, distributions of ordinary income paid to individual shareholders from interest earned by the Fund on certain U.S. Government obligations may be exempt from state and local income taxation depending on the state. Shareholders should contact their tax advisors with respect to the state and local income tax consequences of investing in the Fund, including whether Fund dividends derived from interest on U.S. government obligations held by the Fund qualify for tax free treatment.
Non-U.S. investors: Non-U.S. investors may be subject to U.S. withholding tax at 30% or a lower treaty rate on Fund dividends of ordinary income. Non-U.S. investors may be subject to U.S. estate tax on the value of their shares. They are subject to special U.S. tax certification requirements to avoid backup withholding, claim any exemptions from withholding and claim any treaty benefits. Exemptions from U.S. withholding tax are generally provided for capital gains realized on the sale of Fund shares, capital gain dividends paid by the Fund from net long-term capital gains, short-term capital gain dividends paid by the Fund from net short-term capital gains and interest-related dividends paid by the Fund from its qualified net interest income from U.S. sources. However, notwithstanding such exemptions from U.S. withholding tax at source, any such dividends and distributions of income and capital gains will be subject to backup withholding at a rate of 24% if you fail to properly certify that you are not a U.S. person.
Other reporting and withholding requirements: Payments to a shareholder that is either a foreign financial institution or a non-financial foreign entity within the meaning of the Foreign Account Tax Compliance Act (FATCA) may be subject to a 30% withholding tax on income dividends paid by the Fund. The FATCA withholding tax generally can be avoided by such foreign entity if it provides the Fund, and in some cases, the IRS, information concerning the ownership of certain foreign financial accounts or other appropriate certifications or documentation concerning its status under FATCA. The Fund may be required to report certain shareholder account information to the IRS, non-U.S. taxing authorities or other parties to comply with FATCA.
Other tax information: This discussion of “Distributions and Taxes” is for general information only and is not tax advice. You should consult your own tax advisor regarding your particular circumstances, and about any federal, state, local and foreign tax consequences before making an investment in the Fund. Additional information about the tax consequences of investing in the Fund may be found in the SAI.
9. Describe the process and expected timeline for liquidation of assets, if given instructions to do so by Arbitrum governance.
All Fund transactions must be conducted via the Institutional Web Portal.
You can redeem your shares at any time through the Institutional Web Portal, although redemptions of Fund shares will only be processed during normal business hours on business days.
As long as your transaction is for $250,000 or less, you can sell your shares via the Institutional Web Portal without a signature guarantee. Institutional investors making redemptions via the Institutional Web Portal will use a submitter/approver process to authorize transactions.
Redemption proceeds will be sent by electronic funds transfer (ACH or Fed Wire) from your Institutional Web Portal account to your bank account within seven days after we receive your request in proper form.
Before requesting to have redemption proceeds sent to a bank account, please make sure we have your current bank account information on file.
If the bank account was added or changed within the last 15 days, you may be required to provide written instructions signed by all Fund account owners, with a signature guarantee for each Fund account owner.
If we receive your request in proper form prior to 1 p.m. Pacific time, or the regularly scheduled close of the New York Stock Exchange, whichever is earlier, proceeds sent by ACH generally will be available within two to three business days.
10. What amount of first-loss equity will Sponsor provide to ensure over-collateralization, how is the first-loss equity denominated, and what is the source of capital?
Since the Franklin OnChain U.S. Government Money Fund is a stable Net Asset Value (NAV) product invested in U.S. government securities, we would not anticipate a situation where the Fund, or its underlying securities, become impaired.
11. Describe the liquidity and stability of the proposed underlying assets, including anticipated settlement times from the sale of the underlying to the repayment of ARB.
The Fund only buys securities that the investment manager determines present minimal credit risks. The Fund maintains a dollar-weighted average portfolio maturity of 60 calendar days or less, maintains a dollar-weighted average life for its portfolio of 120 calendar days or less, and only buys securities that mature or are deemed to mature in 397 calendar days or less.
The Fund uses the amortized cost method of valuation to seek to maintain a stable $1.00 share price and does not currently intend to impose liquidity fees or redemption gates on Fund redemptions.
All Fund transactions for institutional customers must be conducted via the Institutional Web Portal.
As mentioned in question 9 above in the “plan design” section, as long as your transaction is for $250,000 or less, you can sell your shares via the Institutional Web Portal without a signature guarantee. Institutional investors making redemptions via the Institutional Web Portal will use a submitter/approver process to authorize transactions.
Redemption proceeds will be sent by electronic funds transfer (ACH or Fed Wire) from your Institutional Web Portal account to your bank account within seven days after we receive your request in proper form.
Before requesting to have redemption proceeds sent to a bank account, please make sure we have your current bank account information on file.
If the bank account was added or changed within the last 15 days, you may be required to provide written instructions signed by all Fund account owners, with a signature guarantee for each Fund account owner.
If we receive your request in proper form prior to 1 p.m. Pacific time, or the regularly scheduled close of the New York Stock Exchange, whichever is earlier, proceeds sent by ACH generally will be available within two to three business days.
12. If relying on the blockchain for any of the transactional flows, please describe any blockchain derived risks and mitigations.
The Fund’s transfer agent maintains the official record of share ownership via a proprietary blockchain-integrated system that utilizes features of traditional book-entry form and one or more public blockchain networks. The use of blockchain technology is relatively new and still evolving for mutual funds. Similar to traditional fund recordkeeping systems, all Fund and shareholder records in the blockchain-integrated system are under the full and complete control of the Fund’s transfer agent.
The recording of Fund shares on the blockchain will not affect the Fund’s investments. The Fund intends to be a Government money market fund. Accordingly, the Fund will invest, consistent with Rule 2a-7 under the 1940 Act, at least 99.5% of its total assets in Government securities, cash and repurchase agreements collateralized fully by Government securities or cash. The Fund will not invest in any cryptocurrencies (referred to as, among other things, virtual currencies).
Complex information technology and communications systems, such as blockchain networks, are subject to a number of different threats or risks that could adversely affect the Fund. If such an event occurs, the Fund may incur substantial costs. In addition, market events also may trigger a volume of transactions that overloads current information technology and communication systems and processes, impacting the ability to conduct the Fund’s operations. The Fund may never achieve market acceptance and may not be able to attract sizable assets or achieve scale. The Fund’s investment manager expects that the blockchain-integrated recordkeeping system will provide operational efficiencies without negatively impacting the quality of the transfer agent’s services.
13. Does the product rely on any derivative product (swaps, OTC agreements)?
No, the Franklin OnChain U.S. Government Money Fund does not rely on any derivative product agreements.
14. List all the third party counterparties linked to your assets including and not restricted to prime broker if any, custodian, reporting agent, banks for derivatives or loans and provide primary contact details for the third party counterparties
- Sub-administrator: JPMorgan Chase Bank, N.A. (JPMorgan) has an agreement with FT Services to provide certain sub-administrative services for the Fund. The administrative services provided by JPMorgan include, but are not limited to, certain fund accounting, financial reporting, tax, corporate governance and compliance and legal administration services.
- Custodian: JPMorgan Chase Bank, at its principal office at 270 Park Avenue, New York, NY 10017-2070, and at the offices of its branches and agencies throughout the world, acts as custodian of the Fund’s assets.
- Independent Registered Public Accounting Firm: PricewaterhouseCoopers LLP, 405 Howard Street, Suite 600, San Francisco, CA 94105, is the Fund’s independent registered public accounting firm. The independent registered public accounting firm audits the financial statements included in the Fund’s Annual Report to shareholders.
15. Can you explain how is risk management (inv and operational) being done? Can you provide a copy of your risk management policy?
Please see the response below for applicable procedures from our risk management policy:
Operational Risk Management Responsibility and Oversight
Risk management is a critical element of Franklin Templeton’s everyday business activities and takes place at all levels of our organization. The Company applies a three lines of defense framework with risk leads from each segment/function accountable for working within their respective areas and matrix support functions to capture and report on relevant business risks, and to utilize this information as part of their ongoing planning and performance management activities to help ensure success.
The Board of Directors has principal responsibility for oversight of the company’s risk management processes. The Audit Committee receives risk management reports at least quarterly and oversees our enterprise risk assessment and risk management policies and procedures. The full board receives reports of, and provides direction to, the Enterprise Risk Management Committee at least annually.
In order to ensure that risks are viewed and managed appropriately across the enterprise, Franklin Templeton has an Enterprise Risk Management (ERM) program and Enterprise Risk Management Committee (ERMC). The ERMC is aligned to our Executive Committee and regularly reports to the company’s Board of Directors and Audit Committee about our key enterprise risks and management’s responses. The ERMC includes executive and senior-level representatives from all areas of Franklin Templeton’s business and operations.
The ERMC’s primary roles are to:
· Provide guidance and support for the ERM program
· Promote risk management at all levels of the organization
· Review, discuss, and refresh the key enterprise risks (and other significant risks)
· Review, discuss, and monitor emerging risks and potential threats
· Provide a framework to assist business, regional risk committees, and support units to identify, assess, and manage risks
· Assess management’s programs and responses for each risk
· Report to management, the Audit Committee, and Board of Directors (key enterprise risks, programs & responses, and status of the ERM program)
The ERMC is comprised of the following executive and senior level members:
· SVP, Head of Enterprise Risk & Committee Chair
· Head of Enterprise Risk (EMEA)
· SVP, Quality Assurance, Risk and Control
· Chief Privacy Officer
· EVP, Chief Risk Officer
· SVP, Global Alliances
· Director, Global Audit
· SVP, Global Treasurer & Head of M&A
· SVP, Corporate Real Estate & Aviation Services
· SVP, Chief Security Officer
· EVP, Financial Planning & Strategies
· President – FTIS, Head of Global Shareholder Services
· President – FTS
· SVP, Global Client Partnering (Human Resources)
· Chief Information Officer
· SVP, Head of Business Management & Ops (Public Markets)
· EVP, General Counsel
· SVP, Chief Communications Officer
· EVP, Global Alliances & New Business Strategy
· Head of Product Strategy & Management
· Head of Investment Risk
· EVP, Operations
· EVP, Chief Accounting Officer
· Chief Risk Officer - India
· Chief Operating Officer - Distribution
The Head of Enterprise Risk and the ERM team members provide ongoing support and guidance to subsidiary level risk management committees and functions to best leverage the firm’s ERM processes and standards, align risk activities, and ensure transparency of risk information and reporting across the firm. ERM team members also attend legal entity and business risk committee meetings to promote communication and consideration of risk management practices and findings throughout the organization. There are also regional and legal entity risk committees that meet regularly. All regional groups are modelled after the ERMC, with similar risk practices and processes, along with some adaptation based on the size and scope of the region.
For a copy of Franklin Templeton’s full risk management policy, please reach out to FTDigitalAssets@franklintempleton.com.
Performance Reporting
1. What are your proposed performance benchmarks? If this is substantially different from the underlying assets, please explain why.
The Franklin OnChain U.S. Government Money Fund does not track a benchmark index as it is structured as a “Government money market fund,” as such term is defined in or interpreted under Rule 2a-7 under the Investment Company Act of 1940 (1940 Act). The Fund seeks to provide investors with as high a level of current income as is consistent with the preservation of shareholders’ capital and liquidity. The Fund also tries to maintain a stable $1.00 share price.
2. Describe the content, format, preparation process, and cadence of performance reports. This should include proof of reserves, if appropriate. Please include a sample report.
Performance and portfolio reporting is completed quarterly, by the third week after quarter end. The client receives a quarterly packet that includes market commentary and outlook, performance attribution, and a review of the portfolio for the quarter. For a sample report, please contact FTDigitalAssets@franklintempleton.com.
3. Who provides the performance reports in respect of the underlying assets?
The NAV calculation and publication is completed by third party administrators.
Our dedicated Global Client Service Support Team–with office hubs in London, Singapore, and New York–provides reporting support, working with the firm’s key business units such as Product Management, Portfolio Management, Global Marketing, Performance & Risk, Portfolio Accounting, Legal, and Operations.
4. Describe any formal audit process and timing of such audits.
As an SEC-registered mutual fund, the Fund has a Board of Trustees, an Audit Committee comprised of Independent Trustees, and the Fund’s financial statements are audited by an independent public accounting firm. As mentioned above, PricewaterhouseCoopers LLP, the Fund’s independent registered public accounting firm, audits the financial statements included in the Fund’s Annual Report to shareholders. To see a copy of this audit report, please visit page 16 of Appendix 3 – Franklin OnChain U.S. Government Money Fund Annual Report.
Pricing
1. Provide a copy of your standard contract, or one similar to what is being proposed here.
For a copy our standard institutional onboarding documents, please email FTDigitalAssets@franklintempleton.com.
2. Fee summary: Inclusive of the full scope of services requested. Product Fee schedule If asset based Fee calculation for our plan if asset based Annual fee if flat fee Any other fees (including redemption or minting fees)
The Franklin OnChain U.S. Government Money Fund’s total annual fund operating expenses after fee waiver and/or expense reimbursement is 0.20% (net expense ratio) as the investment manager has contractually agreed to waive or assume certain fees and expenses until July 31, 2024. The Fund’s gross expense ratio is 0.89%.
Please see below table for a summary of the fees and expenses that you may pay if you buy and hold shared of the Franklin OnChain U.S. Government Money Fund:
| Annual Fund Operating Expenses | |
|---|---|
| Management fees | 0.15% |
| Distribution and service (12b-1) fees | None |
| Other expenses | 0.74% |
| Total annual Fund operating expenses | 0.89% |
| Fee waiver and/or expense reimbursement1 | -0.69% |
| Total annual Fund operating expenses after fee waiver and/or expense | |
| reimbursement | 0.20% |
- The investment manager has agreed to waive fees and/or reimburse operating expenses (excluding certain non-routine expenses or costs, such as those relating to litigation, indemnification, reorganizations and liquidations) for the Fund so that the ratio of total annual fund operating expenses will not exceed 0.20% until July 31, 2024. During the term, the fee waiver and expense reimbursement agreement may not be terminated or amended without approval of the board of trustees except to add series or classes, to reflect the extension of the termination date or to lower the waiver and expense limitation (which would result in lower fees for shareholders).
3. Describe frequency of fee payment and its position vis-a-vis payment priority compared with other expenses (i.e., cash waterfall)
Please see the answer to question 2 above in the “pricing” section.
Smart Contract/Architecture
1. How many audits have you had and name of auditors? Please provide a copy of reports.
Our smart contract code has been audited by Trail of Bits as of September 2023. A detailed report can be accessed here.
2. Is the project permissioned? If so how are you managing user identities? Any blacklisting/whitelisting features?
Yes, users of the Benji platform are run through typical KYC/AML verification, and are white listed inside the contract (using ERC-20 roles).
3. Is the product present on several chains? Are there any cross-chain interactions?
The Fund currently uses the Stellar network as the primary public blockchain and Fund investors will initially hold their wallets on the Stellar network. However, the Fund may also use the Polygon, Aptos, Avalanche and Arbitrum networks for certain accounts upon request and subject to eligibility, although one or more of those other blockchain networks may not be available at certain times. It’s important to note that we are not live yet for general availability on Aptos, Avalanche and Arbitrum networks. Please contact us at FTDigitalAssets@franklintempleton.com to determine your eligibility to hold your wallet on a network other than Stellar and the availability of the other network. Approval to hold your wallet on a network other than Stellar is subject to the sole discretion of the Fund and its transfer agent.
Shares of the Franklin OnChain U.S. Government Money Fund are available for transfer from one shareholder to another shareholder (“peer-to-peer”) on the public blockchain. Transfers within the same network/chain are currently available, but we’re working on the availability of cross-chain transfers.
4. Are the RWA tokens being used in any other protocols? Please describe the various components of the ecosystem
The Fund currently uses the Stellar network as the primary public blockchain and Fund investors will initially hold their wallets on the Stellar network. However, the Fund may also use the Polygon, Aptos, Avalanche and Arbitrum networks for certain accounts upon request and subject to eligibility, although one or more of those other blockchain networks may not be available at certain times. It’s important to note that we are not live yet for general availability on Aptos, Avalanche and Arbitrum networks.
5. How are trusted roles/admins managed in the system? Which aspects of the solution require trust from users?
During the onboarding process, Franklin Templeton obtains a list of authorized users sanctioned by the client (full know-your-customer/anti-money laundering performed on all entities and entity persons). Franklin Templeton then sends out an invitation to each authorized user that will allow them to establish their username and password and set up multi-factor authentication using Okta Verify and WebAuthn (FIDO2 Compliant Devices - includes Windows Biometrics with TPM, iOS Passkeys onboarded with QR Codes, etc.).
For internal users, regular access control reviews are completed across all technical services used by the Digital Assets Technology team on a regular basis, or if there is a change in job function. There are varying levels of access based on job function and division of responsibilities as well. Access is granted based on the principle of least privilege, meaning a user is given the minimum levels of access – or permissions – needed to perform his/her job functions.
6. Is there any custom logic required for your RWA token? If so please give any details.
For tracking, no custom logic is required – it’s ERC-20 compatible. Since user-managed wallet functionality is currently disabled, all operational logic (such as creating purchases and liquidations) has to go through our Institutional Website. There are additional custom functions available such as querying pending transactions.
Supplementary
1. Please attach any further information or documents you feel would help the screening committee or ARB tokenholders make an informed decision.
For questions about this proposal, please reach out to FTDigitalAssets@franklintempleton.com.
References:
- Franklin Templeton Corporate Governance Documents
- Franklin OnChain U.S. Government Money Fund Prospectus
- Franklin OnChain U.S. Government Money Fund SAI
- Appendix 1 – Say Hello to Benji
- Appendix 2 – Franklin Advisers, Inc. Regulatory Summary
- Appendix 3 – Franklin OnChain U.S. Government Money Fund Annual Report
What are the risks?
All investments involve risk, including loss of principal. The fund’s yield may be affected by changes in interest rates and changes in credit ratings. Blockchain is subject to a rapidly-evolving regulatory landscape in the U.S. and in other countries, which might result in security, privacy or other regulatory concerns that could require changes to the way transactions in the shares are recorded. These and other risks are discussed in the fund’s prospectus.
You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial professional, call us at (800) DIAL BEN/342-5236 or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money.
© 2024 Franklin Distributors, LLC. Member FINRA/SIPC. All rights reserved.
Appendix Items
Appendix 1 - Say Hello to Benji
Due to embedded media constraints, please reach out to FTDigitalAssets@franklintempleton.com for a copy of Appendix 1.
Appendix 2 - Franklin Advisers, Inc. Regulatory Summary
Appendix 3 - Franklin OnChain U.S. Government Money Fund Annual Report
Please visit Franklin OnChain U.S. Government Money Fund - FOBXX (franklintempleton.com) for the latest annual report for the Franklin OnChain U.S. Government Money Fund.
