SEC Crypto ETF Rule Creates Sudden Roadblock for 3x–5x ETF Filings

How the SEC Crypto ETF Rule Shapes the Review of High-Leverage Filings

A new regulatory letter, along with fresh industry commentary, reveals a major conflict between ETF issuers and the SEC Crypto ETF Rule that caps leverage at 2x. The development has created strong reactions across the digital currency trading world, especially among traders hoping to see more aggressive products.

SEC Raises Red Flags Over Leveraged Crypto ETF Filings

The U.S. Securities and Exchange Commission has formally raised concerns about multiple filings seeking approval for high-leveraged crypto ETFs. 

These products were designed to give traders amplified exposure to Bitcoin, Ethereum, Solana, and several major tech stocks.

In a letter dated December 2, 2025, the commission informed Direxion Shares exchange traded fundTrust that any fund offering more than 200% leverage would not move forward until strict issues are addressed. 

This limit is defined under the SEC Crypto ETF Rule, officially known as Rule 18f-4 under the Investment Company Act of 1940.

According to the letter, they asked issuers to revise their investment objectives or withdraw the filings entirely.

What Rule 18f-4 Says 

Under the SEC Crypto ETF Rule, a leveraged fund cannot exceed 200% of the Value-at-Risk (VaR) of its reference portfolio.
This essentially means:

• 2x leverage = allowed

• 3x leverage = not allowed

• 5x leverage = far outside the limit

This rule prevents extreme leverage, which increases both gains and losses. The SEC notes that such products can expose retail traders to unexpected “termination events,” especially during volatile digital currency swings.

Bloomberg Analysts Weigh In

Bloomberg ETF analyst Eric Balchunas reacted strongly to the commission’s pushback.
He posted on his social media (formerly Twitter):

“Looks like the SEC is pushing back on all the 3x and 5x filings. They were trying to use a loophole to get around the 200% VaR. Honestly, it’s for the best. I’m as libertarian as they come, but 2x is plenty of heat.”

Source: Eric Balchuna (formerly Twitter) 

Balchunas argued that anything above 2 times would cause constant liquidation risks and distract both traders and issuers.

ETF expert James Seyffart also noted earlier that “3x isn’t really allowed” under existing ETP rules. Some issuers were trying to use options to bypass these limits.

A Flood of Filings, Then a Sudden Halt

The past few months saw unusually aggressive Exchange Traded Fund filings:

October Updates

• Defiance ETFs submitted 6 new leveraged digital currency funds, including 3 times long and short products for Bitcoin, Ethereum, and Solana.
  

• REX Shares and Osprey Funds filed for 21 digital currency ETFs in a single day.
  

• Volatility Shares attempted to launch 5 times leveraged Funds, which would have been the first of their kind.
  

The SEC Crypto ETF Rule now blocks all such filings pending revisions.

Why Traders Wanted High-Leveraged ETFs

High-risk traders were excited about the possibility of amplified returns. With the crypto market recovering, many saw leverage as a fast way to multiply gains.

These funds would have:

• Delivered 3 to 5 times daily performance

• Used futures, swaps, and options

• Targeted major assets like BTC, ETH, SOL, NVDA, TSLA, and COIN

However, they also carried extreme risks such as volatility decay and amplified losses.

What Happens Next?

As of now, issuers must either:

• Refile their applications with 2 times leverage,
  or

• Withdraw the filings completely.

Disclaimer: This article is for informational purposes only and does not constitute a financial advice, kindly do your own research before investing.