SEC Blocks 3x-5x Leveraged Crypto ETFs: Understanding Rule 18f-4 and the 200% Leverage Cap

Source: CoinEdition Original Title: SEC Invokes Rule 18f-4 to Block 3x Solana and XRP ETF Proposals Original Link:

SEC’s Regulatory Action on Leveraged Crypto ETFs

The Warning: The SEC issued warning letters to ProShares, Direxion, and GraniteShares, effectively blocking the introduction of ETF products offering 3x-5x leverage on volatile crypto assets.

The Rule: Regulators cited Rule 18f-4, which places a 200% leverage cap for ETFs. The proposed funds targeted high-volatility assets such as Bitcoin, Ethereum, Solana, and XRP, but the issuers’ benchmarks understated the associated risks.

The Retreat: Following the warning, ProShares has withdrawn several crypto and stock filings. The SEC stated it will suspend reviewing the filings until the firms address the identified issues.

Understanding the 200% Leverage Cap

Under Rule 18f-4, ETFs cannot exceed a 200% leverage ratio for volatile assets. The SEC’s action is broadly perceived as protective, aimed at shielding investors from risks associated with excessive volatility in choppy markets.

Why the SEC Acted

Although the proposed offerings presented short-term appeal with potential for significant returns, regulators highlighted the inherent risks, which they consider disproportionate to the proposed returns. The SEC believes that having leverage of more than 200% leaves ETF products uncontrollable.

Several crypto community members consider the SEC’s decision reasonable. According to industry analysts, the SEC’s response represents a protective measure that will safeguard ETF investors from excessive risk exposure.

Next Steps

The affected companies must address the identified compliance issues before the SEC will resume reviewing their filings. The firms are currently in discussions with the SEC on how to resolve the leverage compliance concerns.