The U.S. Securities and Exchange Commission has issued warnings to issuers of high-leveraged exchange-traded funds, including proposed crypto ETFs, citing concerns over potential risks of such products.
In letters sent Tuesday, the regulator halted the review of the funds until concerns were addressed by the issuers. The SEC reviews applications for ETFs before they start trading on stock exchanges.
The regulator warned a total of nine issuers, including ProShares, which already has leveraged crypto ETFs on the market.
“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,” one of the letters read, and asked the fund managers to review the products.
Typical ETFs give investors exposure to an asset—be it a security or commodity—via shares that track its price and trade on stock exchanges.
Leveraged ETFs hold debt to amplify an investor’s position so returns for investors can be greater than the tracked asset—but losses can also be compounded.
A number of leveraged crypto ETFs have debuted on U.S. markets in recent years, including a fund aiming to give amplified returns of Nasdaq-listed Bitcoin treasury Strategy—formerly MicroStrategy—stock.
ETF issuer Defiance in October filed paperwork to release 49 funds offering three times long and short leveraged exposure to tech and crypto-focused firms, gold, and ETFs that individually track the price of Bitcoin, Ethereum and Solana, among other assets. Those products are part of a surge of products following the success of spot Bitcoin and Ethereum ETFs, which debuted last year.
BlackRock’s iShares Bitcoin Trust (IBIT) has broken records for the pace of its growth. IBIT now manages about $70 billion in assets, according to data provider CoinGlass. The total 11 BTC funds oversee about $122 billion in assets.
In recent weeks, XRP, Solana, Dogecoin, and Chainlink funds have listed on U.S. exchanges.
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