Under current rules, funds cannot exceed 200% of their baseline risk profile when compared to an unleveraged version of the same holdings.
Crypto Regulatory News
Federal regulators put the brakes on a wave of aggressive crypto ETF applications this week, telling three major issuers their proposed products violate decades-old investment rules.
Direxion, ProShares, and Tidal all received warning letters on Wednesday from the Securities and Exchange Commission over plans to offer funds with 3-5x leverage on digital assets. The SEC pointed to the Investment Company Act of 1940, which restricts how much risk investment funds can take on through borrowed exposure.
Under current rules, funds cannot exceed 200% of their baseline risk profile when compared to an unleveraged version of the same holdings. Regulators told the firms they must dial back their leverage targets before any applications move forward.
The timing suggests urgency from the SEC. Officials posted the rejection letters publicly the same day they sent them to issuers, an unusually fast turnaround that Bloomberg noted signals concern about protecting retail investors from risky products.
Crypto markets suffered massive damage from leverage in October when a sudden crash triggered $20 billion in forced liquidations, the largest single-day wipeout in the industry's history. Daily liquidation volumes have nearly tripled compared to the previous market cycle, according to Glassnode data.
Average daily forced closures now run at about $68 million for long positions and $45 million for shorts, up from $28 million and $15 million, respectively, in prior years. Analysts at The Kobeissi Letter responded to the SEC action by stating that leverage has clearly spiraled out of control.
Interest in leveraged #crypto funds surged after the 2024 presidential election as investors anticipated friendlier regulations under the incoming administration. Unlike derivatives that face margin calls and automatic liquidations, leveraged ETFs avoid those immediate risks but can still devastate portfolios during downturns as losses multiply faster than gains.
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