SEC Cracks Down on Ultra-Leveraged ETFs: 3x–5x Crypto Funds Put on Ice

The U.S. Securities and Exchange Commission has quietly halted the rollout of a new wave of ultra-leveraged crypto ETFs after sending formal deficiency letters to issuers including Direxion, ProShares, and Tidal Investments. The filings, which sought daily 3x to 5x exposure to Bitcoin, Ethereum, and other digital assets, have been effectively frozen under a long-standing provision of the Investment Company Act of 1940 that caps leverage at 200% of a fund’s net assets.

The move, confirmed in letters circulated in late November 2025, marks the clearest regulatory line yet on how much leverage the SEC is willing to tolerate in registered crypto products.

(Sources: SEC)

The Rule That Stopped 3x–5x Crypto ETFs Cold

Under Rule 18f-4 of the 1940 Act (adopted in 2020 and fully enforced since 2022), any registered investment company using derivatives must maintain a “Derivatives Risk Management Program” and limit leverage risk to 200% of a designated unleveraged reference portfolio.

The SEC’s letters emphasize that the reference portfolio must be the plain-vanilla underlying asset or index — not another leveraged product. In practice, this means:

• A 2x Bitcoin ETF is acceptable (200% of spot Bitcoin).
• A 3x, 4x, or 5x Bitcoin ETF built on top of an existing 2x product would breach the 200% ceiling when measured against the original unleveraged benchmark.

Issuers had attempted to skirt the restriction by structuring the higher-leverage funds as separate series that technically referenced spot price trackers, but the SEC rejected that interpretation, stating explicitly:

“The fund’s designated reference portfolio provides the unleveraged baseline against which to compare the fund’s leveraged portfolio for purposes of identifying the fund’s leverage risk under the rule.”

Which Products Are Affected

Known filings now on hold include:

• Direxion Daily Bitcoin 3x Bull and 5x Bull Shares
• ProShares UltraPro Bitcoin ETF (3x) and UltraProShort Bitcoin ETF (-3x)
• Tidal’s suite of 3x–4x Ethereum and Solana leveraged/long-short ETPs

Existing 2x products such as ProShares Ultra Bitcoin ETF (BITU) and Volatility Shares 2x Ether ETF (ETHU) remain unaffected and continue trading normally.

Market and Industry Reaction

Trading desks had already priced in significant retail demand for higher-octane products, especially after the success of 2x Bitcoin ETFs earlier in 2025. The SEC’s action triggered immediate price gaps in pre-launch tracking instruments, with some 3x proxies on offshore platforms dropping 8–12% on the news.

Industry sources indicate issuers are now exploring two workarounds:

1. Registering the funds as commodity pools or private placements outside the 1940 Act framework (similar to how some 3x oil and gold ETPs operate).
2. Launching the products exclusively on offshore venues or decentralized perpetuals platforms where U.S. retail access is technically restricted.

Bottom Line

The SEC has drawn a firm line: 200% daily leveraged exposure is the ceiling for registered ’40 Act ETFs — at least for now. While 2x Bitcoin and Ethereum products remain fully operational and continue attracting billions in inflows, investors seeking 3x–5x daily returns will have to look to unregulated offshore brokers, futures-based CFTC products, or DeFi perpetuals protocols.

For regulated U.S. markets, the dream of easy, one-click 5x crypto ETFs just got deferred indefinitely.