Michaela
The U.S. Securities and Exchange Commission (SEC) has issued warning letters to multiple exchange-traded fund (ETF) providers, pausing applications for leveraged crypto ETFs proposing 3-5 times exposure, exceeding the 200% regulatory limit.
Key Points
- The SEC paused multiple 3–5x leveraged crypto ETF applications, citing overexposure beyond the 200% limit.
- Issuers Direxion, ProShares, and Tidal were flagged under the Investment Company Act of 1940, which sets exposure limits using a “reference portfolio.”
- Analysts warn that highly leveraged ETFs amplify gains and losses, making them risky for retail investors, especially in volatile crypto markets.
In the SEC letters, ETF issuers Direxion, ProShares, and Tidal were cited under the Investment Company Act of 1940, which limits fund exposure to 200% of value-at-risk based on a “reference portfolio” of unleveraged assets or benchmark indexes. The SEC noted that this reference portfolio serves as the baseline to assess the leverage risk of each fund’s proposed leveraged portfolio.
The SEC instructed the ETF issuers to scale back their proposed leverage to comply with existing regulations, effectively pausing the approval of 3-5x leveraged crypto ETFs in the U.S.
In October, the crypto market plunged following a flash crash that triggered $20 billion in leveraged liquidations, prompting analysts and investors to debate the risks of high leverage and its impact on market stability.
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Following the SEC’s warning letters, the spotlight on leveraged ETFs has intensified, particularly in the crypto sector where volatility is a constant factor. Analysts warn that highly leveraged funds can amplify both gains and losses, making them a risky tool for retail investors who may not fully understand the mechanics of leverage. Unlike standard ETFs, leveraged ETFs aim to multiply the daily returns of an underlying asset or index, meaning even a small market movement can result in significant swings in value.
The SEC’s move signals that regulators are prioritizing caution, highlighting the potential systemic risks that unchecked leverage could introduce. Experts emphasize that these products, while not subject to margin calls like crypto futures, still carry the potential for rapid capital erosion, particularly in sideways or declining markets.
Related: Crypto Whales: The Hidden Players Quietly Shaping the Entire Market
Market participants are now closely monitoring how the regulatory push will affect the availability of leveraged crypto ETFs in the U.S., and whether issuers will adjust their strategies to comply with the 200% exposure limit. The SEC’s intervention spotlights the fine line between innovation and investor protection in the evolving crypto financial landscape.
The SEC’s actions serve as a reminder that in the fast-moving world of crypto finance, prudence remains just as important as opportunity.
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MICHAELA
Michaela is a news writer focused on cryptocurrency and blockchain topics. She prioritizes rigorous research and accuracy to uncover interesting angles and ensure engaging reporting. A lifelong book lover, she applies her passion for reading to deeply explore the constantly evolving crypto world.
