- The Block: The SEC issued warning letters to ProShares, Direxion, and others, halting the launch of 3x and 5x leveraged ETFs.
- The Rule: Regulators cited Rule 18f-4, forcing a strict 200% leverage cap on volatile assets like Bitcoin, Solana, and Strategy (MSTR).
- The Retreat: ProShares immediately withdrew filings for leveraged crypto products, signaling the end of the “hyper-leverage” experiment.
According to reports, the US Securities and Exchange Commission (SEC) has taken action against three firms, including Direxion, ProShares, and GraniteShares, for violating leverage conditions.
The SEC sent identical warning letters to the companies, effectively blocking the introduction of ETF products offering 3x-5x leverage.
Related: Vanguard Capitulates: $11 Trillion Manager Opens Door to Crypto ETFs
The SEC’s ETF Leverage Cap is 200%
It is worth noting that the regulator’s laws place a 200% leverage cap for ETFs under Rule 18f-4. Meanwhile, the proposed funds targeted high-volatility assets, such as Bitcoin, Ether, Solana, Tesla, and Nvidia, but the issuers’ benchmarks understated the risks.
Following the warning, ProShares has reportedly withdrawn several crypto and stock filings, while the other affected firms are discussing with the SEC on how to fix the situation. Notably, the SEC’s move is broadly perceived to be protective and an action to shield investors from the risks associated with extensive volatility in choppy markets.
Over-bloated Leverage Makes ETF Products Uncontrollable
Although the proposed offerings offer short-term appeal with the potential for significant returns, regulators highlighted the inherent risks, which they consider disproportionate to the proposed returns. For such ETF products, the SEC believes that having a leverage of more than 200% leaves things out of control.
Several crypto community members consider the SEC’s decision reasonable. According to CNBC Investing Club pioneer Jim Cramer, the SEC was right in halting the proposed highly leveraged ETF products. Cramer described the SEC’s response as a “gutsy pro-investor move” that will save billions of dollars for ETF investors.
For context, the latest ProShares filing offered 3x leveraged ETF products for Bitcoin, Ethereum, Solana, and XRP, all of which the firm has withdrawn, as mentioned above. Meanwhile, it is worth noting that the SEC stated in its letter that it will suspend reviewing the filings until the firms address the identified issues. Hence, the companies must delay the effectiveness of the filings until a resolution is found.
Related: Chainlink Price Prediction: LINK Price Attempts Recovery as New ETF Approval Boosts Interest
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