The U.S. crypto ETF market slowed after the SEC blocked new high-leverage ETF proposals. Several firms wanted to launch 3x and 5x crypto ETFs, but the SEC told them to change their plans or withdraw. The agency is worried that extreme leverage could create instability in crypto and traditional markets.
Bloomberg analyst Eric Balchunas said the SEC believes some firms were trying to bypass rules under Rule 18f-4, which limits how risky funds using derivatives can be. The rule generally allows up to 2x leverage, so anything higher needs special approval.
The SEC warned that 3x or 5x crypto ETFs could collapse during market swings, causing shutdowns and adding instability. The same concerns apply to leveraged ETFs tied to individual stocks and high-risk sectors.
Firms like Direxion were singled out for trying to list highly leveraged ETFs. The SEC told them to either redesign the funds to meet the rules or withdraw their applications.
Regulators have been worried about these products for months. In October, Brian Daly from the SEC said the agency received a flood of leveraged ETF filings, many asking for 3x or 5x exposure, which exceeds Rule 18f-4 limits.
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VolShares proposed 5x ETFs for Solana, Ethereum, XRP, and volatile tech stocks like Nvidia and Tesla. GraniteShares also filed for a 3x XRP ETF, adding to the wave of high-leverage products now under review.
Crypto traders and analysts have had mixed reactions. Hammerstone Markets noted the irony, saying SEC Chair Atkins had recently claimed the agency’s role is not to “protect investors” but to let capitalism thrive, meaning firms offering ultra-leveraged ETFs were just taking risks.
On the other hand, analyst Tolga Yilmaz said the SEC’s decision was expected. He explained that 3x–5x ETFs can break risk limits, lose value quickly in volatile markets, and create harmful feedback loops. Another analyst added that leverage isn’t the only issue—even a 2x MicroStrategy ETF could stop out faster than a 5x Treasury product.
Most agree that ultra-leveraged crypto ETFs are risky, likely to fail in volatile conditions, and dangerous for retail traders. The SEC’s move is therefore more about preventing market blowups than blocking innovation.
