Why Is SEC Blocking Highly Leveraged Crypto ETF Applications?

Guy Fawkes 2025.12.05 3 min read

The US Securities and Exchange Commission has suddenly put brakes on high-leverage crypto ETFs by issuing warning letters to major ETF issuers.

Proposed funds from issuers like Direxion, ProShares, Tidal Financial, Volatility Shares, and GraniteShares apparently exceeded volatility limits – by using derivatives to chase extreme leverage on crypto and single stocks such as Tesla or Nvidia.

The applications for ETFs that promised 3x to 5x returns on assets like Bitcoin and Ethereum could be blocked? But why has the SEC stepped in? Apparently, the regulators cited violations of Rule 18f-4 under the Investment Company Act of 1940 which caps a fund’s value-at-risk (VaR) at 200% of its unleveraged reference portfolio.

“We write to express concern regarding the registration of exchange-traded funds that seek to provide more than 200% (2x) leveraged exposure to underlying indices or securities,” said the SEC letter, issued on 2 December 2025. “We request the registrant revise its objective and strategy to be consistent with rule 18f-4”

“The SEC has issued a flurry of warning letters to some of the country’s most prolific providers of high-octane ETFs, effectively blocking the introduction of products designed to deliver 3 and even 5 times the daily returns of stocks, commodities and cryptos.” pic.twitter.com/ZKm6HAqsgZ

— Kalani o Māui (@MauiBoyMacro) December 3, 2025

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ProShares Pulls Several Crypto ETF Applications After Receiving SEC Warning

A 1% Bitcoin drop could mean 3-5% ETF losses daily. Which means, over half of recent leveraged ETFs have shuttered due to poor performance.

Shortly after receiving the SEC letter, ProShares pulled several 3x crypto ETF applications while acknowledging that they didn’t meet the legal standards. ProShares had originally filed its ETF in NYSE in October 2025.

The SEC has stopped ProShares from launching new 3× leveraged crypto funds.
They proposed

3× Bitcoin,
3× Ether,
3× Solana,
3× XRP.

The SEC says the funds break leverage rules, so ProShares must fix the filings or withdraw them.
Nothing moves forward until they do.… pic.twitter.com/SXlYAHKgkZ

— 𝗕𝗮𝗻𝗸XRP (@BankXRP) December 3, 2025

Notably, no 3x or 5x single-stock or crypto ETFs exist in the US market yet. Rules limit leverage to 2x maximum.

SEC Could Soon Redefine How Digital Assets Are Classified Under US Law

Speaking in Philadelphia on 12 November 2024, SEC Chair Paul Atkins said the agency will “in the coming months” propose a structured framework based on the Supreme Court’s Howey test, the legal standard used to decide whether an asset counts as a security.

The move aims to bring clarity to one of the most contentious areas in crypto regulation: determining when a token constitutes a security and when it does not.

Atkins also said the Commission intends to release a “package” of exemptions designed to create a more flexible system for crypto projects that sell assets through investment contracts.

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