SEC Pushes Back on 3x and 5x ETFs Amid Crypto Exemption Plans in Weeks

The SEC just slammed the brakes on leveraged crypto ETFs—again. While the agency eyes broader crypto exemptions, it's drawing a hard line on 3x and 5x products, calling them too risky for the average investor. The move highlights the regulator's cautious, piecemeal approach to digital assets.

A Tale of Two Tracks

On one track, the Commission is reportedly finalizing plans to exempt certain crypto activities from securities laws within weeks—a potential win for the industry. On the other, it's outright rejecting proposals for highly leveraged exchange-traded funds. The simultaneous push and pull creates a confusing landscape: permission for some, prohibition for others.

The Leverage Loophole That Wasn't

Proponents argued these ETFs would offer regulated exposure to crypto's volatility. The SEC wasn't buying it. The agency's concern? These products amplify risk exponentially—a 3x ETF aims to deliver three times the daily return of its underlying asset. In crypto's wild markets, that math can lead to catastrophic losses faster than a trader can say 'margin call.' It's a reminder that in finance, 'innovation' is often just old-fashioned risk with a new ticker symbol.

What's Next for Crypto ETFs?

The rejection doesn't kill the dream of crypto ETFs—it just narrows the path. The focus now shifts to simpler, spot-based products. The impending exemptions could clear regulatory fog for custodians and exchanges, making the bedrock for these funds more stable. But for the thrill-seekers hoping to triple their Bitcoin bet with a single click, the door remains firmly shut—for now.

The SEC's message is clear: you can have progress, but you can't have a casino. The coming weeks will test whether the crypto industry can build on that foundation, or if it will keep knocking on the leveraged door.

TLDR

• SEC asks issuers to revise 3x and 5x crypto ETF filings citing Rule 18f-4.

• Direxion’s proposed high-leverage ETFs now face regulatory review.

• SEC Chair says crypto innovation exemption could launch by January.

• The agency is assisting Congress on broader digital asset legislation.

The U.S. Securities and Exchange Commission (SEC) has requested revisions to several ETF proposals aiming for 3x and 5x leverage, citing the need to comply with Rule 18f-4, which regulates the use of derivatives in investment products.

ETF providers like Direxion, which filed for Leveraged exposure to Bitcoin, Ethereum, and tech stocks, are among those affected. The SEC’s feedback asks firms to either revise objectives and strategies or withdraw the filings.

The rule enforces a Value-at-Risk (VaR) limit and requires funds to implement risk management programs. These steps aim to ensure that retail and institutional investors are not exposed to excessive volatility from leveraged ETF products, which can swing widely in price over short periods.

ETF Experts and Market Voices Respond to SEC’s Decision

ETF analyst Eric Balchunas commented that the SEC’s action is a necessary move, saying “2x is plenty of heat,” and that more extreme products could cause frequent termination events.

On social media, other market commentators supported the SEC’s action, noting that extreme leverage might encourage speculative trading habits among retail investors.

Despite the regulatory tightening, critics pointed out inconsistencies. Some cited SEC Chair Paul Atkins’ recent CNBC interview, in which he emphasized supporting capitalism and innovation over excessive investor protection.

Innovation Exemption for Crypto Nears January Rollout

In the same interview, Chair Paul Atkins also said the SEC is finalizing an innovation exemption that could help crypto firms launch on-chain products more easily in the United States.

The exemption aims to reduce regulatory hurdles while the agency works with Congress to define a comprehensive digital asset market structure bill. The exemption is expected to roll out within the next month, though it was previously delayed by the government shutdown.

“We were impeded a bit by the government shutdown,” said Atkins. “But we’re on track… to embrace this new area of innovation.”

SEC Balances Oversight With Market Innovation Goals

The SEC’s simultaneous action—tightening control on leveraged ETFs while easing access for crypto product development—reflects a broader strategy. On one hand, it wants to curb high-risk leveraged exposure, especially during volatile markets. On the other, it seeks to position the U.S. as a competitive blockchain innovation hub.

The planned exemption will likely offer temporary relief from certain securities laws, pending the passage of full legislation. It could also facilitate tokenization projects and decentralized finance (DeFi) solutions, offering firms a more defined path to regulatory clarity.

This two-track approach by the SEC signals its attempt to balance market integrity with technological growth, especially as global competition in digital asset regulation intensifies.