SEC Issues Harsh Warning as Leveraged Crypto ETF Applications Come to a Halt
In a decisive move that rattled ETF issuers and crypto traders alike, the U.S. Securities and Exchange Commission issued a major SEC leveraged ETF warning, halting all applications for exchange-traded funds (ETFs) seeking more than 200% exposure to their underlying assets.
ETF providers Direxion, ProShares, and Tidal Financial Group were among those receiving formal warning letters citing restrictions under the Investment Company Act of 1940, which limits a fund’s exposure to 200% of its value-at-risk. The SEC emphasized that risk must be measured against an unleveraged “reference portfolio.”
According to the agency:
“The fund’s designated reference portfolio provides the unleveraged baseline against which to compare the fund’s leveraged portfolio for purposes of identifying the fund’s leverage risk under the rule.”
The letters effectively shut the door on the wave of 3x to 5x leveraged crypto ETFs attempting to enter the U.S. market.
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SEC Leveraged ETF Warning Issued With Unusual Speed
In a highly unusual move, regulators posted the warning letters publicly the same day they were issued — an aggressive signal that the agency wants investors to understand the danger of excessive leverage.
Bloomberg analysts called the action “unusually speedy,” suggesting the SEC is increasingly concerned about the explosive growth of leveraged crypto trading products.
The timing follows a historic $20 billion crypto liquidation event in October — a flash crash that triggered the largest single-day leveraged wipeout in crypto history and reignited fears about systemic risk.
Crypto Leverage Surges Into Dangerous Territory
Analysts from The Kobeissi Letter reacted bluntly to the SEC crackdown, stating:
“Leverage is clearly out of control.”
Data from Glassnode reveals the scope of the problem:
- In the previous cycle, average daily liquidations were $28M (longs) and $15M (shorts).
- In the current cycle, those figures have ballooned to $68M (longs) and $45M (shorts) — nearly triple.
The crypto derivatives market has become increasingly volatile, with leverage amplifying price swings and suppressing natural price discovery.
Demand for Leveraged Crypto ETFs Skyrocketed Post-Election
Interest in leveraged crypto ETFs surged after the 2024 U.S. presidential election, as investors anticipated a friendlier regulatory environment.
While these ETFs avoid margin calls and automatic liquidations — unlike perpetual futures — the SEC warns that leveraged ETFs can still rapidly incinerate capital in volatile or sideways markets. Losses compound much faster than gains, making them dangerous for inexperienced investors.
What the SEC Crackdown Means for the Future of Leveraged Crypto ETFs
The SEC leveraged ETF warning signals a turning point:
- Regulators are placing tight limits on leverage in publicly traded products.
- ETF issuers must reduce leverage levels before applications will be reconsidered.
- The U.S. is unlikely to approve 3x–5x crypto ETFs under current rules.
At a time when institutional interest in Bitcoin ETFs is accelerating, the SEC is drawing a firm line between regulated exposure and high-risk leverage.
The message is clear:
Excessive leverage will not be tolerated — especially after a cycle defined by record liquidations and growing systemic risks.
