The SEC halts 3x and 5x leveraged cryptocurrency ETFs, requiring issuers to amend or withdraw their applications.

The U.S. Securities and Exchange Commission (SEC) recently took action against leveraged cryptocurrency ETFs, officially halting several applications for 3x and 5x leveraged products, and requiring issuers to either significantly revise their strategies or directly withdraw their applications, drawing widespread market attention. This move not only affects crypto assets but also impacts leveraged ETFs related to high-beta stocks.

Bloomberg ETF analyst Eric Balchunas stated that the SEC pointed out these products were attempting to circumvent strict VaR (Value at Risk) limits through regulatory loopholes. According to Rule 18f-4, a fund’s risk exposure must not exceed 200% of its benchmark, meaning leverage is generally limited to 2x. The SEC emphasized that products with leverage over 2x could lead to frequent termination events and extreme market volatility, and therefore do not meet current risk management requirements.

Institutions singled out include Direxion, which had submitted multiple leveraged ETF applications tied to crypto assets, technology stocks, and high-volatility equities. Regulators stated that this notice also applies to single-stock leveraged strategies and certain sector ETFs.

The SEC’s latest move comes amid a sharp increase in leveraged ETF applications. Since October, VolShares has applied for 5x leveraged crypto ETFs including SOL, ETH, and XRP, while GraniteShares has applied for a 3x XRP leveraged product. During the pandemic lockdown, registrations for high-leverage products surged even further.

However, the high risks of such products have already manifested within the industry. Morningstar analyst Brian Armour pointed out that over half of the leveraged ETFs launched in the past three years have been forced to close, indicating the market’s limited tolerance for high-volatility products. He believes that although the SEC has become more open to new strategies in recent years, 5x single-stock leveraged ETFs exceed reasonable risk boundaries and may prompt further regulatory tightening.

With SEC Chairman Paul Atkins announcing that new innovative exemption rules will be introduced in the future, the market is still watching the regulatory trend for crypto financial products. Nevertheless, this suspension action sends a clear message: high-leverage crypto ETFs will face stricter regulatory scrutiny, and the likelihood of approval in the short term has dropped significantly.